The long read: India’s tender prices tumble, despite Discom delays

The Indian solar market has proven attractive to international solar players in recent years. This interest, it seems, has continued despite of the impacts of the Covid-19 pandemic. “Even during a lockdown, India finalized [solar] bids worth 12 GW,” Power Minister RK Singh recently said.

According to Sourya Choudhary, head of the utilities business at Amp Energy, international interest in the Indian market and highly competitive tender outcomes have been driven by a confluence of factors. “The sustained interest from domestic as well as global players is a result of … [the] immense market size of National Solar Mission [100 GW solar by 2022] along with defined timelines to achieve that, increased focus both domestically as well as globally to move into renewables, availability of lower-cost growth capital, and muted returns in other geographies offering better opportunity cost.”

Shantanu Jaiswal, head of India research, and Rohit Gadre, an associate at BloombergNEF, said that new entrants have bid aggressively at recent auctions because they want to gain experience developing standalone solar projects in India. They aim to do this before the country shifts completely to more complex auctions that require the integration of solar with wind and or storage.

They said that their analysis shows that by the late 2020s, solar paired with battery storage will have a lower levelized cost of energy (LCOE) than new-build coal.

New ‘low’

This year’s 2 GW solar auction held by Solar Energy Corp. of India (SECI), a government-owned company tasked with implementing the National Solar Mission, attracted a new historic low solar electricity tariff of INR 2.36/kWh ($0.032/kWh) from Spanish developer Solarpack, which is 3.3% lower than the previous record of INR 2.44.

The procurement exercise saw all the grid-connected capacity allocated for INR 2.36-2.38/kWh with the other successful bidders, including Goldman Sachs-backed Renew Power, Italy’s Enel, French firm Eden Renewables, IB Vogt Singapore, and U.K. investor-backed Ayana Renewable Power; plus AMP Energy.

Driving factors

Jaiswal and Gadre attribute the competitive tariffs to a combination of five factors in capital expenditure and financing. These factors are falling imported module prices by 10% in the first half of 2020 and zero import duties, on the expectation that the country’s safeguard duties will not be applied. They also include the waving of state-based transmission charges and losses, an infusion of liquidity due to stimulus measures, and the nature of the federal auctions themselves, with strong payment guarantees attractive to developers.

“[Low] tariffs are reflective of risk-adjusted acceptable returns on the basis of input costs, technological advances, design innovations, financing, off-taker robustness, policy clarity and consistency along with ease of doing business on-ground,” said Choudhary.

Limited PPAs

While the developers are doing their best to offer the most competitive tariffs, the cash-strapped electricity Discoms (distribution companies) appear reluctant to sign new power purchase agreements (PPAs). The dire predicament of the Discoms is threatening, at worst, or delaying India’s solar progress.

Jaiswal and Gadre explained that poor tariff designs contribute to the parlous state of Discom finances. “This situation worsened due to Covid-19 as the power demand from lucrative industrial and commercial customers has dropped. Caught in this situation of uncertain power demand growth and stretched balance sheet, Discoms are understandably reluctant to sign large volumes of long-term power purchase agreements.”

Alongside this, some projects are struggling to achieve grid connection and export agreements – leading to project delays and “systemic stress,” said Choudhary. But he adds that “the concerned authorities are diligently working toward removing such bottlenecks, and we expect power supply agreements to be signed soon.”

Despite these challenges, Spain-based developer Solarpack received a letter of award, on July 15, 2020, from SECI for the 300 MW project capacity it secured at a record low tariff of INR 2.36/kWh in its successful 2 GW solar auction bid. The developer reports that it will set up the project in Rajasthan and expects to sign a PPA within weeks.

Pradeep Chauhan, country manager for the Indian subcontinent at Solarpack, said with interconnection rights having been secured, plans for the project are now in place. “SPKCT [Solarpack’s parent company] has set up a special-purpose vehicle for the project, called Gorbea Solar. Module supply agreement has been signed with the manufacturer, and land acquisition on lease term basis identified… Solarpack India LLP, which will act as the EPC contractor for the project, has initiated the planning of activities for design, engineering and procurement works.”

Maintaining momentum

Jaiswal and Gadre noted the federal government’s Discom loan package would provide temporary relief, but sustainable reforms in accountability, privatization, prepaid metering and direct benefit transfer are needed. Such measures will provide IPPs and financiers the confidence to continue investing in India’s growth story.

Choudhary suggests a remedy could be for stakeholders to evaluate the situation holistically and arrive at a win-win situation. “The Discoms, as a result of their own stretched finances, seem to be engaged in so-called tariff shopping, and we believe that all the concerned stakeholders must evaluate the situation holistically to arrive at a win-win situation. It may not be right to ‘blame’ just one element of the entire value chain,” he says.

“To ensure continued interest of global and domestic players, the government and decision-making stakeholders must remove hindrances such as timeline slippage vis-à-vis the bidding documents, clarity and consistency of policies and regulations at both central and state levels, facilitating ease-of-doing business on ground and most importantly, the PPA terms and conditions are adhered to and enforced at all times.”