Execution headwinds Viability and implementation risk constrain outlook for wind sector - CRISIL
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Execution headwinds Viability and implementation risk constrain outlook for wind sector February 2019
Screenshots
Capacity addition of ~1 GW over Apr-Dec FY19 14-16 GW of capacity addition expected over FY19-
FY23
(GW)
Capacity addition (GW)
6.0
5.5
5.0
4.0
3.4
3.0
5.4
2.3
2.1 1.9 2.0 4.3
1.7 1.8 3.4 3.8
2.8
1.1 1.0 2.1 2.3 1.9 2.3
1.8
1
0.0
2013-14
2014-15
2015-16
2016-17
2018-19 P
2019-20 P
2020-21 P
2021-22 P
2022-23 P
2017-18
2012-13
2013-14
2014-15
2015-16
2016-17
2017-18
9M 2016-
9M 2017-
9M 2018-
17
18
19
Source: MNRE, CRISIL Research Source: MNRE, CRISIL Research
Weighted average tariff of Rs 2.7 per unit at auctions to OEMs face severe decline in profitability
date
(MW) (₹/unit)
22.3% 13.0%
3.46 3.43 18.5% 14.6% -5.2% 11.2% 2.0% 5.3%
2.86 2.80 2.77 11.4%
2.65 2.51 9.6% 0.1% -2.3%
2.44 2.44 -27.7%
43 -54.2% -28.4%
36 -68.7%
22 18 16 12 10
6
Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18
1,050 500 1,000 500 2,000 500 2,000 1,200 1,200
(Dec 2017)
NTPC ISTS
SECI Tranche III
SECI Tranche I
SECI Tranche II
(Mar 2018)
SECI Tranche IV
SECI Tranche V
TANGEDCO
Net sales (Rs billion) EBITDA margin (%)
(Aug 2018)
MSEDCL
(Aug 2017)
GUVNL
(Feb 2017)
(Sep 2018)
(Oct 2017)
(Feb 2018)
(Apr 2018)
Net Margin (%)
Note: Financials for Inox Wind Limited (S) and Suzlon Energy Limited
(S) have been considered
Bid Capacity (MW) (LHS) Bid Tariffs (Rs./Unit) (RHS)
Source: Company Filings, CRISIL Research
Source: Industry, CRISIL Research
Non-solar compliance low in non-windy states RPO targets up steeply; compliance a monitorable
(%)
Mop target of Non-Solar RPO is 10.25% for FY19
10.25% 21.00%
19.00%
17.00% 17.50%
9.5% 9.5%
7.0% 14.25%
10.50%
4.5% 5.0% 5.5% 8.75%
4.0% 2.8% 11.50% 6.75% 7.25%
2.4%
1.5% 0.4% 0.1% 0.1% 0.5% 1.0% 1.0% 4.75%
2.75%
Delhi
Uttar Pradesh
Jharkhand
Assam
Bihar
Orissa
Haryana
Chattisgarh
9.50% 10.25% 10.25% 10.25% 10.50%
8.75%
Non-Solar RPO Target (2018)
Estimated Non-Solar RPO compliance (2018) 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22
MoP Target for Non-Solar RPO (FY 2019)
Non-Solar Solar Total (RHS)
Source: State policy documents, CRISIL Research Source: Ministry of Power, CRISIL Research
2Wind capacity addition of 14-16 GW expected over fiscal 2019 to 2023
CRISIL Research expects capacity addition to grow slowly over the next five years, driven by the allotment of central
transmission utility’s (CTU) grid connected capacities. The shift to a competitive bidding mechanism has slowed
industry growth due to a significant fall in tariffs, triggering a decline in both bid response and profitability for original
equipment manufacturers (OEMs).
CRISIL Research expects capacity addition of 14-16 GW over fiscal 2019 to 2023, entailing investments of ~Rs
1,100 billion. Capacity additions will primarily be driven by central government (SECI) allocations with relatively
stronger counterparties like Solar Energy Corporation of India (SECI) and PTC, reducing risk as compared to direct
exposure to state discoms. State auctioning, on the other hand, has slowed as several states have signed power
supply agreements (PSAs) with PTC and SECI to procure wind power under the schemes auctioned by them, to help
fulfil their non-solar renewable purchase obligations (RPO) targets.
