Wind Energy Sector: Re-introduction of Accelerated Depreciation benefit remains a key Fver

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1 Wind Energy Sector: Re-introduction of Accelerated Depreciation benefit remains a key positive Fver for the sector, though concerns on RPO compliance continue Summary February 2015 ICRA RESEARCH SERVICES Wind based capacity addition estimated at MW in FY : As on December 31, 2014, the total installed wind energy based capacity stood at 22,465 MW, constituting 9% of the overall installed capacity in the country and within the renewable energy segment, wind segment continues to occupy a dominant share i.e. at 66%. Wind based capacity addition during FY2014 improved by 23% to 2084 MW on y.o.y basis which was also supported by reintroduction of generation based incentive (GBI) by Government of India (GoI) in September, During the first nine months of FY2015, wind based capacity addition stood at 1329 MW, a significant increase of 21% over the capacity addition achieved during 9M-FY2014. ICRA expects annual capacity addition during the current FY to improve to about MW, implying growth of about 10% over the previous year which is supported by reintroduction of Accelerated Depreciation (AD) benefit by GoI since July 2014 & sizeable investments under implementation by large players in IPP segment. Historically, AD benefit has been a key driver for capacity addition by corporate & financial investors (i.e. non-ipp segment) and with the reintroduction of AD benefit in July 2014, ICRA expects incremental annual demand of about 800 MW from such investors. Corporate customers availing AD benefit (or non-ipp segment) to have relatively more favorable project economics as compared with IPP segment: With the reintroduction of AD benefit, ICRA estimates the project IRR for non-ipp segment to be higher by 1.5% to 2.8% as compared with IRR level for IPP segment availing GBI across states 1, except for assets in Rajasthan and Maharashtra where the tariffs approved by SERCs are adjusted for AD benefit, if availed. Project economics for such corporate customers availing AD benefit in most states with wind potential are remunerative with project IRR estimated to be in the range of 13% to 16% except in the state of Tamil Nadu where the project IRR is estimated to remain weak owing to prevailing low tariffs. The estimated IRR for such customers is estimated to be the highest in the state of Madhya Pradesh followed by the states of Maharashtra and Andhra Pradesh. Contacts: Sabyasach i Maju mdar sabyasach i@icraind ia.com Girishkumar Kad am girishku mar@icraindia.com Vikram V Vikram.v@icraind ia.com Key regulatory developments on feed-in tariff norms by State Electricity Regulatory Commission (SERCs) 2 : Wind energy tariff in Rajasthan applicable for FY2015 increased by 3-4% as compared to the same for FY2014, where the increase in tariff approved by SERC is mainly on account of revision in normative capital cost and O&M cost. Wind energy tariff in Maharashtra applicable for FY2015 decreased by 1-3% as compared to the same for FY2014, where the decline in tariff (wind zone based) approved by SERC is on account of upward revision in normative PLF norms which is based on higher hub height (i.e. at 80 m instead of earlier at 50 m) based estimation & is in line with CERC s generic tariff norms. While the control period for wind energy tariff order issued by SERC in Tamil Nadu in July 2012 has expired in July 2014, SERC is yet to come out with a new tariff order. SERC in Tamil Nadu has however approved the continuation of the previously approved tariff beyond July-2014, i.e. until the new tariff is notified. Meanwhile consultative paper has been issued by TNERC for tariff determination, however ICRA notes that proposed changes for wind tariff norms continue to deviate significantly against the CERC s generic tariff norms. This in turn, has led to lower tariff estimation as proposed, which will be a negative for the sector, if approved. 1 Andhra Pradesh, Gujarat, Karnataka, Madhya Pradesh and Tamil Nadu 2 Tariff order for wind power projects has been issued by SERCs in two states for FY2015, while for other states the last approved tariff is applicable over the respective control period (in the range of 2-4 years) including for FY2015. This is unlike the CERCs generic norms as per which the tariff order is required to be issued every year ICRA LIMITED 1

