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Expert Speaks | July 2017

Competitive bidding will lower procurement costs

Rahul Prithiani, Director, CRISIL Research, explains the impact that auctions will have on the segment.

Companies successfully participated in the wind power auctions. How sustainable are the wind auction bids?
The bids are fairly aggressive and assume most of the project risks to play out favourably. For achieving the good returns, generating PLFs of close to 35 per cent will be necessary through the life of the projects. Hence, location of the project will be very critical.

Can we be sure that companies are being cautious enough or simply aiming to capture most projects?
Due to limited opportunities in the wind energy market owing to transitional delays in shifting from feed-in-tariff regime to competitive bidding, expiration of benefits like 80 IA and generation based incentives and halving of accelerated depreciation benefits and competition from solar segment, the companies are aggressively bidding for projects with relatively lower counter-party risk.

What impact will these bids have on the wind industry and existing models? How do you see the market evolving post this?
The feed-in-tariff model adopted by state discoms is likely to peter out. Going forward discoms are likely to buy power from competitively bid projects for meeting their Renewable Purchase Obligations (RPO) requirement. With the advent of competitive bidding, original equipment manufacturers (OEMs) and developers would have to settle for lower returns.

Are the economics of the winning bids sustainable or will we see similar doubts as the solar sector is having in the face of drastically reducing prices?
The economics of the winning bids is quite stretched and assume high PLFs through the life of the projects. The ability to achieve desired PLFs, manage project implementation, address operational and receivable risks is likely to be challenging thus increasing the risk profile of projects.

How updated/relevant is this new model for wind procurement? What are the benefits?
The competitive bidding model is being practised for most of government contracts including power purchase from solar PV plants. From the discom/utility perspective this is likely to result in lower procurement costs from wind energy projects. In fact the competitively bid tariffs are even lower than the average power purchase cost (APPC) for most of the discoms.

On the flip side, historically, states have been procuring wind power under a preferential regime with feed-in-tariffs, what are the foreseeable challenges this move to auctions and replicate the solar model will have?
The challenges will remain the same as in other auction processes to ensure realistic bidding so that project implementation does not suffer. Further under the new model finding a good wind site with evacuation access to the central transmission corridors and mitigation of counter-party risk, is critical to ensure lower costs, are the key challenges for the same.

Auctions are aimed at providing more transparency to the sector, break wind turbine manufacturers' domination and make the wind turbine market more efficient. Given the successful bidding, has this goal been met or is on the way to being accomplished?
Kindly elaborate. The transparent bidding mechanism will ensure lowest cost wind power is available to the state discom. Going forward, we would see large independent power producers undertaking project related activities in house to cut costs.

GoI wants to tender out 4 GW of wind capacity next year but capacity addition through the tendering process often takes a long time, which may lead to a short-term demand hiatus in the market. What is your take?
Till the fresh tendering process is initiated the project developers will be in wait and watch mode. With discoms not signing any fresh power purchase agreements (PPAs) on existing feed-in-tariffs there could be some slowdown in capacity additions.

The trend of auctions is expected to increase compliance to RPO norms. On what basis is this expectation held, especially for states that have not traditionally turned towards wind?
With the cost of wind power moving down, and central level allocations allowing interstate sale of power, large non-windy states with low non-solar RPO compliance such as Uttar Pradesh, Bihar, Odisha, Chhattisgarh, Haryana etc., will buy more wind power.

What is the profit-margin that developers and investors can expect under this new model? On an average will the RoI increase and payback period reduce?
RoI improvement for developers is unlikely compared to the earlier mechanism. Further, returns will the contingent on site specific factors which will influence PLFs. Under standard PLF assumption of 28-30 per cent the equity IRRs are likely to be at 8-10 per cent.


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