In the Indian power sector there are perhaps only a few industries that have experienced a more significant series of changes in their tariff regime in recent times than those in the wind space. In 2017, the wind segment experienced a transition from feed-in tariffs (FiTs) to competitive bidding (reverse auctions). Recently, the Ministry of New and Renewable Energy (MNRE) revised the auction process for wind energy projects to move from reverse auctions to closed bidding. The following are key points of the new competitive bidding mechanism:
- Bids for a cumulative capacity of about 8 GW will be issued each year from January 1, 2023 onwards, up to 2030.
- To ensure that wind energy capacity is developed in all the eight windy states, every bid will be a composite one, consisting of state-specific sub-bids for each of the eight windy states. The power generated from the capacity established via each of the state sub-bids will be pooled and offered at a pooled tariff to all procurers. The pooling will be as per the Electricity (Amendment) Rules, 2022.
- The bids will be on a single-stage two-envelope closed-bid basis. One envelope will contain the technical bid and the other will contain the financial bid. The envelope containing the technical bid will be opened first and the financial bids of only those bidders who qualify in the technical bid will be opened.
- The bids will specify the capacity to be installed. Each sub-bid will be specific to one state. The cumulative size cap for any one of the eight states in one year will not be more than 2 GW every year. The Solar Energy Corporation of India (SECI) or implementing agencies may determine the minimum and maximum bid size, based on the wind RPO targets of the states.
- SECI will issue bids with a cumulative capacity of about 8 GW every calendar year from 2023 up to 2030. A detailed break-up of this capacity shall be issued by SECI.
- Necessary amendments in the Guidelines for Tariff-Based Competitive Bidding Process for Procurement of Power from Grid-Connected Wind Power Projects for this purpose will be notified separately.
To understand the nuances of this new notification, it is necessary to dig deeper into the background of the regulatory transitions in the wind power segment.
Transition from FiTs to reverse auctions
A key incentive for the Indian wind power sector to attract foreign capital was the use of FiTs – that is, a tariff fixed by regulators and not discovered through competitive bidding. Separately, the sector also enjoyed the benefit of accelerated depreciation, generation-based incentives and renewable energy certificates. These policy initiatives assisted in the growth of wind power projects in the country, particularly for captive and group captive consumers.
Through the years, equitable growth across the windy states in the country became a key highlight of the segment. This happened primarily due to improvements in technology, which resulted in higher capacity turbines with higher hub heights and larger rotor diameters, which helped in tapping wind at higher altitudes. A common criticism of the fixed FiT regime was that improvements in technology happened at a slow pace or were limited which stalled greater innovations on the part of original equipment manufacturers. In 2017, to ensure transparency and achieve lower tariffs through competition, probably upon seeing the success in the solar segment, it was decided to transition to competitive bidding with reverse auctions.
As of March 2018, the installed wind capacity stood at 34 GW, having grown at a compound annual growth rate of 13 per cent since 2013-14. Between 2012-13 and 2016-17, wind capacity additions recorded an increasing trend (approximately 2 GW, 4 GW and 5 GW). However, the capacity addition from 2016-17 to 2017-18 was approximately 2 GW. The record capacity addition in 2016-17 was on account of a combination of factors such as phasing out of accelerated depreciation benefits and discontinuation of generation-based incentives, with effect from April 1, 2017. Meanwhile, the slowdown in 2017-18 can be attributed to the transition to competitive bidding for project allocation. Post the transition, the slowdown continued and yearly wind power capacity additions remained approximately in the range of 1 GW to 2.5 GW.
In order to streamline the bidding process for these projects, the Ministry of Power, in December 2017, issued competitive bidding guidelines for solar and wind plants. The guidelines provided a transparent and cost-effective framework for wind power procurement. Subsequently, with the shift to competitive bidding, the focus also shifted to the then emerging opportunity of developing solar-wind hybrid projects. The MNRE, in May 2018, released the Hybrid Wind-Solar Policy, which set guidelines for the procurement of power from a hybrid project through the tariff-based bidding process. Later, schemes concerning peak power and round-the-clock power were also introduced to improve capacity addition of wind projects.
