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Competitive bidding in Wind: An idea whose time is now

According to reports, for the first time Indian companies generating and selling electricity from wind turbines are facing the prospect of having the selling price determined by market forces.

For many years, the price (called ‘feed-in tariff’) was fixed on the basis of negotiations with the buyer, viz., the electricity boards. In the recent years, though, the price is being fixed by the state’s electricity regulator, who would hear out both the wind company and the power distributor, and then ‘award’ the feed-in tariff.

Last month, the government, acting through its entity Solar Energy Corporation of India, came out with a tender for purchase of electricity from wind power generators. (SECI would in turn enter into back-to-back agreements with state electricity distribution companies for selling the power.)

The tender had been in the works for over two years. It is for purchase of power from 1,000 MW of total wind power capacity. Bidders quote a price and the least bidders win an opportunity to set up wind farms and sell energy to SECI.

But the wind companies have been resisting it fearing that competition-driven pricing would hammer their margins. The resistance has been spearheaded by the wind turbine manufacturers (rather than their customers, the energy companies) because it is the machine manufacturers who ultimately have to bear the brunt of the lower tariff. (In the wind industry, the equipment manufacturers do not just sell the machines, they “sell IRR” – which means, they price their machines so as to assure their customers of a certain rate of return from energy sales.)

It is therefore noteworthy that Ramesh Kymal, a doyen of the wind industry and Chairman and Managing Director of Gamesa India, says that competitive bidding is an idea whose time has come. “Turbine manufacturers have to accept that. I don’t see feed-in tariffs the way we know it after a few years.”

As in any move, the implications vary for different stakeholders. For electricity distribution companies it is favourable as they would get clean energy at cheaper prices. However, when feed-in tariffs are replaced by market-determined tariffs, turbine manufacturers’ margins could come under pressure. Though they have been resisting this, there is now a creeping realisation that there is no other go.

‘Wind’ is always compared with ‘solar’, and if wind energy prices do not come down, the industry will not grow. (Industry captains, such as Tulsi Tanti, CMD of Suzlon, point out that the wind industry is subject to certain statutory levies that the solar companies are not, and given the same benefits, wind tariffs could be brought down by 50 paise a kWhr. Today, excluding outliers, wind prices are in the ₹4.50-₹5 band.)

But the true implication of competitive bidding in wind is that it opens up new markets. Today eight states are assessed to be windy enough for wind farms. These have policies to foster wind projects. Other States (like Haryana, UP and Bihar) have no prospects of wind power because of lack of wind. It is to these States—which too are mandated to buy clean energy—that SECI will sell.

To this wake-up-call for the turbine producers, there is another dimension. Among the participants in the bids were three machine manufacturers themselves—Gamesa, Inox and ReGen. This means, machine manufacturers are competing with their own customers—the power companies. If the manufacturers win (the tariff bids are yet to be opened), it implies that the manufacturers priced their products lower to themselves than they would to their customers. A new benchmark for turbine prices would be set.

How the turbine manufacturers lower their prices while keeping their margins is their problem, but no doubt they will look to technology and scale for succour. Experts say that lower tariffs and new markets are the fundamental requisites for India’s annual wind power capacity additions to climb to 6,000+ MW levels, from 3,500-odd MW today. Hence, the kicking-off of competitive pricing for wind has huge positive implications.

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