Pressure on Modi to fix India's wind auction mess

When Narendra Modi became prime minister of India in 2014, we had great hopes he would deliver fast growth in wind energy. He had successfully done so at state level.

And we have seen growth since he came to power, although there is discrepancy over the figures. The Global Wind Energy Council reports that total installed wind capacity in India grew from 22.5GW at the end of 2014 to 28.7GW at the end of 2016, with 3.6GW installations last year. That seems to tally with official statistics.

Numbers from the Indian Wind Turbine Manufacturers Association are brighter: 32GW installed capacity at the end of March with completions of 5.4GW in the preceding 12 months, and a forecast of a further 6GW in the year to March 2018. On that basis, you would have thought that everything is rosy in India’s wind industry.

It isn’t. In February, the government held its first competitive auction for wind, to back projects of between 50MW and 250MW each. The auction was oversubscribed by 2.6 times, and awarded support for projects totalling just over 1GW: Green Infra, Inox, Mytrah and Ostro Kutch for 250MW each, and Adani for 50MW.

But this competition has led to complications. The winning bidders have shown they can build wind farms at a levelised cost of energy of $52/MWh, which is around 25% less than those recently signed by state governments. The result is that state utilities in Andhra Pradesh and Karnataka now want to renegotiate deals of 1.1GW.

For instance, Bangalore Electricity Supply Co. in Karnataka has scrapped 400MW of power purchase agreements, and Southern Power Distribution Company in Andhra Pradesh wants to renegotiate 684MW of PPAs. If states can back out of deals they have signed then that can only undermine investor confidence.

These projects now face impasse. The states want the lowest rates, and developers and investors want them to honour their promises. We still think that compromise is the most likely option – which developer has the time or cash to take the states to court? – but our concern if that happens is the states may feel they have a licence to push around wind companies in future. We would not be surprised if this ends in legal action.

Either way, the dispute has slowed construction activity in India and puts pressure on Modi’s government if it is to hit its target of doubling wind capacity to 60GW in 2022.

To do this India has to add 6GW a year, which it has never done before: its average annual installation figure for the last decade is 2.4GW. It now has to do far more than that in an environment where businesses cannot rely on government PPAs.

The kicker for Modi is this is a problem of his government’s making. It approved the use of auctions in June 2016 at national and state level, to boost competition and drive down the cost of wind energy. That is the way the industry had to go. But now India can only expect installations of 1GW-1.5GW in 2017 according to PwC, and only saw 228MW completed in the first quarter of 2017.

That is not to say businesses are blameless. These companies, particularly turbine makers, fought for higher FITs from state governments under the previous system. It is understandable that some governments will feel short-changed paying 25% more.

Now Modi must fix the mess and deliver on his early promise.

When Narendra Modi became prime minister of India in 2014, we had great hopes he would deliver fast growth in wind energy. He had successfully done so at state level.

And we have seen growth since he came to power, although there is discrepancy over the figures. The Global Wind Energy Council reports that total installed wind capacity in India grew from 22.5GW at the end of 2014 to 28.7GW at the end of 2016, with 3.6GW installations last year. That seems to tally with official statistics.

Numbers from the Indian Wind Turbine Manufacturers Association are brighter: 32GW installed capacity at the end of March with completions of 5.4GW in the preceding 12 months, and a forecast of a further 6GW in the year to March 2018. On that basis, you would have thought that everything is rosy in India’s wind industry.

It isn’t. In February, the government held its first competitive auction for wind, to back projects of between 50MW and 250MW each. The auction was oversubscribed by 2.6 times, and awarded support for projects totalling just over 1GW: Green Infra, Inox, Mytrah and Ostro Kutch for 250MW each, and Adani for 50MW.

But this competition has led to complications. The winning bidders have shown they can build wind farms at a levelised cost of energy of $52/MWh, which is around 25% less than those recently signed by state governments. The result is that state utilities in Andhra Pradesh and Karnataka now want to renegotiate deals of 1.1GW.