The first-ever reverse auction for wind power projects was conducted by SECI for 1,000 MW of capacity in February 2017. The lowest tariff that emerged in the auction was Rs 3.46 per kWh. In subsequent auctions, tariffs kept on decreasing, even going lower than Rs 3 per kWh. This was a significant decrease in tariff compared to FiTs. Prior to the introduction of competitive bidding, wind FiTs determined by various state electricity regulators varied from Rs 4 to Rs 6 per kWh, depending on the speed and intensity of wind in a given state. Following the reduction in wind tariffs under the competitive bidding regime, discoms felt that they had been paying very high tariffs for wind power, and therefore decided to not sign any further power purchase agreements (PPAs) under the FiT system. In fact, discoms in many states were reluctant to honour the already signed PPAs, which were yet to be approved by the respective state regulatory commissions.
The transition in the regulatory regime, although considered a major reform, came with its own challenges. Several industry stakeholders felt that the transition, though necessary, was not done in a phased manner. With the reduction in tender trajectory and low capacity additions, wind turbine manufacturers were left with big inventories. Moreover, from captive and group captive wind projects, the focus shifted to centralised procurement from discoms. All this led to a reduction in the market size. Thus, in the few tenders that were floated, independent power producers started to bid with low tariffs that some considered unviable. However, according to some, tariffs were falling not only because of aggressive bidding but also due to the segment as a whole becoming more efficient and thus able to set up projects at lower tariffs. Nevertheless, falling tariffs meant that projects only in Gujarat and Tamil Nadu were economically feasible. Thus, concentration of projects in these two states started, against the prior norm of somewhat equal development across all windy states. In addition, with the greater role of discoms in the wind power segment due to centralised procurement, industry players started facing greater issues of payment delays and even wind curtailment.
Transition from reverse auctions to closed bidding
Given the challenges faced by the wind segment, several industry stakeholders and bodies started questioning whether the transition to competitive bidding was helpful and openly shared their views on the need to either go back to the old regime of FiTs or at least make amends to the existing framework of e-reverse auctions. The new competitive mechanism, released recently, calls for closed bidding, which can be considered a step back from reverse auctions. In closed bidding, the bidder who offers the lowest (L1) tariff will win the project if the technical criteria are met. In contrast, in reverse auctions, bidders would continue quoting lower competitive tariffs after the opening of bids. This change in the bidding process is expected to stop aggressive bidding by developers, which was making several projects unviable. However, many still believe that abandoning reverse auctions by giving the reason of “aggressive” bidding and unviable projects is a product of lobbying by many inefficient players who were in financial distress and unable to compete with the few efficient ones. The other key legacy issue of projects being concentrated only in Gujarat and Tamil Nadu is now being solved by having composite tenders with projects across eight windy states and by procuring power at a pooled tariff. At least on paper this seems to be a step in the right direction, promoting equitable development across states. However, to make this a success, timely execution of planned and additional augmentation of transmission infrastructure will be key.
According to the MNRE, the installed wind power capacity as on January 31, 2023 was 41,983.18 MW (approximately 42 GW). According to Renewable Watch Research, currently, approximately 13 GW of standalone wind projects (excluding capacities under hybrid projects) are at various stages of development (announced/under-bidding/under-construction). The new notification states that bids for a cumulative capacity of about 8 GW will be issued each year from January 1, 2023 onwards, up to 2030. This translates to about 64 GW of additional capacity through government procurement. Assuming this includes both onshore and offshore wind capacity and that the tender trajectory is indeed implemented in letter and spirit, the total projected wind capacity by the end of 2030 may reach 119 GW. This is still less than the often cited domestic target of 140 GW of total wind and 30 GW of offshore wind capacity by 2030. This leaves significant scope for routes other than government procurement, through centralised tenders, to not only achieve domestic or international targets but also the full wind potential across the country.
Therefore, going forward, it is necessary to tap the low-hanging fruit of wind repowering. According to Idam Infrastructure Advisory, about 19,500 old wind turbines in the country with less than 1 MW capacity rating each have a total repowering potential of 10.5 GW. To this end, necessary augmentation of the transmission infrastructure, improvements in the financial health of discoms and the provision of more financial incentives to make business models viable will be key from the government’s end, even though a repowering policy is in place. Apart from repowering, corporate procurement of wind energy from captive or open access projects will be essential for meeting the targets. To this end, policy clarity and low open access charges will be key.
Therefore, going forward, the transition from reverse auction to closed bidding – although hailed by the industry – is perhaps only one of the many policy interventions currently required to augment wind power capacities in India.