Financing and Auction of Solar Projects in India: A Reality Check

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India has made a quantum leap reaching approximately 9 GW in 2016 from a meagre 10 MW in 2010. Government departments and private players working in unison has helped in scaling such an achievement. However, intense competition has led to tariff wars, resulting in very low tariff rates. This trend dates back to December 2011 when a foreign company bid Rs. 7.49 for projects under NSM. 6 years later we are standing at Rs. 3.64 bid for 750 MW (250 MWx3) solar project in Rewa, Madhya Pradesh. Although, low solar energy tariff firms up the hope of reaching countrywide solar grid parity with conventional energy, bidders are finding it tough to get funding. Banks and private lenders are inching away from financing solar projects in India due to lower tariffs, seeing it as a cost risk. To explain the situation in a single sentence, we can say that low tariff rates in the solar industry are introducing high cost financing issues to the developers and industry players.

Low tariff rates are questioning financial feasibility of the project and even putting timely completion of projects under unstable grounds. In the same breath, we can discuss about the PPA for bundled scheme under JNNSM, poses another payment security concern for lenders. The deteriorating financial state of State Discoms increases the credit risks for lenders. Further, assumptions that Discoms may not honour their obligations under the PPA for 20 years if the costs of solar come down eventually, as they will, worsen the scenario. Keeping in mind that payment default by State Discoms is common, the credibility and bankability of the PPAs do not find favour with lenders.

 Approximately, $34 billion was sourced till 2015 to attract private financing in the Indian solar sector. And $2.1 billion that Indian Government had budgeted for (renewable energy) 2016-17, falls short comparing the amount of financing needed from private and public sources to achieve 100 GW by 2022 ($25 billion every year till 2022).

Delay in Awarding Contracts is another major hurdle on the road to success. More than 12 GW capacity of project bids have been conducted in the FY 2016-17, which is quite impressive. However, only 4 GW capacity of projects have been awarded to the winning bidders. Even the DCR category projects that are supposed to help the domestic manufacturers, did not get more than 0.850 GW awarded to the winning bidders, out of the 2.5 GW DCR category projects (within 12 GW). Not having enough projects in the DCR category is making it hard for the domestic manufacturers to compete with the global players. As example we can highlight the 200 MW (100 mw X 2) capacity project for Coal India under Solar Energy Corporation of India (SECI). Reverse auction for the project was completed in two phases. However, the tender has been cancelled recently. This reflects poorly on the investor sentiment as it depicts the uncertainty of PV Solar power projects in the country, and the criticality in terms of dependence on signing of the PPAs by respective DISCOMS. Similarly, the NTPC 750 MW (125 MWx6) phase Two project is still waiting to be awarded after the bidding process was completed some time ago.

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This delay in awarding projects stretches the project timelines and decreases demand, while adding extra expenses due to continuous price rise of land, raw materials, and machinery. Additionally there is the issue of organizing auctions under an old price model, wherein incomplete auctions are resulting in lower prices for the auctions thereafter, thus sabotaging the feasibility of the project and creating gaps in finance flows during project execution. Lower tariff and unnecessary delays are scaring away investors, which in turn are hindering the Power Purchase Agreements. In order to address this serious issue, it is imperative that time bound bids are released and LOIs are issued within strictly set timelines. Additionally, Standard Bidding documents need to be published from MNRE to regulate and streamline the process. Or else, the targets for 2022 will not materialize into reality.

While stabilizing solar tariffs is incredibly important for India to retain investors, Indian Government needs to quickly reduce the delay between project auction and awarding the LOI to ultimately achieve 100 GW by 2022 target.

Further domestic manufacturing of quality components needs a boost from the government, as otherwise, sustainable solar development would not be realised. Presently, massive imports of sub-standard modules from countries like China, is hurting this objective. Owing to the low quality of these dumped modules, the sustainability and durability of the projects have become questionable, which in turn, is resulting in lack of investor confidence, and hence, appropriate financing is taking a hit. Hence, there is an urgent need for imposing Anti-Dumping duty on imported solar panels from countries like China. It will provide a level playing field for the domestic solar manufacturing industry, while providing a check on import and use of sub-standard material at the same time.

Besides these primary issues a better strategy and action is needed in developing infrastructure to transmit energy, creating enough land banks, offering better transportation and roadways, filling up gaps in policy development and implementation, and creating more skilled labour through training. India has made incredible changes to enhance solar capacity. However, more needs to be done to reach the 100 GW target by 2022. In addition, focusing on project auctions and financing issues can make the efforts worthwhile.

Reference:

http://www.thehindubusinessline.com/economy/solar-tariffs-crash-to-below-rs-3-in-madhya-pradesh-auctions/article9533738.ece

http://www.eetimes.com/author.asp?section_id=36&doc_id=1330879&_mc=RSS_EET_EDT

http://www.livemint.com/Industry/zW5Lf1okn054cFug5yKGsL/Madhya-Pradesh-solar-bids-hovering-at-Rs3-per-unit-in-revers.html

http://www.greenworldinvestor.com/2016/07/04/another-solar-auction-in-india-leads-to-low-developer-interest-and-reasonable-tariffs/

https://www.bloomberg.com/news/articles/2016-04-13/indian-solar-auction-sees-foreign-developers-mostly-shut-out

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