Gujarat power regulator’s proposal to share generation-based incentives may result in 0.75 per cent lower internal rate of return (IRR) for wind energy projects, said India Ratings and Research (Ind-Ra).
“The Gujarat Electricity Regulatory Commission’s (GERC) proposal to share the generation-based incentive (GBI) may result in 75 bp (basis point) lower project IRR for wind energy developers,” said Ind-Ra.
The rating agency believes such policy level changes which impact the developer IRRs would lead to a slow down in wind capacity addition.
The GERC in a discussion paper has proposed sharing of the GBI in the ratio of 50:50 with the distribution licensee/end consumer.
Ind-Ra opines such sharing of the GBI, if approved by GERC is likely to result in the decline of project IRRs by 75bp and equity IRR by 125bp.
As per the current policy, the wind developers are entitled to receive an incentive of Rs 0.50/kwh for a unit of electricity generated.
In case a similar policy were to be implemented by other state electricity regulatory commissions, the impact on IRRs will be higher for states where the tariffs are low, since the GBI incentives would form a bigger share of the overall income stream.
The introduction of GBI was primarily to boost investments into the sector, serving as an additional source of revenue which could improve the project IRR. Sharing the GBI goes against the underlying objective of incentivising developers toward generating renewable energy, it said.
Ind-Ra believes developers in order to protect their IRRs may need to either renegotiate with the wind turbine manufacturers to lower the capital cost or to increase hub heights in order to improve capacity utilisations.
It notes that investor interest has been waning in the wind sector in the last one year.
The bulk of the reason for low investor interest is the lack of proper policy direction with respect to continuation of GBI beyond 2016-17 fiscal.
Besides, non-signing of fresh power purchase agreements by state electricity distribution companies particularly Maharashtra lead to stranded capacity, thus drawing less investment.
Substantial delay in payments by some of the key wind capacity rich states (namely Maharashtra and Rajasthan) and a decline in wind tariffs in some states, is also leading to low investment in the sector.