A shift to a competitive bidding mechanism in the wind energy sector has caused a slowdown in capacity addition as
participants are yet to adjust, with tariffs having fallen to Rs 2.4-2.6 per unit, from Rs 4.0-4.5 per unit under the feed-
in-tariff regime. Such low realisations remain unviable for the entire value chain at current capital costs of Rs 6.8-7.2
crore per MW.
Further, fiscal 2019 is expected to continue to see a slowdown in capacity additions as, despite tendering and
auctioning occurring in spurts through the fiscal, most of the capacity is expected to come online only between end-
fiscal 2019 and fiscal 2021. Thus, capacity pipelines are presently bunched up over those years with a weak outlook
thereafter due to incremental challenges to execution.
Wind capacity addition expected over fiscal 2019 to 2023
(GW)
6.0
5.0
4.0
3.0
5.4
2.0 4.3
3.4 3.8
2.8
1.0 2.1 2.3 2.3
1.8 1.9
0.0
2013-14
2014-15
2015-16
2016-17
2018-19
2019-20
2020-21
2021-22
2022-23
2017-18
P
P
P
P
P
Source: MNRE; CRISIL Research
Execution and viability challenges are major risks to future capacity addition
Despite robust tendering, we believe that the sector would require significant regulatory support from states in terms
of acceptance of bid results, resolution of payment-related issues with wind developers, and meeting of state RPO
targets and open access regulations to allow seamless transfer of wind power.
The following constraints/risks have emerged in this regard which may constrain capacity addition:
3I. Sustainability at low tariffs:
The initial competitively-bid wind auctions, which took place in fiscal 2018 and early-fiscal 2019, witnessed bid tariffs
of ~Rs 2.5 per unit. This led to regulatory authorities (discoms/SECI) considering this the benchmark. However,
current market dynamics are not conducive to such realisations. While those tariffs were achievable at low capital
costs of Rs 6.3-6.5 crores per MW (on account of an inventory build-up with OEMs), current capital costs range
between Rs 6.8-7.2 crore per MW, and cannot be supported by tariffs as low as Rs 2.5 per unit. With state/central
tendering agencies not ready to accept tariffs above a certain mark, the sector has witnessed a pricing impasse.
OEMs are also not in good shape with a few key players reporting losses at the net level over the past five quarters.
II. Poor bid response and slow tendering / auctioning activity:
The sector witnessed an initial spurt of auctions from February to December 2017, with tariffs reaching Rs. 2.44 per
unit by the end of Dec 2017. Auctions saw a brief lull post-April 2018, with two tenders (NTPC, 2 GW, and SECI, 2
GW) delayed by several months due to poor bid response. The last wind auction took place in September 2018, post
which there has been only one 1.2 GW tender issued by SECI which is pending for auction. This is in contrast to the
30-40 GW tendered in solar over FY’19. Players are also finding it difficult to acquire contiguous land with good
quality (Type I) wind sites. These execution challenges have also led to poor bid response. The slowdown in
tendering/ auctioning will further extend the time for commissioning, weakening the sectoral outlook.
III. Adequate transmission infrastructure:
The rapid addition of renewable capacities requires adequate grid infrastructure to evacuate incremental power. This
has increasingly emerged as a concern, with developers lowering participation in bids (SECI, 2 GW, NTPC, 2 GW)
where this has been a key issue. Specifically, for wind, a majority of the best wind sites are concentrated in a few
states like Gujarat, Tamil Nadu, Andhra Pradesh and Karnataka, causing increased congestion in specific regions in
these states. Although, the central government has framed several policy initiatives to solve these issues, their
implementation lacks pace, especially at the intra-state level.
IV. Availability of low-cost funds for projects:
Reduction in marginal cost of funds-based lending rate (MCLR), coupled with opening up of other financing avenues,
had helped players reduce their capital cost. Fiscals 2017 and 2018 witnessed a relatively lower interest rate regime,
which started to reverse in fiscal 2019 due to several macroeconomic factors. This may be a cause for concern going
forward as it would directly impact cost of debt for developers. Lenders have also become cautious in lending to the
segment due to a pile-up of stressed assets in the conventional power sector. While there are ways to lower the cost
of debt for developers, players would have to actively manage the same as a rising interest rate regime and other
macro factors impact borrowing costs. This remains a key monitorable for the sector.
