OK, we all heard the latest on wind power – Rs 3.46/kWh was the tariff arrived at in the competitive bidding held by SECI.
Expectedly, there are a number of industry honchos who are not convinced that Rs 3.46/kWh is a sustainable tariff.
Of course, the loudest of them all is the IWTMA (Indian Wind Turbine Manufacturers Association), which is for all purposes the lobbying arm for the Indian OEMs.
While most of the work I do these days is in solar power, I and my team have been comparing solar and wind power costs at a fairly intense level for a while, so I thought I would use these templates to estimate the cost of wind power.
And when I do that, Rs 3.46/kWh does not seem to completely unrealistic. At good CUFs (25%), and at a capital cost of Rs 6 crore/MW (which should be possible for large scale wind farms), and at the prevailing Indian interest rate (some developers might be able to get it slightly lower), the levelized cost comes to Rs 3.3/kWh. For CUFs of 22%, the LCOE comes to Rs 3.8/kWh. Given that all the above parameters (except CUF) will be slightly more favorable for large wind farm bidders, it does appear that, if they are able to get good CUF locations, they can just about make a tolerable IRR on Rs 3.46/kWh.
Now, I am not entirely sure what CUFs the bidders factored in, but I do admit that it is not easy to get locations with CUFs of 25%. In addition, if there is significant backing down and subsequent generation loss, that could hurt the IRRs as well.
So, let us say my inference is that Rs 3.46/kWh is quite iffy, but might just about fly under the right scenario.
Whatever it be, I was surprised to read the veiled warning from IWTMA, which practically seemed to chide developers for bidding this low.
Now, that does not sound very fair to me.
The Indian wind industry has flourished for over 25 years on a whole lot of incentives – from accelerated depreciation to GBI to good tariffs in some states. It has had its share of problems too, but which industry does not have problems?
But something strange about the Indian wind power industry is the way the business model works. Until recently, the OEM was everything. The OEM sold the turbine, in many cases even identified land, did the implementation, and post implementation, also did the O&M. A nice arrangement.
You might ask: What’s wrong with such a turnkey offering? Doesn’t it benefit the investor?
It most likely did when the investors were companies investing purely for tax benefits (which was how a large majority of the first 20 GW of Indian wind installations came about). But as the wind power industry starts moving towards investors who are professional power developers (also called IPPs or Independent Power Producers), this one-guy-does-it-all model is sub-optimal, and things are beginning to look choppy for the OEMs.
You see, the IPPs are different beasts compared to the small investors investing purely for tax benefits (the IPPs do not even avail the AD tax benefits!). The IPPs ask many professional questions. They would like the OEMs to be more transparent on the costs and the break-ups (and they cannot be hoodwinked like the simpleton investors). They would like to do the implementation themselves. And they would like to have the O&M done by independent O&M companies instead of the OEMs themselves – in many cases, the IPPs take up the O&M themselves.
You can see why this is giving the OEMs sleepless nights. The Indian wind turbine OEM manufacturers have been living in a cosy land where, with a fairly “illiterate” end user, and with their strong connections to the government and bureaucrats, they were pretty much able to get away with whatever prices they quoted. Unlike solar cell prices, there are hardly any benchmark prices for wind turbines. One should wonder why, given that wind turbines are a very old industry, dating as far back to Don Quixote!
Through the IWTMA, their key lobbying association, the OEMs push their interests forcefully, and usually have got their way. My past interactions with the IWTMA, or for that matter, some of the leading wind OEMs, have not exactly left me in awe of them. Some of the turbine OEM CEOs think they have descended from the Gods, and quite a few of them are the old economy guys who think exactly the way old economy guys think – respect for just money and power alone, cosy ties with bureaucrats and government, screw-the-small-guys, you get it.
Anyway, the Indian wind OEMs, moneybags and all, were having a rather good time overall. And then the reverse bidding happens for wind power. I am aware that the wind turbine OEMs have been resisting this for quite sometime. I will not be surprised if the IWTMA had used its “good offices” to convince the powers that be not to go for reverse bidding, as that would result in a further fall in the tariffs, leading to IPPs demanding even lower prices for the turbines. The IWTMA was successful for quite sometime in preventing the reverse bidding from happening, but all good times had to come to an end.
Right now, what the Americans would have called a triple whammy is hitting the Indian wind turbine OEMs.
==> Firstly, their customers are demanding higher transparency in costs and this bring about a cost reduction and reduction in their margins
==> Second, a steady revenue they made from the OEM services might soon evaporate as independent OEMs might take over that business.
==> On top of the above two comes the reverse bidding for wind power. This will most likely further reduce the margins the OEMs make on the sale of every turbine.
I am not envying the Indian wind turbine OEMs. But I am not exactly praying for them either – they have had 25 long years to prepare for this.