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Wind Energy Sector: Regulatory challenges continue to affect-ICRA

According to reports, despite the strong policy support; Capacity addition estimated at 2800 MW in FY 2016

Wind based capacity addition estimated at 2800 MW in FY2015-16: ICRA expects annual wind capacity installations during the current year to improve to 2800 MW, a growth of about 20% over the previous year, driven both by the IPP as well non-IPP segments. While the former was encouraged by satisfactory feed-in tariff based PPAs in key wind energy rich states and cost competitiveness with conventional power, the latter derived benefits from the accelerated depreciation (AD) norms. Strong policy support by Government of India (as evident from wind based cumulative capacity target of 60 GW by FY2022 and from the proposed National Renewable Energy Act), coupled with cost competitiveness of wind energy tariff continue to support favorable demand outlook in the long run. As on June 30, 2015 the total installed wind energy based capacity stood at 23763 MW, constituting 9% of the overall installed capacity in the country; within the renewable energy segment, it continues to occupy a dominant share of 65%.

Mixed trend in revision in preferential feed-in tariff by SERCs for wind projects during FY 2015-16: State Electricity Regulatory Commissions (SERCs) in the states of Andhra Pradesh, Karnataka and Rajasthan have revised the preferential feed-in tariff by 3%, 7% and 2% respectively for the wind projects to be commissioned in FY 2016. However, the tariff norms continue to vary and are also not consistent with CERC’s generic tariff norms. While the approved tariff revision in Feb 2015 by SERC in Karnataka is subsequent to direction by Appellate Tribunal of Electricity (ATE) for redetermination of tariff based on CERC’s tariff principles, revised tariff by KERC is applicable till October 2018 and hence remains negative, especially for projects to be commissioned in next year onwards as the tariff does not take into account the upward indexation for capital cost & O&M cost during such period. In Maharashtra, SERC has extended the tariff applicable for FY 2015 till October 2015, pending review of existing renewable energy tariff regulations for the next control period w.e.f April 2015. Also in the state of Tamil Nadu, significant delays are observed for tariff determination for wind energy projects given that last tariff order was issued in July 2012 with its applicability till July 2014. Notwithstanding these uncertainties, ICRA believes that the current feed-in tariff levels in most key states are remunerative for wind energy developers.

Renewable Purchase Obligation (RPO) norms vary across states with limited compliance; though recent regulatory developments are positive: RPO norms continue to vary across the states in terms of both, quantum of RPO varying from 1.50% to 11.25% in FY2016 across the states and also the period of RPO trajectory with only 9 states stipulating RPO norms till FY2020. Further, the RPO levels remain lower than the RPO trajectory across majority of the states with only 3 states having RPO norms at greater than or equal to the target suggested by NAPCC for FY2016. Based on study of RPO compliance during FY 2014 by utilities in 14 states (which account for 65% of energy demand), utilities in 5 states have fully met the RPO targets and for the balance, average RPO compliance remained at 60% of norm in FY 2014. In most cases, SERCs have allowed carry forward of the shortfall in RPO compliance to the next fiscal, while penalty enforcement is seen only in few instances. Nonetheless, regulatory direction by ATE in April 2015 to SERCs for ensuring RPO compliance as well as Supreme Court’s directive in May 2015 to uphold SERC’s authority to enforce the RPO compliance for open access/captive consumers are positive regulatory developments for RE sector, though the extent of improvement in compliance and sustainability remains to be seen. Subsequent to ATE’s directive, SERCs in Maharashtra and Punjab have recently issued stricter orders to the state owned utilities directing them to meet the shortfall in a time-bound manner, while SERC in Maharashtra has imposed RPO regulatory charges on the state owned utility.

Wind Energy Sector: Regulatory challenges continue to affect the sector, despite the strong policy support; Capacity addition estimated at 2800 MW in FY 2016 to the state owned utilities directing them to meet the shortfall in a time-bound manner, while SERC in Maharashtra has imposed RPO regulatory charges on the state owned utility.

Scheduled & forecasting framework in place by CERC for inter-state wind power projects: CERC’s regulations on scheduling & forecasting framework is currently applicable to regional entities and will not have any negative impact on the majority of the wind projects/IPPs which are connected to the intra-state transmission system. As CERC has suggested SERCs to follow and implement a similar framework for wind and solar power projects, such framework will have a negative impact on cash flows & project IRR for the wind projects, if actual overall deviation (mix of over-generation and under-injection) exceeds 30% of the scheduled, assuming that such regulations are also implemented by SERCs in their respective states. This is also because if the variation is above -/+35%, reduction in PPA tariff is to the extent of 30% for deviation in energy generation (i.e. in case of under-injection and over-generation). Wind by nature is however variable and intermittent which may translate into a risk of wide fluctuations in actual resource availability which in turn makes it challenging for the sector for forecasting, though the same is possible to some extent through robust technical/statistical modeling with the use past generation/weather conditions data.


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