Wind power bids seem unrealistic

The recent bid by the Solar Energy Corporation of India (SECI) to set up 1000 MW wind power plants saw tariffs drop to ?3.46 per unit. This has set a new benchmark for wind power in India, bringing the overall cost of power down in a rapidly growing economy.

Despite being India’s first wind power project tender, SECI was oversubscribed 2.6 times. Bids were concentrated in three States; with Tamil Nadu receiving the highest share of 1794 MW, followed by Gujarat with 700 MW and Karnataka with 100 MW.

The tender was floated by the SECI to help non-windy States access wind power by linking them to the inter-state transmission system. Project developers will sign a 25-year PPA with the Power Trading Corporation of India, which, in turn, shall sign back-to-back arrangements with discoms /bulk customers of non-windy States. Waiver of inter-State transmission charges and compensation for system losses till the interconnection point by allowing for construction of 5 per cent additional capacity were also provided as part of the tender.

Until now, wind energy in India followed the feed-in-tariff (FIT) route with tariffs for long-term PPAs with State discoms ranging from ?4- 6 per unit. With the SECI tender mitigating key risks of off-take, evacuation and payment and going by the recent solar bidding process which witnessed tariffs fall below the ?3 mark, the level of interest observed shouldn’t come as a surprise.

But, having lived through a situation where aggressive bidding in infrastructure projects has not worked in the industry’s favour, it does make us wonder about the strength of the underlying assumptions made in these bids.

A basic number crunching carried out with a tariff of ?3.46 per unit at prevalent industry conditions – Central Electricity Regulatory Commission (CERC) estimated project cost of about ?6.2 crore per MW, debt to equity of 70:30, financing at 9.5-10 per cent – indicates that Plant Load Factors (PLFs) of about 33-35 per cent may be required to fetch investors reasonable returns of 15-16 per cent.

More uncertainties loom

From April 1, 2017, the tax relaxation for infrastructure projects under 80IA shall cease. Further, wind power plants commissioned after this financial year will not be eligible for generation based incentives. Accelerated depreciation will reduce from 80 per cent to 40 per cent.

Also, the cloud of uncertainties that the implementation of GST poses needs to be factored for any reasonable viability assessment. Most wind turbines are domestically made. Currently, there is no excise duty to be paid for WTGs and renewable energy components attract a VAT of 0-5 per cent in most States. According to a report published by the Ministry of New and Renewable Energy, GST is likely to cause an increase of 11-15 per cent in project cost of wind power projects.

One can only hope that all these risks were adequately factored by the bidders. This kind of aggressive bidding is not new to us. Starting from BoT road projects awarded a decade back, to coal mining, telecom spectrum and more recently, solar power and hybrid annuity model (HAM) projects in the road sector, this issue has been ingrained in the system.

While it is good to see such investor interest in India’s infrastructure space, it is absolutely essential to tread carefully. Let us not forget all the BoT projects which became distressed assets in the books of lenders due to optimistic traffic projections or higher revenue shares promised during a competitive bidding war.

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