Renewable energy is posing an indirect risk to the regulated thermal power sector, despite the latter having long-term power purchase agreements (PPAs), says India Ratings and Research (Ind-Ra). Renewable energy’s lower tariffs and increasing share in the energy mix due to growth in such capacities has increased its importance among power distribution companies (discoms).
Decline in Renewable Tariffs: Renewable energy tariffs for both solar and wind power have touched grid parity from 2HFY17. The levelised tariffs dropped to INR2.44/kWh in solar energy and INR2.65/kWh in wind energy after the bidding in 1HFY18. These tariffs are lower than the average power tariff (INR3.30/unit for FY17) of NTPC Limited (‘IND AAA’/Stable), which is India’s largest coal-based power generation utility. These tariffs are also substantially lower than the regulated tariff for new thermal power plants. Moreover, these solar tariffs could move lower than the variable cost of generation in some regulated thermal power plants. Thus, cheaper renewables could lower the scheduling of the coal-based power and lower the interest on the part of discoms to continue with long-term PPAs.
Note: Wind prices till 1HFY17 are CERC benchmark tariffs
The sharp decline in per unit solar tariffs from a high of INR9-10 in FY11 has been due to lowering of both capital cost and cost of capital for the sector. Capital cost for solar power reduced due to a decline in module and invertor prices. Whereas the wind sector has seen a tariff fall due to the sector transitioning from a feed-in tariff regime to tariff-based competitive auctions along with declining wind turbine prices.
Growth in Renewable Capacities: Capacities in renewable power have strongly grown in the last three years in view of the energy’s competitiveness and the government’s focus on green energy. India’s renewable capacity was 60.2GW up in 1HFY18 (FY15: 35.7GW).
Although the effective renewable capacity at 20% plant load factor was only 7% at FYE17 of the coal-based capacity at 85% plant load factor, renewable capacity grew at 20%-30% per year compared to thermal capacity’s growth of below 5% for FY17. Furthermore, Ind-Ra believes that growth in renewable capacity would continue, given the Indian government’s revision of its renewable target to an ambitious 175GW by 2022. The overall target includes 60GW for wind and 100GW for solar, under which India needs to add about 6GW of additional annual wind capacity and about 17GW of solar from FY18-FY22. India added around 5.5GW of wind capacity and around 5.4GW of solar capacity in FY17.
Discoms are also favouring renewable energy to reduce their overall cost of energy using the single-part tariff structure compared to the two-part tariffs structure (under long-term PPAs) for coal-based plants. In accordance with the increase in the renewable capacity addition, the share of power generation increased substantially to around 8.6% in 1HFY18 from around 5.6% FY15.
Ind-Ra believes that after adding about 5.4GW wind capacity in FY17, there could be a substantial dip in capacity addition in FY18 to 1-1.5GW only owing to unwillingness of state discoms to sign long-term PPAs at higher feed-in-tariffs. However as the wind sector has also shifted to competitive bidding, auctions can pick up from FY19 in the agency’s view. Growth in the solar capacity addition is likely to continue on account of its levelised tariffs at sub INR3/kWh level.
Additionally, we are still in a zone of oversupply for solar panels and hence the prices are likely to decline further giving further push to solar adoption and hence the battle between coal and renewables would continue.
The future adoption of solar and wind energy would hinge upon technical advancements which could help i) predict solar and wind generation with greater accuracy resulting in greater grid stability and ii) store power from these sources in a cost-effective manner. A successful movement on these two fronts would result in the accelerated adoption of renewables as a viable means of meeting the base load demand.
Due to the higher capital costs in the past and the green nature of the power, renewable energy projects were provided a must-run status. Although these plants were not scheduled for the entire power initially, given the high tariffs and grid congestion, they would become competitive and receive higher scheduling with the decline in capital costs and consequently tariffs even if the must-run status is discontinued. The discoms by the virtue of the must-run status are bound to schedule this power, though grid constraints prevent full scheduling. However, once the tariffs fall further such that the cost of generation from wind is lower than the variable cost of generation of the coal-based plants, the wind and solar plants would move higher up the merit order dispatch schedule and become extremely competitive.
Ind-Ra, in a five-part series, will present its analysis on the changes in the business risk faced by regulated thermal power plants that operate under the cost-plus return on equity model, which typically lends itself to higher cash flow stability and predictability. In Ind-Ra’s opinion, those five risks are broadly classified as (i) lower regulated return on equity, (ii) lower fuel availability, (iii) higher contractual risk, (iv) lower competitive positioning, and (v) lower financial flexibility.
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