ICRA Limited (an associate of Moody's Investor Service) has released a report on India's Wind Energy market according to which the fundamental long term demand outlook for wind energy is expected to remain strong, supported by large wind energy requirements to meet the Renewable Purchase Obligation (RPO) requirements in the country.
The report, titled as "Wind Energy Sector: Strong demand potential in the long run, although challenges remain on regulatory front" is analyzing the impacts of latest developments in the regulatory regime of the country specifically in the field of wind energy projects.
According to the Report, the wind projects are also getting benefits due to their increased cost competitiveness against the conventional sources of energy both due to increase in fuel prices (such as coal and gas etc) and persisting fuel shortages in the country.
The demand of Wind Energy is further supported by National Action Plan for Climate Control (NAPCC) set up by Government of India (GoI) in June 2008 recommending a target of renewable energy mix in the overall energy procurement by utilities at 10% (minimum) by 2015 and 15% (minimum) by 2020 and by the remunerative preferential tariff in some of the key wind states namely Maharashtra, Madhya Pradesh, Rajasthan and Andhra Pradesh. Also, going forward, investment demand from IPP segment would remain key growth driver and ICRA expects the share of IPP segment in the capacity addition to increase from currently at about 40-45% to about 60-70% over the next two to three years.
Also, untapped wind resource potential on all India basis (across the key states having windy sites) remains quite significant, as evident from the revision in estimates of gross wind energy potential in India from 49,500 MW to 102,800 MW by Centre of Wind Energy Technology (CWET) in February 2012.
Wind energy projects remain exposed to significant counter-party credit risks, given that the financial position of the state distribution utilities in some of the states (having wind resource potential) continue to have weak liquidity & financial position, which in turn has adversely affected their payment pattern towards the wind energy project developers. With continued delays in payments by state utility in Tamil Nadu, fresh investments in the state have been showing a declining trend, as reflected in a sharp decrease in the wind energy installations in the state during FY 2012-13. As distribution utilities are the principal obligated entities to meet RPO norms, the fundamental improvement in their financial position remains extremely crucial in the long run; as this would also enable them to honor the RPO norms in a more sustained manner. ICRA however notes that implementation of financial restructuring scheme (FRS) under progress across the five states3 having utilities with stressed financial position, as well as trend of retail electricity tariff revisions by SERCs for FY 2012-13 & FY 2013-14 so far, subsequent to ruling by Appellate Tribunal for Electricity (ATE) in November 2011; remain positives for the power sector.
CERC has recently approved implementation of mechanism for Renewable Regulatory Fund (RRF) which is to be implemented from July 15, 2013 for wind projects (of 10 MW and above), which requires them to forecast and schedule their power generation on a day-ahead basis. Wind power projects would have to pay Unscheduled Interchange (UI) charges, if the actual generation deviates by more than 30% from the scheduled generation. While the forecasting for the wind projects can be made possible by way of robust technical/statistical models as well as the availability of past data/weather conditions if in place, it remains a key challenge due to intermittent nature of wind pattern as well as nascent stage of implementation for the entire sector. This in turn, may have financial implications on wind power projects, if the actual variations remain beyond the limit of (+/-) 30% and also, given that UI charges vary widely depending upon the frequency range i.e. between Rs. 0/kwh (@50.2 Hz) and Rs. 9/kwh (@49.5 Hz).
RPO levels put in place by SERCs across the states vary widely i.e. in the range of 1% to 10.3% as applicable for FY 2013, as against the recommended level of 8% by National Action Plan for Climate Control. According to ICRA, risk of amendment in RPO norms by SERCs cannot be ruled out, as observed in the past in a few states. Also, implementation of the regulations by SERCs to ensure the compliance in RPO norms on an annual basis by obligated entities continues to remain weak, as SERCs tend to carry forward the shortfall in RPO compliance to the subsequent period, instead of directing any penalty or regulatory charges for non-compliance. As a result, price of renewable energy certificate (REC) on the power exchanges has remained depressed since August 2012, which in turn has led to increased risk profile of the wind energy projects preferring the REC route.
As preferential tariff norms by SERCs across the key seven4 states (which have wind resource potential) are not consistent with the guiding principles/norms as stipulated by CERC, project IRR (post tax) based on preferential tariffs for the wind assets too vary. Notwithstanding the same, ICRA notes that the preferential tariffs have been revised upwards by SERCs in all major states, except Karnataka, which have wind resource potential, in last 12 month period, with the upward revision being in the range of 4% and 34%. This in turn, has also led to increased preference of incremental capacity addition by IPPs through preferential tariff route instead of REC route. Project IRR5 for wind energy assets in the state of Maharashtra is estimated to remain high in the range of 14-15%, while the IRR in Madhya Pradesh, Rajasthan and Andhra Pradesh remains satisfactory in the range of 11-13%, based on the prevailing revised tariffs and in turn, incremental investments in the sector in the near to medium term are likely to happen in these states. On the other hand, IRR for wind projects in case of other states such as Tamil Nadu and Karnataka remains below 10%, because of relatively lower feed-in tariffs.
In respect of domestic wind turbine equipment manufacturing segment, overall annual manufacturing capacity has reached close to about 10,000 MW (as per the industry sources) with about 17 players in the market. This represents a significant over-capacity build-up. While this, coupled with slowdown in investments in turn has intensified the competitive pressures among the players, the market continues to be dominated by 4-5 players who cater to about 90% of the demand, especially by those who have a strong land-bank position & project development rights. Further, vulnerability for the domestic manufacturers who aim to target export markets, has increased further due to subdued demand outlook for wind energy installations in the near to medium term particularly in regions such as China, Europe and America.
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