Hybrid Renewable Tariffs to Continue at a Premium over Solar: India Ratings

India Ratings and Research (Ind-Ra) believes that upcoming wind-solar hybrid auctions will spark cautious optimism among independent power producers. Technical complexities related to grid integration and inclusion of floor capacity proportion of wind projects (at least 33% of the total contracted capacity) in the hybrid mix could weigh on the project economics and tariff assumptions.

This is despite the competitive bidding guidelines addressing many of the issues hampering the growth of hybrid projects in the past. On the contrary, standalone renewable auctions (especially solar) are likely to garner higher interest on account of developing comfort around photovoltaic technology, improving in panel efficiency, lower volatility in generation, increasing economies of scale and decreasing operating costs.

The Ministry of New and Renewable Energy issued tariff-based competitive bidding guidelines for power procurement from grid-connected solar-wind hybrid projects during October 2020, to promote large grid connected wind-solar hybrid systems for optimal and efficient utilisation of transmission infrastructure and land and thus reduce the variability in renewable power generation and achieve better grid stability.

Ind-Ra views the impact of some of the key clauses of these guidelines and their ability to address key risks associated with renewable projects as follows:

Must-run Status a Positive but with a Caveat: While hybrid projects will enjoy the must-run status and shall be eligible for compensation at PPA tariff for any grid backdown, no generation compensation will be applicable if backdown is on account of grid safety. This caveat keeps hybrid projects exposed to the risk of permanent loss of revenue due to grid curtailment on occasions. Renewable projects in Ind-Ra’s portfolio have not received any grid compensation payments until now (matter pending at various courts in some cases). Projects in a number of states including Andhra Pradesh, Telangana and Karnataka have been facing curtailments over the past couple of years without any compensation for the loss of revenue. The hybrid bidding guidelines have not entirely addressed this risk in the agency’s view, given the litigation delays and possible curtailment quoting grid safety related issues. 

There are a limited number of independent power producers with equal capabilities to execute both solar and wind projects on this scale which reduces competition. If located in the most resource-rich areas, hybrid projects at the tariffs discovered so far are likely to provide better returns than standalone solar and wind, making a good case for investments in them compared to commoditised standalone solar and wind projects.

Figures 4 and 5 indicate the average debt service coverage ratios (DSCR) for a 17-year loan with 8.5% interest rate per annum for various PLF combinations of solar and wind for a project with 60% solar and 40% wind capacity at a tariff of INR2.41/kWh. The total operating expenses assumed: solar – INR0.5 million/MW, wind – INR1 million/MW).

Figure 4
Wind and Solar Projects at Same Location

Average DSCR42%40%38%36%
Source: Ind-Ra
Figure 5
Wind and Solar Projects at Different Locations
Average DSCR42%40%38%36%
Source: Ind-Ra

However, commissioning and operating wind plants entail a greater risk than that in solar projects, given the dependency on turbine suppliers and greater volatility in generation patterns. The unusual variations in wind generation levels throughout the country this year further highlight the generation risk for wind plants. Land and transmission related risks are also significant for wind power plants. These risks make standalone solar projects preferable to wind and hybrid power at current tariffs, as seen in the recent SECI auctions. 

Solar Continues to Outshine Wind in Bids: The recent solar tenders have been oversubscribed with the past five standalone solar tenders (since August 2019, excluding manufacturing-linked capacity) floated by SECI, receiving aggregate bids of 15.43GW for tenders of 6.67GW. On the other hand, wind auctions have been relatively less frequent off late with the recent SECI standalone wind auctions remaining considerably undersubscribed. The last five standalone wind auctions conducted by SECI have seen aggregate bids of 8.6GW for tenders of 7.4GW. However, the last two of these auctions, viz. tranches VII and VIII were undersubscribed by almost 62%, i.e. bids were received for 1.15GW against tendered capacity of 3GW. 

Solar tariffs have been continuously falling with the SECI auction in November 2020 witnessing a lowest tariff bid of INR2.00/kWh, 15.3% lower than the lowest bid discovered in the previous SECI auction a few months ago. This steep fall in tariff is likely to have been caused by a number of factors including the end of safeguard duty on imported solar modules by July 2021, falling module prices and falling interest rates. Whether tariffs can sustain at this low level, remains to be seen. The introduction of increased basic customs duty affecting imported module prices could again see a tariff pick-up to earlier levels.

Interest in hybrid projects seems to be picking up with SECI’s third tranche of auctions earlier this month seeing tariffs falling by about 10% to INR2.41/kWh. Before this auction, SECI had awarded 1.56GW of hybrid capacity against a tendered capacity of 3.7GW. 

Round-the-clock renewable power would be vital if the country has to increase its dependence on renewables and  meet the ambitious target of achieving 450GW of renewable energy by 2030.

Hybrid power, whether a combination of just renewables or an optimal combination of renewables backed by conventional power, is surely a step in the right direction. While the initial response to hybrid power auctions had been muted, Ind-Ra expects the interest to pick-up as more developers become comfortable with both solar and wind.

Especially, if SECI decides to push hybrid projects more and standalone solar and wind tenders become less frequent, developers will have to adapt or lose out. Also, if storage backed renewables is the future, then storage required for hybrid plants would be lower than that of standalone solar or wind, thus reducing the investment required in storage.

However, it may take some time before the tariffs discovered during hybrid projects bidding come near to the tariffs discovered during recent solar auctions (as low as INR1.99/kWh).