The wind sector in India has for years performed far below its growth potential. There are many issues at play so a nuanced context is needed to understand the implications of latest policy moves.
The government of India introduced a competitive bidding mechanism in 2017 for the award of power purchase agreements (PPAs) for wind projects. The central government’s nodal agency would only facilitate the auction and sign back-to-back agreement with utilities to buy the power.
These utilities were those which did not have a lot of wind resource but still had to buy non-solar power to meet their renewable obligations. Thus, central government would act as a bridge between demand and supply. By design the contracts were to be awarded to developers which bid the lowest. Since then nearly 21GW of tenders have been issued and 15GW awarded under this mechanism.
The prices discovered and the volume of tenders issued were much lower than earlier mechanisms where states which had their own wind resource also did their own procurement. These almost dried up to only 3GW of issued tenders and 2GW of awarded tenders with some of the wind resources states also moving towards central auctions.
In order to bid for lowest cost, developers focused on some very specific substations and areas where land was cheap and resource was great. This led to bottlenecks on grid and land. As a result, out of the 15GW awarded, only 3.7GW is commissioned so far.
In order to open larger volume and ease infrastructure bottlenecks the government has considered conducting state-specific or substation-specific auctions to utilise nearly 12GW of grid capacity (available and planned) and large volumes of allocated land for wind development which did not fit with the lowest cost requirement. This would have opened the volumes across India.
The latest consideration (no official announcement has been made as of the time of writing this) of moving away from auctions completely is a response towards the rising cost of supply chain for wind OEMs during 2021.
Wind OEMs have faced inflation in raw materials, supply chain disruptions due to the war in Ukraine, increase in logistics cost, and changes in the taxation structure in India. It is expected that nearly 2GW of cancellations might happen on account of inflation.
The recent move will allow bidders to not underbid the cost of projects in order to secure contracts. and hence save the sector from overoptimistic expectations.
Demand side requirements
However, while these interventions may solve the supply side issues, it will create demand side challenges. Utilities which have to sign the agreements to buy the power are extremely price sensitive and abhor any increase in tariffs.
Nearly all the contracts awarded by central government have faced a lot of delay in getting the utilities to sign PPAs. There has been a considerable underachievement to meet the renewable purchase obligations up to 2022, due to the reluctance of utilities to sign contracts even at the prices discovered so far. This is primarily due to lower bidding prices of solar and lack of focus on the value of the electron produced at a particular time.
In order to overcome this, the government in July announced increase in renewable obligations across Indian utilities, replacing the current ones that run until this year. For the first time, India has introduced wind-specific RPOs to carve out demand for wind technology, something done earlier for solar to safeguard it from head-on competition with other renewable energy sources. This is a welcome move.
Hybrids will drive volumes
Nonetheless, the role of wind will remain solidified in supplying round-the clock, peak power and other hybrid formats. As solar volumes continue to increase there is high demand for meeting renewable power requirements beyond the time at which PV is producing. Wind sites in India produce at a time when the sun is not shining and hence complement solar.
Already, large corporate PPAs centred around developing hybrid projects are being signed. Central government has also issued multiple tenders around procuring hybrid power. The impact will increase even more as both the cost of hybrid projects and the production profile of hybrid projects match the need of utilities.
It remains to be seen how the procurement will be done for hybrid projects as this is likely to be the main driver for building out wind capacity in the future.
Sidharth Jain is managing director at MEC+