Indian wind (NYSEARCA:FAN) energy has been facing tough times of late with the whole paradigm of feed-in tariffs (fixed payments for electricity generation) being abandoned in favor of the reverse auction model which is much more competitive.
It seems that these tough times are an inherent problem of the industry itself which has grown fat over the years, by making high margins across the value chain as FIT of around 7-9 cents/kWh was paid by different state governments. This is much higher than the recently discovered 4 cents/kWh in the most latest central government SECI auction. It was not only much lower than the FIT rates but also lower than the last auction, in which the rate was 6 cents/kWh. This shows and proves that the wind energy industry in India was making supernormal profits in the absence of competition.
There were a number of top renewable energy (NYSEARCA:XLE)developers that bid very low prices showing that this was not an arbitrary bid but the price is rational and reasonable. It was driven by a number of factors mainly that the offtake seems assured, interest rates have fallen recently as well as much lower margins charged by the wind turbine equipment makers and the associated prime estate land.
Wind turbine equipment players such as Inox and Suzlon have always hoarded high resource wind sites and have used it effectively to gain money at the expense of the government. But with very little alternate left for these sites except to participate in central reverse auctions, the value of these land sites has reduced. It is no longer possible for these companies to make very high profits by selling at high assured rates.
The 1000 MW of capacity saw a lot of high competition with more than 2.8 GW being bid and with 9 bidders qualifying. The government of India proposes to bid out for 4-5 GW of wind energy every year and given the current trend, it seems it will get great prices. Wind energy price has fallen to very low levels across the world and is giving good competition to solar energy. India was an aberration till date because of the contorted compensation mechanism where solar energy was bid out competitively through reverse auctions while wind energy got fixed rates. Now with both these main renewable energy forms seeing competitive bidding, the prices will be more equalized going forward.
The price of wind energy in India has become INR 2.64/kWh which is almost 20% lower than the new coal based thermal power plant prices of INR 3.2/kWh. Coal now faces a huge challenge in India with not one but two energy sources being sold at prices which are much lower priced. With fossil fuel energy itself facing huge pressure due to climate change and pollution issues, economics has also turned against coal. Wind energy now seems on a revival path once again due to economics even though market players will not have such a good time as they had in the past