CRISIL Research believes the advent of competitive bidding in wind power would change the market landscape and lead to a sharp reduction in tariffs, put pressure on returns across the value chain, and lead to consolidation of the market towards independent power producers.
While deployment of latest technology and lower financing charges would reduce generation cost, aggressive bids by developers to scale up their portfolios will mean suboptimal equity internal rate of return. However, the market for wind power would expand with more active participation by the central government, which reduces the risk for developers. Higher offtake from power distribution companies with lower tariffs will also support capacity additions. Thus, overall compliance with the renewable purchase obligation is expected to increase, particularly by non-windy states such as Uttar Pradesh, Haryana, Delhi, Odisha and Chhattisgarh
Says Prasad Koparkar, Senior Director, CRISIL Research, “To compete in bids, developers are likely to put pressure on wind power original equipment manufacturers (OEMs), denting their profitability. Also, gradually, developers would go for the self-development model, piling more pressure on OEM margins as the premium charged for value-added services like clearances, wind resource assessment and grid connectivity would come down. But OEMs having land banks with high wind potential and proximity to the central transmission utility will be less impacted because these would fetch a premium.”
With the discovered prices for wind energy falling to as low as Rs 3.46/unit, large states such as Karnataka, Rajasthan, Gujarat and Andhra Pradesh, which account for 47% of the total wind energy fed to the grid, have declared their reservations on continuing with the feed-in tariffs (FiT) regime.
Says Rahul Prithiani, Director, CRISIL Research: “Under construction projects that have only been allocated capacities under the FiT regime but not yet signed PPAs are at risk. There are about 600 MW of such projects in Gujarat, Andhra Pradesh and Rajasthan. However, we believe that projects which have already signed the equipment purchase order assuming returns based on FiT will renegotiate their contracts with the equipment suppliers. Developers would either negotiate with the OEM for more favourable wind locations (for achieving higher plant load factors) or cheaper turbines to optimise their returns at low tariffs”
As the wind energy ecosystem transitions from FiT to the bidding regime, the market is expected to consolidate towards IPPs as companies in unrelated businesses seeking tax breaks would now find it difficult to participate in competitive bids given the large scale. Another trend likely to emerge is the potential forward-integration of OEMs, which are favourably placed since they possess both attractive wind sites and manufacturing capability.