Over the last few years, India has made momentous strides in its wind energy capacity addition, positioning itself among the top five nations as it continues to bolster the capacity with each progressing year. However, the number of profitable business ventures arising out of this stellar showing remains few, with the industry stakeholders yearning for reforms to arrive at a bankable implementation model which fosters competition and transparency.
Several wind power producers have witnessed considerable revenue leakages due to grid unavailability, instability and payment defaults by distribution companies (discoms), coupled with insufficient or lack of payment security from the procurer or government, or the lack of funding. Frequent instances of grid backing down (i.e. where conventional and sometimes solar power producers are given preference to export power on the grid over wind power producers) without any compensation being awarded is another major cause of concern. Moreover, and to the horror of the existing lenders, after the low tariff discovered from the auctions conducted thus far, discoms of the primary wind-energy producing states have expressed strong reservations about continuing with the current feed-in tariffs (FiT) and have been pushing developers that qualify for fixed payments to match the lower costs as achieved during auctions.
To add to the investors’ plights, the first two wind auctions, conducted in February and October 2017 (prior to the guidelines coming into effect), resulted in record-low tariffs of ₹3.46 (US$0.054) and ₹2.64 (US$0.041) per megawatt, respectively. The forecasted disruption from aggressive tariff downfalls due to an ultra-competitive atmosphere in India’s power sector has made ensuring ease of obtaining low-cost financing from lenders a paramount need for the industry stakeholders.
Discarding the FiT regime and in an endeavour to resolve the bottlenecks, the Ministry of Power in December 2017 notified the Guidelines for Tariff Based Competitive Bidding Process for Procurement of Power from Grid Connected Wind Power Projects.
To this end, the guidelines aim to resolve the loose take-or-pay structure, firstly by expressly providing for compensation for any shortfall in guaranteed offtake by the procurer and also instances of backing down (in this regard the guidelines provide that no commissioned plant should be made to back down except due to grid exigencies and safety issues). Secondly, the guidelines provide that payouts under the power purchase agreement (PPA) may be backed by a government guarantee (in addition to a letter of credit and a limited payment security fund, which must be provided), and that developers are entitled to novate the PPA if a procurer defaults on payment, or alternatively to exercise their termination rights (and seek damages or have the project assets taken over by the procurer).
The guidelines also bring about key relaxations aimed at creating a positive sentiment among developers, procurers and lenders and insulating them from the aftermath of severely low tariffs. Firstly, the procuring entity may seek bids for fixed or escalating tariff structure for the term of the PPA (at least 25 years). Secondly, the guidelines permit closed bidding (i.e. the lowest bidder being allowed to win the bid, as opposed to reverse bidding, where the price of the lowest bidder is revealed and others are allowed to match it).
On the policy and regulatory front the guidelines provide several reassuring measures for developers and lenders, yet the determination of feasible tariffs is key in the long run and without a far-sighted approach, not only will obtaining low-cost financing become a major challenge, but the state governments and discoms are also likely to continue to pressurize the existing FiT-regime developers to renegotiate and reduce their tariffs and to match the competitive tariffs. This is in addition to the fact that infrastructure projects developed in the 2018-19 financial year will be ineligible for generation-based incentives.
In closing, it appears that policy makers and regulators have taken a hint from the debacle in the solar industry and the potentially deleterious consequences of low tariffs have not entirely been ignored. Subject to the government ensuring swift implementation and proper enforcement of the guidelines and avoiding the possible pitfalls, the introduction of a uniform policy setting in the wind sector is expected to bring about positive competition and sustainability in the long run.
Rahul Arora is a partner and Abhinav Mishra is an associate at HSA Advocates. HSA is a full-service ﬁrm with ofﬁces in New Delhi, Mumbai, Bengaluru and Kolkata.
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