Despite the above-mentioned challenges, CRISIL Research believes that the sector does have an upside in view of
the ambitious 60 GW target by fiscal 2022. The centre does expect to auction upwards of 5 GW each year, which
will support additions to an extent. Additionally, capacities under other schemes such as the 1.2 GW wind solar hybrid
scheme (includes solar component), offshore wind energy tenders and repowering of existing low capacity wind
turbines may further contribute to overall capacity addition, provided risks are mitigated.
4Analytical contacts
Rahul Prithiani Mayur Patil
Director, Industry Research-Analytical Associate Director, Industry Research-Analytical
rahul.prithiani@crisil.com MayurP@crisil.com
Media contacts
Saman Khan Hiral Jani Vasani Parmeshwari Bhumkar
Media Relations Media Relations Media Relations
CRISIL Limited CRISIL Limited CRISIL Limited
D: +91 22 3342 3895 D: +91 22 3342 5916 D: +91 22 3342 1812
M: +91 95940 60612 M: +91 982003 9681 M: +91 841184 3388
B: +91 22 3342 3000 B: +91 22 3342 3000 B: +91 22 3342 3000
saman.khan@crisil.com hiral.vasani@crisil.com parmeshwari.bhumkar@ext-crisil.com
5About CRISIL Limited
CRISIL is a leading, agile and innovative global analytics company driven by its mission of making markets function better.
It is India’s foremost provider of ratings, data, research, analytics and solutions, with a strong track record of growth, culture of
innovation and global footprint.
It has delivered independent opinions, actionable insights, and efficient solutions to over 100,000 customers.
It is majority owned by S&P Global Inc, a leading provider of transparent and independent ratings, benchmarks, analytics and
data to the capital and commodity markets worldwide.
About CRISIL Research
CRISIL Research is India's largest independent integrated research house. We provide insights, opinion and analysis on the
Indian economy, industry, capital markets and companies. We also conduct training programs to financial sector professionals on
a wide array of technical issues. We are India's most credible provider of economy and industry research. Our industry research
covers 86 sectors and is known for its rich insights and perspectives. Our analysis is supported by inputs from our large network
sources, including industry experts, industry associations and trade channels. We play a key role in India's fixed income markets.
We are the largest provider of valuation of fixed income securities to the mutual fund, insurance and banking industries in the
country. We are also the sole provider of debt and hybrid indices to India's mutual fund and life insurance industries. We pioneered
independent equity research in India, and are today the country's largest independent equity research house. Our defining trait is
the ability to convert information and data into expert judgments and forecasts with complete objectivity. We leverage our deep
understanding of the macro-economy and our extensive sector coverage to provide unique insights on micro-macro and cross-
sectoral linkages. Our talent pool comprises economists, sector experts, company analysts and information management
specialists.
CRISIL Privacy
CRISIL respects your privacy. We may use your contact information, such as your name, address, and email id to fulfil your request and service
your account and to provide you with additional information from CRISIL. For further information on CRISIL's privacy policy please visit
www.crisil.com.
Disclaimer
CRISIL Research, a division of CRISIL Limited (CRISIL) has taken due care and caution in preparing this Report based on the information obtained
by CRISIL from sources which it considers reliable (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the
Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. This Report is not a
recommendation to invest / disinvest in any company covered in the Report. CRISIL especially states that it has no financial liability whatsoever
to the subscribers/ users/ transmitters/ distributors of this Report. CRISIL Research operates independently of, and does not have access to
information obtained by CRISIL’s Ratings Division / CRISIL Risk and Infrastructure Solutions Limited (CRIS), which may, in their regular
operations, obtain information of a confidential nature. The views expressed in this Report are that of CRISIL Research and not of CRISIL’s
Ratings Division / CRIS. No part of this Report may be published / reproduced in any form without CRISIL’s prior written approval
Argentina | China | Hong Kong | India | Poland | Singapore | UK | USA | UAE
CRISIL Limited: CRISIL House, Central Avenue, Hiranandani Business Park, Powai, Mumbai – 400076. India
Phone: + 91 22 3342 3000 | Fax: + 91 22 3342 3001 | www.crisil.comYou can also read
