This year's downturn in India followed the country's first reverse auction in February, which saw tariffs crashing to INR 3.42/kWh ($0.052/kWh). In comparison, feed-in-tariffs across the states at the time were INR 4-6/kWh ($0.06-$0.09/kWh).
The fallout was swift, with nearly all states discouraging or stopping feed-in-tariff (FIT)-based purchasing. Industry experts saw the low tariff as an anomaly, despite the second wind auction pushing prices down even further to INR 2.64/kWh ($0.04/kWh).
The government is planning additional auctions — for as much as 6GW in the next four months. However, wind-power developers and manufacturers are having to cope with the impacts of the sudden downturn.
Perhaps most notably affected was Siemens Gamesa Renewable Energy (SGRE), which has struggled over the past nine months, blamed, in part, on the market downturn. Prior to the merger between the two major European OEMs, Gamesa was the leading manufacturer in India.
In an effort to better understand the upheaval, Windpower Monthly (WPM) spoke to SGRE India CEO Ramesh Kymal (RK), to assess the future of wind power in India:
WPM: The Indian government is talking about auctions for an additional 6GW this year. Will these auctions help SGRE India save jobs and win new projects?
RK: Auctions are certainly a welcome move and will stabilise the industry in the long-term. It is clear competitive bidding is here to stay, but the industry does need a FIT to sustain it in the short term.
In the past, the manufacturing guidance came from forecasts based on the order book. However, with the auction-based projects having a timeline of 18 months, the manufacturing guidance will have to come from the confirmed order book.
This would make it easier for us to control costs and inventory.
We already have an understanding to supply a 200MW project (developer) Orange won in the second auction. We are in talks with other bid winners.
We will have strategic understanding with other players for bidding, where we can work out a competitive price based on the wind resource data and locations available to us.
WPM: At INR 2.64/kWh, wind power seems to be cheaper than coal. What do you think was behind such low tariff bids?
RK: It is an aberration. After the first wind auction, the market just collapsed as most of the utilities refused to buy new wind power under previous Feed-in-tariff (FiT) rates, which were significantly higher than the bid price. It was hard convincing policymakers and regulators the auctioned tariff was not the new standard. The resulting uncertainty in the market stopped project activity. Even new projects dried up.
The logjam saw most of the industry staring at huge inventories with no projects in hand; a significant change from last year, when 5.5GW was installed.
By the time the second auctions were announced, cash flows became more important than profits and the industry bid aggressively to generate cash flows by selling in-hand inventory.
WPM: Are you expecting any corrections in the tariff in the coming 2GW auction? Will there be more price shocks?
RK: Most of the projects proposed in the first bids were in Tamil Nadu and Gujarat; states with reasonably good wind resource potential.
We have asked the government to distribute the total capacity under bidding across different states. As the auctions move to low-wind resource states, they will automatically dictate a higher tariff.
Factors such as better technology and higher customer expectations have also contributed to the fall in prices. Nearly all major players now offer 2MW and above machines with higher rotor diameters that are optimised to Indian conditions. There is increased focus on cost of energy.
The industry has also optimised its supply chain effectively, cutting flab and costs wherever possible to reduce expenses.
We are seeing customers' expectations have also undergone a drastic change in the past few years. Earlier, wind power customers had a benchmark project internal rate of return (IRR) upwards of 14-16%. After the fall in price in the solar sector, the investors have now lower IRRs.
Some of the other practical decision making factors were availability of excess funds with large investors, control over good wind resource sites, assured grid uptime on inter-state grid, and assured payment mechanism.
The last two factors, namely the grid uptime and assured payment mechanism, were important risk mitigating factors at the time of the first bid as there were issues related to backing down of wind generation due to transmission constraints and delay in payments from cash strapped utilities.
Although all these low-cost drivers for the auctions still remain, the focus in the subsequent bidding round will be on profits as the industry needs to sustain. Eventually, I expect the prices to stabilise and settle at a higher value.
WPM: You suggested closed bids would be a better option than reverse bids. Do you anticipate the bid process changing?
RK: If you look at all major infrastructure projects, procurement is usually done on closed bid. Reverse auction formats have been effective in India, where the capital goods are imported from overseas, especially for conventional energy (thermal) and solar.
Taking that into consideration it was suggested that closed bids should be explored along with reverse bidding to encourage local manufacturing.
We have made calls to the government regarding the need for a closed bid system. Although the coming 2GW auction will again be a reverse auction, we are hopeful of new capacity being called under a closed bid system.
WPM: SGRE recently won an integrated wind-solar hybrid project from Renew Power. What are your expectations from the project?
RK: We believe that wind-solar-hybrid project will ensure optimal use of land resource, grid infrastructure and higher renewable resource utilisation.
While the current hybrid projects are executed under a private-sale contract, we need policy clarity on projects that are currently selling power to the state utilities.
There is also a need to consider a combined tariff for new hybrid projects.
WPM: In August, Tamil Nadu state utility (TANGEDCO) traded wind power and made money. How do you think this has changed the utility's perception of wind power?
RK: Tamil Nadu was the first state to support wind power and remains the largest wind power state in India.
However, as the penetration increased, the state was regularly backing down wind power during peak generation period resulting in losses to the generators.
We went to the highest political authority in the state and made a representation to make optimum use of available wind resource by selling it rather than wasting it away.
This resulted in significant change in utility's response. Further enhancement of inter-state transmission connectivity enabled the state to trade wind power this year.
Understandably, the utility has begun to look at wind power as a welcome option and is open to new wind projects. Interestingly, Tamil Nadu has an estimated potential of 200GW and we have just utilised about 8-9GW leaving a lot of scope for future development.
WPM: What has been the impact of the Indian market on SGRE globally?
RK: India will continue to be a major focus for Siemens Gamesa. We expect the market to stabilise in 2018 and fully recover in 2019.
While the organisation is taking all possible efforts to adapt to this market conditions, it is awaiting positive signals from the government with respect to clarity on power purchase contracts, policy certainty and roll out of announced auctions to stabilise capacity additions, which will help the industry to bounce back.
We expect the market to pick up and for us the future is bullish. We have always been lean as a employer so we do not anticipate any large scale layoffs. Our presence in solar power also helps us to deploy our assets optimally.
WPM: Gamesa was also the first developer to successfully undertake repowering. What do you think are the policy hurdles to repowering?
RK: The biggest hurdle to repowering is that most of the utilities are not ready to renegotiate power purchase rates making repowering economically unviable.