With the record low tariff of INR3.46/kWh discovered during the first round of auctions conducted by Solar Energy Corporation of India in February 2017, the winning bidders bank on the latest technological innovations and cost saving measures to achieve better equity returns, says India Ratings and Research (Ind-Ra).
Ind-Ra believes that the utilities will depend on the auction method for future power purchase contracts.
According to the prevalent technology and costs, Ind-Ra estimates that the winning bidders will just be able to earn an equity internal rate of return of about 9.0 percent and achieve moderate debt coverage at this tariff.
Technological innovations with cost reductions on both capex and operational front will be required to earn more desirable and equity-like returns. Ind-Ra considers higher hub heights (exceeding 100m) and bigger wing spans to be the biggest contributors to achieve this, among other technological improvements such as better aerodynamic profile with modular blades, lower generator-to-rotor ratio, better carbon fibre material and direct drive gearless machines.
There could be a substantial dip in capacity addition in FY18 to 1-1.5GW only from about 5.4GW in FY17. This will be because of the unwillingness of state discoms to sign long-term purchase agreements at higher feed in tariffs and unpreparedness on their part to come out with auctions in a big way in the near term.
Auctions can pick up from FY19 in the agency’s view. Although the Ministry of New and Renewable Energy has come up with detailed policies on repowering (August 2016), hybrid (draft in June 2016) and offshore wind power projects (October 2015) in the past, ground challenges and bottlenecks hinder a speedy progress on these fronts.
Distributed ownership of land and non-availability of contiguous land (due to urbanization in between) pose the biggest challenge to repowering the wind projects nearing the end of their life.
Although a higher 200-250bp equity internal rate of return can be earned in repowering projects than new plants, these practical limitations can dampen the process and limit the overall progress to a fraction of the overall potential of 3,000MW estimated by the ministry.
Hybridization of wind with solar power has major advantages as wind power peaks during night and solar power peaks during day hours, perfectly complementing each other. Besides, there can be savings on the land and evacuation fronts.
However, according to the agency’s discussions with major industry players, infrastructure bottlenecks are preventing hybridization of the existing wind power plants, while the same can be planned for upcoming plants.
According to Ind-Ra, hybrid plants can offer about 1 percent point higher returns than an individual wind or solar power plant without trackers. Given the marginal nature of incremental returns, industry players prefer to wait and watch before going up for the same in a big way.
On the same lines, emerging technology, practical difficulties around logistics and non-existence of experienced players in the field are the major hindrances for offshore wind projects to take off now.
Developers expect risks to be rightly balanced to facilitate investments in this new theme as of now. Should the engineering, procurement and construction model adopted for the initial phase until technology stabilizes, offshore projects could show a gradual uptick, in the agency’s opinion.
Cost of financing remains one of the most effective drivers to reduce cost of energy and issuers are employing new innovative structures such as introducing subordinate debt, pooling of assets, flexible repayment schedules, cash trap/additional reserves and external credit enhancements to reduce the same.
According to the agency, there is considerable appetite in the market for renewable assets with novel financial structures (key elements of structures below) which are expected to hit capital markets in FY18.