bad below 14.10
more downside then
can go up to 16 ( 3 months)
wait and watch
And then it happened, the one development that has incontrovertibly damaged the burgeoning industry—bidding. The central government, in its wisdom, decided to introduce bidding to bring down the cost of power. This started with solar, and, in tandem with lower module prices, the government brought down capital costs and solar tariffs from a high of `17/unit to `2.44/unit. What an impressive achievement in two years, which led to the boom in the solar industry that took it from hothouse status to achieving impressive scale! The same was then done in wind, and the tariffs fell from a feed-in-tariff band of `4-5/unit to `3.46/unit and, most recently, `2.64/unit, a decline of 23% in less than a year. This, inspite of the fact that wind capital costs are largely domestic and less variable versus solar, which tracks global module prices given the Chinese supply glut. This also ignores the facts that the central grid evacuation by PGCIL for the first award has still not been delivered, and the CERC guidelines for various state-level evacuation programmes are not in place.
On the face of it, these developments are impressive: They make the growth areas of solar and wind power generation more competitive than before, more competitive than thermal power, and more acceptable to the loss-making SEBs. The problem lies elsewhere. All this was done in an environment of poor power demand. This gave the states the ability to make much mischief: question existing PPAs, not sign PPAs for approved and constructed projects awaiting commissioning, basically not accept any more renewable capacity, unless it is at this obscenely low rate. With no goad needed to increase grid curtailment and further delay payments, India is basically punishing renewable power generators. The bidding also kills the logic for the Renewable Purchase Obligation, which has long ceased to be a stick to enforce renewable purchase by the SEBs.
At these bid tariffs, and recognising execution-, grid-, and payment-risks, the few specialised institutions lending to the sector are not willing to lend, as they are not able to make the case that the risk and returns are evenly matched, that the debt would have adequate coverage, and they would get their capital back. If the lenders are not sure of debt returns, we know the equity returns are modest, likely below debt. The bidders bet on falling capital costs (module process going down to $0.25/wp, when they have gone up to $0.38/wp), on not hedging dollar debt from vendors or ECB financing, and the marvellous fiction of a premium on flipping the operating assets into an INVIT, when the current INVITs in the market are trading at a discount. For wind, the OEMs could lower their margins from 10%, given a huge inventory of partially-developed projects, to some 5%. Even at 10%, the working capital funding is a challenge. At the lower margins, it is not possible.
So, we have the government’s poor understanding of power demand and supply, the reaction of the SEBs, the capabilities for power evacuation, and the private sector’s classical penchant for resource-auction hara-kiri. All this, exacerbated by the lack of any bids for six months, is further pressurising the bidders to hara-kiri land-acquisition bids with debt-like single-digit equity returns in an environment with no meaningful reduction of risk. The vast bulk of the projects will not be built, they will not be financed. The capex will not be signed up. By the time we learn, two years of failure will have passed, and given the ‘success’ of the bids in generating significantly lower tariffs, there is no return to FIT possible. The wind sector is forecast to reach 600 MW of projects commissioned this year (FY18)—from 5,500 MW to 600 MW in just one year! Please debate this with me, and tell me how this is a success. Was the hara-kiri industry really cartelised and sitting on juicy returns? The leading companies, all Make-in-India for wind, have let go of some 3,000 frontline jobs, with more jobs losses coming. These are jobs-in-India. Why did it have to happen like this just when the sector was scaling up? The nation wants to know.