Tariff Discord: Regulatory uncertainty as wind segment shifts to competitive bidding

Regulatory uncertainty as wind segment shifts to competitive bidding

The wind power segment is shifting from the traditional feed-in tariff (FiT) regime to competitive bidding. At the central level, the Ministry of New and Renewable Energy floated draft guidelines for the procurement of wind power through competitive bidding in April 2017, following the successful conclusion of the country’s first wind auction by the Solar Energy Corporation of India (SECI) in February 2017. At the state level, however, the transition has been abrupt and has created regulatory uncertainty for projects that were planned based on the FiTs fixed by the state electricity regulatory commissions (SERCs). The discovery of a record low tariff of Rs 3.46 per unit in SECI’s wind auction for 1 GW (based on the viability gap funding mechanism) has nearly disrupted the segment. This has put at risk the investments made in several upcoming wind projects in these states as the regulators had fixed their rates prior to the SECI auction.

Following this development, the discoms of Andhra Pradesh, Gujarat and Karnataka have refused to enter into power purchase agreements (PPAs) with wind power developers at rates fixed by their respective regulators. This is significant given that the three states together accounted for 80 per cent of 5.4 GW of wind capacity addition during 2016-17 at 2,190 MW, 1,275 MW and 882 MW respectively. The country’s wind capacity addition had exceeded the target of 4 GW, largely due to the capacity added in these states. In a setback to developers, the SERCs in these states have supported the discoms in not signing PPAs at the rates fixed by them and are planning to review FiTs.

In March 2017, the Gujarat Electricity Regulatory Commission (GERC) issued an advisory to its discoms asking them not to procure wind power at a price above Rs 3.46 per unit. This is despite the fact that GERC had earlier set a tariff of Rs 4.19 per unit, with an accelerated depreciation (AD) benefit of Re 0.53 per unit, for wind projects coming up between August 2016 and March 2019. This has impacted the upcoming wind power capacity of about 216 MW.

In Andhra Pradesh, the Andhra Pradesh Electricity Regulatory Commission (APERC) has agreed to the state discoms’ appeal to not approve the wind PPAs pending with it. Before the auction, APERC had set a levellised tariff of

Rs 4.84 (without AD benefit) and Rs 4.25 per unit with AD benefit for wind projects entering into PPAs with state discoms after April 1, 2016. Subsequently, the state discoms signed PPAs for 832 MW of wind capacity at the APERC-determined tariff. However, the discoms have now asked APERC to reduce the control period of the existing tariff and notify a new tariff for 2017-18. The discoms have also reportedly written to wind power developers seeking a reduction in existing tariffs.

Meanwhile, the Karnataka Electricity Regulatory Commission (KERC) has directed its state discoms to stop signing PPAs with wind power developers till further notice. It has noted that the state discoms have signed enough PPAs to meet their renewable purchase obligations for 2017-18 and 2018-19. In a recently released discussion paper, the commission has stated that since the state’s current wind power tariff (of

Rs 4.50 per unit valid till October 2018) is considerably higher than that discovered in the SECI auction and that prevalent in other states, there is a need for a mid-term tariff revision. KERC has proposed a downward revision of the wind power tariff to Rs 3.60 per unit, which will be applicable to projects commissioned after September 1, 2017. For projects that have entered into PPAs prior to the date of issue of the new order, the tariff determined earlier would be applicable, provided they are commissioned within the time stipulated in the PPAs, failing which the revised tariff would become applicable. Going forward, KERC has directed the discoms to procure wind power through competitive bidding.

The state discoms’ decision to renegotiate existing PPAs has left developers in the lurch, as many of them have already made investments and started the construction of projects based on the tariff determined by the SERCs. The shift to competitive bidding and the downward revision of tariffs will ensure the overall development of the sector. This will also help relieve financially stressed discoms and price-sensitive consumers. Nevertheless, the existing contracts must not be reneged on. KERC has revised tariffs for future projects and directed its discoms to honour the existing PPAs. However, the Andhra Pradesh discoms’ are planning to disregard the existing PPAs, which does not augur well for the wind power industry. This would set a bad example, particularly in the light of the Supreme Court’s recent judgment stressing on maintaining the sanctity of contracts (in the case of Tata Power and Adani Power’s Mundra projects). For the overall benefit of the sector, the state regulators must follow a balanced approach to ensure that the interests of all stakeholders – developers, discoms and consumers – are protected.