For instance, Bangalore Electricity Supply Co. in Karnataka has scrapped 400MW of power purchase agreements, and Southern Power Distribution Company in Andhra Pradesh wants to renegotiate 684MW of PPAs. If states can back out of deals they have signed then that can only undermine investor confidence.

These projects now face impasse. The states want the lowest rates, and developers and investors want them to honour their promises. We still think that compromise is the most likely option – which developer has the time or cash to take the states to court? – but our concern if that happens is the states may feel they have a licence to push around wind companies in future. We would not be surprised if this ends in legal action.

Either way, the dispute has slowed construction activity in India and puts pressure on Modi’s government if it is to hit its target of doubling wind capacity to 60GW in 2022.

To do this India has to add 6GW a year, which it has never done before: its average annual installation figure for the last decade is 2.4GW. It now has to do far more than that in an environment where businesses cannot rely on government PPAs.

The kicker for Modi is this is a problem of his government’s making. It approved the use of auctions in June 2016 at national and state level, to boost competition and drive down the cost of wind energy. That is the way the industry had to go. But now India can only expect installations of 1GW-1.5GW in 2017 according to PwC, and only saw 228MW completed in the first quarter of 2017.

That is not to say businesses are blameless. These companies, particularly turbine makers, fought for higher FITs from state governments under the previous system. It is understandable that some governments will feel short-changed paying 25% more.

Now Modi must fix the mess and deliver on his early promise.

When Narendra Modi became prime minister of India in 2014, we had great hopes he would deliver fast growth in wind energy. He had successfully done so at state level.

And we have seen growth since he came to power, although there is discrepancy over the figures. The Global Wind Energy Council reports that total installed wind capacity in India grew from 22.5GW at the end of 2014 to 28.7GW at the end of 2016, with 3.6GW installations last year. That seems to tally with official statistics.

Numbers from the Indian Wind Turbine Manufacturers Association are brighter: 32GW installed capacity at the end of March with completions of 5.4GW in the preceding 12 months, and a forecast of a further 6GW in the year to March 2018. On that basis, you would have thought that everything is rosy in India’s wind industry.

It isn’t. In February, the government held its first competitive auction for wind, to back projects of between 50MW and 250MW each. The auction was oversubscribed by 2.6 times, and awarded support for projects totalling just over 1GW: Green Infra, Inox, Mytrah and Ostro Kutch for 250MW each, and Adani for 50MW.

But this competition has led to complications. The winning bidders have shown they can build wind farms at a levelised cost of energy of $52/MWh, which is around 25% less than those recently signed by state governments. The result is that state utilities in Andhra Pradesh and Karnataka now want to renegotiate deals of 1.1GW.

For instance, Bangalore Electricity Supply Co. in Karnataka has scrapped 400MW of power purchase agreements, and Southern Power Distribution Company in Andhra Pradesh wants to renegotiate 684MW of PPAs. If states can back out of deals they have signed then that can only undermine investor confidence.

These projects now face impasse. The states want the lowest rates, and developers and investors want them to honour their promises. We still think that compromise is the most likely option – which developer has the time or cash to take the states to court? – but our concern if that happens is the states may feel they have a licence to push around wind companies in future. We would not be surprised if this ends in legal action.

Either way, the dispute has slowed construction activity in India and puts pressure on Modi’s government if it is to hit its target of doubling wind capacity to 60GW in 2022.

To do this India has to add 6GW a year, which it has never done before: its average annual installation figure for the last decade is 2.4GW. It now has to do far more than that in an environment where businesses cannot rely on government PPAs.

The kicker for Modi is this is a problem of his government’s making. It approved the use of auctions in June 2016 at national and state level, to boost competition and drive down the cost of wind energy. That is the way the industry had to go. But now India can only expect installations of 1GW-1.5GW in 2017 according to PwC, and only saw 228MW completed in the first quarter of 2017.

That is not to say businesses are blameless. These companies, particularly turbine makers, fought for higher FITs from state governments under the previous system. It is understandable that some governments will feel short-changed paying 25% more.

Now Modi must fix the mess and deliver on his early promise.