Wind energy stocks are priced for growth that may not come

India's renewable energy targets are ambitious: 500 GW of non-fossil fuel capacity by 2030. Wind energy was once a leading contender in the race toward this goal. However, recent trends suggest that wind power might not be the growth engine many hoped for.

Over the past year, wind power generation has barely budged. Between April 2023 and January 2024, output dropped by 0.38 per cent, a concerning sign for a once high-flier sector. This is at odds with the soaring valuations of wind turbine OEMs like Suzlon Energy and Inox Wind, which continue to trade at 63-68 times earnings. But are their high valuations justified by the sector's outlook? We look at some trends that suggest otherwise.

Climate change: The invisible hand slowing wind power

One of the biggest challenges facing the wind sector is climate change, a factor that is often overlooked when discussing the growth of renewable energy. A recent study by Consolidated Energy Consultants revealed that rising temperatures are reducing wind speeds. The possible impact on energy generation is stark—every one metre per second drop in wind speed can reduce turbine output by as much as 9 per cent.

This is not just a distant issue. States like Andhra Pradesh, Telangana, Karnataka and Maharashtra are already experiencing lower-than-expected generation, linked to high temperatures.

While this may not immediately affect the industry's earnings, it signals the beginning of a long-term structural slowdown in wind energy generation.

Policy headwinds diminishing demand

On top of the climate-induced supply threat, the demand outlook for wind power is equally bleak, led by policy changes. One significant change is the phase-out of the Inter-State Transmission System (ISTS) waiver, which currently allows renewable projects to transmit power without incurring additional charges. By 2028, this waiver will be withdrawn, resulting in rising power transmission costs. As a result, wind power tariffs, from Rs. 3.7 per unit in 2024, could rise by 65 to 80 per cent. This could erode wind energy demand as power producers potentially move to cheaper thermal sources. Turbine manufacturers Suzlon and Inox Wind will naturally see a trickle-down impact.

Power producers, in fact, are also turning to hybrid projects to offer better dispatchability, reducing the appeal of standalone wind projects. This is reflected by the fact that nearly 55 GW of renewable energy (including wind) capacity awarded in auctions as of October 2024 has still not translated to power purchase agreements.

There are signs of strain in the industry, too. Suzlon Energy, for instance, recently announced the cancellation and trimming of nearly 300 MW in orders. While order cancellations are not unusual, a more telling sign of weak demand is Tata Power's recent shift away from wind.

Once a vocal proponent of clean energy, Tata Power is now scaling up its thermal capacity. According to company officials quoted in The Economic Times, muted returns from wind projects were a key reason for this pivot. When a company as large and influential as Tata Power makes this move, it sends a strong signal that the economics of wind power are not as favourable as once thought.

Risk from global players amid technological stagnation

Wind turbine manufacturers, primarily Suzlon and Inox Wind, have long benefitted from protectionist policies that shield them from global competition. While this insulation has helped Indian manufacturers dominate the domestic market, it has also led to complacency in innovation.

Globally, wind turbine OEMs are moving toward more powerful turbines—5-6 MW units for onshore installations and 10 MW plus units for offshore, which help produce more energy at lower costs. In India, however, most new installations are still in the 2-3 MW range with limited options for higher-capacity turbines. Without the pressure of international competition, Indian manufacturers have little incentive to innovate or reduce costs, leaving them vulnerable to superior global competition.

What investors should consider

The wind energy sector is facing multiple challenges: stagnating supply, rising costs, diminishing demand and technological stagnation. Add to this the poor financial health of players like Suzlon and Inox Wind. While Suzlon has reduced its debt-to-equity to an impressive 0.03 times, it remains free cash flow negative. Inox Wind remains highly leveraged with a debt-to-equity ratio above 1.9 times. Considering this, their current valuations are more grounded in hope than in reality. An overlooked risk that deserves immediate investor attention is this: if the wind sector is struggling during favourable conditions, what happens when conditions worsen further?

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