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‘Death by a thousand cuts’

India
Typography

The mood is despondent in the wind industry, with States bent on hammering down prices and a record low expected in installations this year, writes M Ramesh

At Windergy, 2017, an international conference of the wind industry that was held towards the end of April in New Delhi, the mood among...


The mood is despondent in the wind industry, with States bent on hammering down prices and a record low expected in installations this year, writes M Ramesh

At Windergy, 2017, an international conference of the wind industry that was held towards the end of April in New Delhi, the mood among the participants was euphoric. The industry had just ended a financial year with a record and unexpected level of installation of 5,400 MW. The industry sensed an encore this year. The Centre had, only in February, held the country’s first auction of wind power capacities – for 1,000 MW – and promised to do more. Tulsi Tanti, the doyen of the wind industry and Chairman of Suzlon, a wind turbine manufacturer, said he expected the Indian market to be a respectable 10,000 MW a year.

In the last week of July, the Confederation of Indian Industry held a conference of the renewable energy industry in Chennai. The wind industry representatives looked as cheerful as an ambulance. Their despondency was palpable. The Director General of Indian Wind Turbine Manufacturers’ Association, D V Giri, said he had “resigned” to fate.

Two events changed it all

What happened in just three months that caused a complete inversion of sentiment? Mainly, two events — both related to the country’s first wind auctions of February. Until the auctions, the electricity regulator of a State would hear out the cases of both sellers and buyers of electricity, and then fix a ‘feed-in tariff’, or FiT. The tariff-based auctions, in which energy companies that agree to sell power at the lowest prices, would get to sign long term power purchase agreements with government of India-owned Power Trading Corporation, threw up a record low tariff of ₹3.46 a kWhr. In contrast, the previous least was ₹4.16 that was FiT for Tamil Nadu, for the State.

The figure “3.46” attained a magical hue. “These days, we in the wind industry greet each other saying ‘hi, 3.46’,” chuckles S Venkatachalam, Managing Director and CEO, Orient Green Power, a wind energy company.

The low tariff of ₹3.46, which some consider unviable, created two effects. First, the State governments, which were paying much more as FiT for the electricity they bought from wind companies, saw the auction as a lesson for themselves. Why don’t we also go in for price-lowering competitive bidding process, they thought. They stopped signing PPAs on the basis of FiTs. Nor are the States ready to come out with competitive bidding — they need guidelines from the Central Electricity Regulatory Commission, which are not yet ready. As a result, there is no project on offer. The industry believes the country would be lucky to see installations of 1,000 MW this year — a steep fall from the 5,400 MW of last year.

Second, two States – Karnataka and Andhra Pradesh – began tinkering with PPAs already signed. Karnataka, rather strangely through a suo moto initiative of the State regulator, has cancelled some PPAs, involving around 400 MW of projects, seeking fresh agreements with lower tariff. The State’s electricity regulator worked back the capital cost of a wind project from the ₹3.46 tariff, and arrived at a figure of ₹4.50 crore per MW, and arbitrarily added 10 per cent to adjust for locational differences, and declared ₹4.80 crore a MW to be a fair capital cost of installation. Andhra Pradesh, according to a source close to the development, has appealed to the State’s regulator for re-negotiating the PPAs for projects already commissioned. Not stopping with that, the State has unilaterally begun keeping for itself the ‘50 paise a kWhr’ generation-based incentive that the Centre gives wind companies.

Pushing down prices

The industry knows that there is no way that these measures would stand in a court of law. But which company would want to go to the court and fight protracted legal battles, even if a positive outcome is certain? The States’ idea is to get the companies to the negotiating table and hammer down the prices.

The moves of these two States have larger ramifications. First, it sets an example for other States to follow. Second, the negative message that agreements are not honoured is beginning to be received by lenders and investors, both Indian and foreign. Industry sources note that the RE-INVEST investors’ meet, to which the government of India attaches much importance, is due to happen in December.

On top of these, there is the perennial issue of State government-owned electricity distribution companies, which are the wind energy companies’ customers, not paying their dues on time. The situation is particularly bad in Tamil Nadu. Payments here are delayed for over a year. “We are having to negotiate for getting our dues,” said one wind energy source, who did not want to be identified.

Added to this is the issue of lack of connectivity that the winners of the February auctions are facing. The government-owned Power Grid Corporation Of India Limited was to let their wind farms hook up to its transmission network, but the company is not technically prepared to do so. It is learnt that all but one of the five winners of the bids (except Ostro) are up against this hurdle. Furthermore, the Centre has brought in anti dumping duty on castings imported from China; turbine manufacturers are sayingthey can’t absorb the additional cost.

D V Giri, the Secretary-General of the Indian Wind Turbine Manufacturers’ Association, describes the overall situation as “death by a thousand cuts”.

Industry to blame

Some observers say that the wind turbine manufacturers are partly to blame for this mess. Until the advent of competition through auctions, they fought for higher and higher FiTs at various State electricity regulators. Then, come auctions, the tariffs fell low, which some presume was because the turbine manufacturers agreed to lower their prices. State governments naturally felt short-changed.

However, turbine manufacturers say that the low tariff of ₹3.46 is a result of several positives built into the bids — such as promise of easy evacuation of power, good windy sites and assurance of timely payment of dues, as well as scale.

While the debate goes on, the reality on the ground is that there is no project happening. In the first quarter of the current year, the installations amounted to a paltry 228 MW. The Centre’s second auction, for 1,000 MW, is still awaiting the opening of price bids and it will be a while before projects are awarded. As a result, it is expected there will be a record low wind installation this year, after a record high last year, and by the looks of it, even 2018-19 does not look very rosy.

(This article was published on August 1, 2017)

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