India Ratings and Research (Ind-Ra) expects the country to fall short of the wind power capacity addition target of 60 GW by 2022, from the present level of 24 GW.
It expects 60 per cent of the target, 10 GW, to be achieved by 2017. In an analysis presented on Thursday, it said the sector was likely to see two-thirds of the incremental capacity addition till 2017 to come up in Andhra Pradesh, Madhya Pradesh, Gujarat and Karnataka. However, these states also have a limited margin of error on plant load factors (PLFs) and will attract only serious and well-established independent power producers (IPPs).
The cumulative capacity additions in the prominent states (in this sector) of Tamil Nadu, Rajasthan and Maharashtra had slowed significantly, as evident from their cumulative annual growth rate of nine per cent in 2012-2015 as against 19 per cent in 2009-2012. This trend, in Ind-Ra’s view, is likely to continue.
However, capacity additions in these latter states could still emanate from re-powering of existing wind power assets, by increasing the average turbine heights to 80-120 metres from 50 metres now.
Despite the significant enthusiasm around wind power, the sector has continued to underperform in comparison to its potential by 25-30 per cent. However, almost all of this was due to captive producers, whose incentives might not necessarily lead to the making of profits. With established IPPs likely to drive capacity additions in secondary states, the risks are likely to be manageable. Even so, developers and investors would want to tread with caution and require the seasoning of assets before investing aggressively.
Ind-Ra’s analysis shows the secondary states are unlikely to achieve grid parity, given the low average power purchase cost and relatively higher rates. This would necessitate significant regulatory support also aggressive incentives to reduce the capital cost of wind assets. Ind-Ra expects capital costs to reduce marginally in 2016, before rising.
It said the secondary states carried higher risks of achieving a break-even debt service coverage ratio (DSCR) through the life of the asset, given the limited cushion on PLF performance. The analysis suggests a two per cent drop in PLF at a rate anywhere below Rs 5 a unit would result in a minimum DSCR lower than 1x. Additionally, the internal rate of return for secondary states is equally sensitive, with a two per cent drop in PLF resulting in a four per cent drop in the returns.
Ind-Ra believes the policy and regulatory environment would need to be supportive to continuously attract investors. Also, the payment risks from state distribution companies of secondary states, though lower than the prominent states, would still need to be addressed in a comprehensive way, to attract capital on a sustained basis.