2 Deviations in the proposed norms are reflected in several factors such as a) absence of tariffs linkage with wind power density, b) no adjustment of higher depreciation if availed, c) lower depreciation rate in relation to debt repayment period and c) simple average method for estimation of tariff instead of levellization which reflects time value of money. Order by Appellate Tribunal of Electricity (APTEL) directing SERC in Karnataka to re-determine tariff is expected to align the tariff with CERC s tariff norms: Karnataka Electricity Regulatory Commission (KERC) revised the feed-in tariff for wind power projects to Rs. 4.2/kwh in October 2013, from Rs. 3.7/kwh which was approved earlier in December However, industry associations/stakeholders filed a petition with APTEL challenging this tariff order by KERC, citing deficiencies & deviations in determination of such tariff. Subsequently, APTEL has issued an order in November 2014, giving directions to KERC for re-determination of wind energy tariff, which is expected to make the tariff more aligned with the CERC s tariff norms. The order by APTEL has directed KERC to re-determine the tariff based on factors such as a) indexation of capital cost to reflect inflationary impact, 2) revision in the PLF assumption based on scientific study or actual data and c) tariff estimation on levellized basis instead of simple average method. As per CERC s generic tariff norms, tariff estimation for wind energy project should be based on wind zone, levellised & fixed every year based on capital cost indexation norms. Renewable Purchase Obligation (RPO) norms continue to deviate significantly: During the period from May 2014 to December 2014, SERCs in the states of Haryana & Rajasthan have issued final amendments in RPO norms while SERC in the states of Tripura, Meghalaya and Odisha have notified draft RPO regulations. Trajectory period validity in these final/draft regulations vary between FY 2017 till FY 2022 and also, RPO target levels vary widely across the states. The RPO levels vary from 1.50% to 11.00% in FY2015 and similarly vary from 2.00% to 11.25% in FY 2016 across the states. Also, SERCs in only 14 out the 29 states have stipulated RPO norms till FY2017, while SERC in only 6 states have stipulated RPO norms till FY2020. Further, the RPO levels for majority of the states continue to remain lower than the RPO trajectory suggested under NAPCC (which specifies a minimum RPO target of 5% in FY 2010, to be increased by 1% every year for a period of 10 years to reach 15% by ). SERCs in only 2 states i.e. Himachal Pradesh, and Tamil Nadu have stipulated RPO norms at greater than or equal to the target of 11% as suggested by NAPCC in FY2016. On the contrary, RPO levels in 9 states still remain less than or equal to 5.5% (i.e. 50% of RPO Target level as suggested by NAPCC for FY 2016). Overall RPO compliance still remains a key challenge for the sector: SERCs in states such as Punjab, Uttarakhand and Union Territories (UT) have issued favorable orders directing the obligated entities to ensure RPO compliance for FY2015 including unmet RPO from past years. Further, SERC in the state of Himachal Pradesh levied a penalty for shortfall in solar RPO, while a token penalty was also imposed on state utility by SERC in Madhya Pradesh for a shortfall in solar RPO compliance. Nonetheless, overall RPO compliance continues to remain weak in many states and ensuring compliance remains a key challenge for the sector. Based on industry sources, RPO compliance continues to remain weak (ranging between 10 % to 50% of the target RPO) in FY2014 in states such as Assam, Bihar, Haryana, Punjab, Uttar Pradesh and Uttarakhand, while RPO target level has been fully complied in FY 2014 by state owned distribution utilities in 4 states i.e. namely Tamil Nadu, Himachal Pradesh, Gujarat and West Bengal. Amendments approved in Renewable Energy Certificate (REC) norms by CERC are positive for the sector: CERC s decision to allow distribution licensees to be eligible to receive RECs when the procurement from RE sources is higher than the specified RPO is positive for the sector as this will encourage the distribution utilities in such states (which have renewable energy potential) to increase procurement from RE sources over & above RPO target level. However, the extent to which utilities would be incentivized to procure more RE would also depend upon liquidity in REC market which has remained depressed owing to low RPO compliance across majority of the states. Given the weak demand for RECs and risk of possible lapse for RECs expiring within next one year, the central commission has approved extension in the validity of these RECs to 1095 days from the date of issuance or March 31, 2017 whichever is later (including for RECs which have expired till date in FY2015). Nonetheless, poor liquidity of REC itself remains a key concern for all REC registered projects, which in turn has led to cash flow mismatches for such projects. ICRA is of view that any improvement in REC market would be crucially dependent upon strict enforcement of penalty framework by SERCs as well as an improvement in the financial condition of the distribution utilities which are the key obligated entities. ICRA LIMITED 2

3 TABLE OF CONTENTS 1. Trends in Wind Energy Capacity Addition in India 2. Investment Plans by IPP Segment & Near term Outlook on Capacity Addition 3. Trends in Wind Power Generation 4. Key Policy Developments a. Reintroduction of Accelerated Depreciation benefit for Wind Power Projects 5. Key Updates & Assessment of Tariff Regulations a. Analysis of Tariff Order by MERC for Wind Power Projects to be commissioned in FY in Maharashtra b. Analysis of Tariff Order by RERC for Wind Power Projects to be commissioned in FY in Rajasthan c. Analysis of the proposed changes in Wind Tariff Norms by TNERC d. Analysis of APTEL order on tariff for Wind Power Projects in Karnataka e. Trends in Feed-in Tariffs for Wind Power Projects across Key States 6. Estimation of Project IRR based on Feed-in Tariffs for IPP and Non-IPP Segment 7. Key Updates & Assessment of Renewable Purchase Obligation (RPO) Compliance a. Trends in Approved RPO Trajectory across the States b. Status of RPO Compliance across the States in FY2013 and FY2014 c. Favorable Orders issued on RPO Compliance by SERCs in Uttarakhand, Punjab and Union Territories d. Updates w.r.t Orders on RPO Trajectory issued by SERCs in Haryana, Meghalaya, Odisha, Rajasthan and Tripura 8. Trends & Comparison for Average Pooled Purchase Cost across Key States 9. Analysis of the Amendments Approved by CERC to REC Regulations 10. Key Trends in Renewable Energy Certificate Market ICRA LIMITED 3

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