Lower payment and offtake risks, falling generation costs improves risk-return
Wind power is likely to be sustainable at around Rs 2.9-3.0 per unit in fiscal 2019 because of reduction in payment and offtake risks, lower capital cost per generated unit, and conducive debt financing.
Such tariffs, despite being 28% lower than the lowest under the erstwhile feed-in-tariff regime, will still offer developers a healthy and sustainable 12-14% equity IRR, or internal rate of return.
With the Solar Energy Corporation of India (SECI), set up by Government of India through the Ministry of New and Renewable Energy, increasingly taking up the role of the principal counter-party, payment risk in projects has reduced. This would have otherwise hinged on discoms, some of which are in financial distress and unable to make payments on time. Average payment delays by SECI have been less than one month compared with ~4 months by discoms of major wind power purchasing states.
What’s also providing comfort to developers is the deemed generation clause in recent power purchase agreements (PPAs) that offer payment for generation rather than offtake.
“Also tariffs of ~Rs 3 per unit would be at least 10% lower than the average power purchase cost of 12 out of 14 major power consuming states in fiscal 2017, and competitive versus other sources of power, which allay the risk of back-downs”, said Subodh Rai, Senior Director, CRISIL Ratings.
Waiver of inter-state transmission charges will also make wind power more attractive for non-windy states such as New Delhi, Uttar Pradesh, Jharkhand and Bihar. This may not only reduce offtake risks, but also provide up to 15 GW demand opportunity over the next 4 years through unmet non-solar renewable power obligations for non-windy states.
“Technology has been playing a part, too,” said Manish Gupta, Director, CRISIL Ratings. “Capital cost per unit of generation has declined by over 10% in in the past three fiscals because of improvement in turbine technology such as higher hub-height machines that capture more wind at higher altitudes. This has improved the viability math of wind projects.”
Additionally, improving scale and track record will enable developers to pool operating capacities and access innovative financing with tenures as long as 20 years along with lower interest rates – which are basic to infrastructure projects.
An improving ecosystem for wind power sector lends more stability to cash flows of future projects. Hence CRISIL expects wind power companies to sustain stable credit outlook despite lower cushions for debt servicing rendered on account of lower tariffs.
That said, the bid-out tariffs could still be lower than Rs 2.9-3.0 per unit seen in the recent bids. Bids were as low as Rs 2.43 in December 2017 and Rs 2.51 in April 2018. This is likely as high competitive intensity among wind developers and lower capital costs may prevail for some time as wind turbine manufacturers are continuing to offer discounts to gain market share. However, going forward, with discounts from wind manufacturers expected to reduce, tariffs are likely to be sustainable at Rs 2.9-3.0 per unit.
Source: crisil
