As delayed discom payments weaken liquidity, renewable energy players have been steadily shifting to the preferential tariff route.
Wind energy projects are likely to remain exposed to significant counter-party credit risks as given that the financial position of the state distribution utilities in some of the states, having wind resource potential, continue to have weak liquidity and financial position, according to the ICRA. This will have an adverse effect on their payment pattern towards the wind energy project developers, the rating agency said in its latest report.
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 FY13. 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 honour the RPO norms in a more sustained manner. ICRA in its report said that implementation of financial restructuring scheme (FRS) under progress across the five states having utilities with stressed financial position, as well as the trend of retail electricity tariff revisions by SERCs, subsequent to ruling by the Appellate Tribunal for Electricity (ATE) in November 2011; remains positive for the power sector.
The Central Electricity Regulatory Commission (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 per cent from the scheduled generation.
While the forecasting for the wind projects can be made possible by way of robust technical or 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 at a 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 per cent 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).
According to the 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 seven states (which have wind resource potential) are not consistent with the guiding principles as stipulated by the CERC, project internal rate of return (IRR), post tax, based on preferential tariffs for the wind assets too vary. Notwithstanding the same, the ICRA notes that the preferential tariffs have been revised upwards by SERCs in all major states, except Karnataka, which have wind resource potential with the upward revision being in the range of 4 per cent and 34 per cent. This in turn, has also led to increased preference of incremental capacity addition by IPPs through preferential tariff route instead of REC route.
Project IRR for wind energy assets in the state of Maharashtra is estimated to remain high in the range of 14-15 per cent, while the IRR in Madhya Pradesh, Rajasthan and Andhra Pradesh remains satisfactory in the range of 11-13 per cent, based on the prevailing revised tariffs and inturn. 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 per cent, because of relatively lower feed-in tariffs.
In respect of domestic wind turbine equipment manufacturing segment, the 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 per cent of the demand, especially by those who have a strong land-bank position and 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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