ICRA expects wind farm based capacity addition during the current FY 2011-12 at about 2800 MW (against actual of 2350 MW in FY 2011), and the same to grow at an annual rate at about 15% going forward, supported by growing demand from Independent Power Producer (IPP) segment. The commencement of trading of Renewable Energy Certificates (REC) on Power Exchanges since March 2011 as well as long-term certainty over the floor/cap pricing mechanism of REC are key positive developments for the renewable energy sector. Further, ICRA believes that the spiralling international cost of conventional energy sources and persistent domestic fuel shortages make wind energy more cost-competitive.
ICRA expects the new wind power based projects/IPPs to prefer the REC route against the preferential tariff route, and within the REC route, many IPPs would prefer to sign their power purchase agreements (PPAs) with discoms at their average power purchase cost (APPC) instead of selling on merchant/short-term basis. This is due to open-access and banking facility constraints and volatility in merchant tariffs, although the merchant option under the REC route is the most remunerative option available. Notwithstanding the favourable long-term demand outlook for wind energy sector aided by regulatory and fiscal support, we see the following key issues which could affect capacity addition:
Implementation issues in complying with Renewable energy Portfolio Obligation (RPO) norms due to lack of consistency and a wide divergence in RPO norms across states, risk of any amendment in RPO norms by SERC (as observed in few states), no precedence of any enforcement of penalty on obligated entities1 for shortfall in RPO & absence of regular monitoring of RPO compliance by state agencies. In ICRA’s view, the counter-party credit risks of state utilities in most of the states having wind energy potential have increased significantly as evident from persisting defaults to wind turbines in the state of Tamil Nadu.
Execution risks associated with strengthening of the intra-state transmission network beyond the inter-connection point remains a challenge for the utilities across the states, also given their weak financial position. With respect to tariff regulations, implementation of wind-zone specific tariffs (as devised by CERC in its generic tariff principles) remains uncertain in Maharashtra, which is the first state to adopt such tariffs. On the other hand, preferential tariffs continue to vary across the states, and remain fixed for a longer control period which could impact the returns of new projects commissioned under this tariff regime.
Target RPO levels vary across states; not in line with the recommendations of the NAPCC; RPO compliance and penalty framework remain extremely crucial
Target RPO levels vary widely from 1% to 11%, as set by SERCs across states for FY 2012, and are not in line with the recommended level of 7% suggested by the National Action Plan for Climate Change (NAPCC), 20088. In fact, it is observed that SERCs in a few states such as Chhattisgarh, Haryana, Kerala, Tamil Nadu, Uttar Pradesh and West Bengal (as shown in Chart 7) have revised their target RPO levels significantly downwards (varying between 27% and 85%) for FY 2012 from the earlier levels set in FY 2010, given that the earlier target levels were quite aggressive in some of these states. The SERC revised the RPO requirements of the state of Tamil Nadu (despite being rich in wind energy) to 9% in FY 2012 from 14% in FY 2011. The regulations of SERC were also amended, bringing more obligated entities (that is, open access customers and captive power plants) instead of only distribution licensees.
Inconsistency in tariff norms across the states; Operationalisation of wind-zone based tariffs, as put forward by the CERC, is yet to be implemented
While the wind-zone based generic tariff regulations issued in September 2009 by CERC provide a guiding benchmark for SERCs to follow for their respective tariff regulations, SERCs in only a few states (that is, Maharashtra, Punjab and Haryana) have so far issued regulations in line with CERC norms. In Maharashtra, which is the first state to adopt such wind-zone specific tariffs, the operationalisation of such a tariff mechanism is still pending.
This was because of delays in the announcement of procedures for classification of wind farm projects under appropriate wind speed zone by the Maharashtra Energy Development Agency (MEDA11, State Agency as appointed by the MERC). Meanwhile, the MERC has approved the interim tariff at Rs. 4.67/Unit (that is, specific to Wind Zone II with the option available for over/under recovery, depending upon final classification of zone) for the projects to be commissioned in FY 2011-12.
The classification procedures for wind zones have now been put in place by MEDA in Maharashtra in September 2011. However, the implementation of the same could face further delays because of a) lack of clarity over the wind power density map prepared by C-WET (which is based on wind resource assessment at 50 M height) and b) the complex and time-consuming process associated with the estimation of project-specific WPD12. Further, MNRE vide its circular13 dated 1 August 2011 removed the minimum requirement of WPD of 200 Watt/m2 at 50 m hub height for wind energy project development, given the suitability of such sites to harness wind potential using technologically efficient wind turbines. However, the CERC is yet to notify tariff norms for wind zones with WPD lower than 200 W/M2. Therefore, uncertainty over the implementation of WPD-based tariff framework would continue.