The Ministry of Power has introduced new guidelines for tariff-based competitive bidding for grid-connected solar projects. These guidelines aim to enhance transparency, establish fair procurement procedures, and encourage competitive pricing.

This new framework is designed to promote consistent growth in installations across the country, with input from developers. The new incentives and relaxations are expected to stimulate increased participation, while penalties will serve as a deterrent against project delays and cancellations.

Mercom asked stakeholders for their opinions on the new guidelines and their impact on the upcoming solar power projects.

Shortened Power Purchase Agreement (PPA) Tenure

The Ministry introduced an amendment reducing the PPA tenure from a standard 25 years to 20 years. The amendment has sparked discussions with industry experts critically assessing the financial viability and long-term planning with the shorter PPA tenure.

According to Yogesh Kumar Singh, Head of Government Affairs & Policy at Redington India, investors prefer longer-duration PPAs that guarantee investment recovery. Shorter PPA tenures could result in higher tariffs quoted in bids but, on the other hand, incentivize efficient project execution with advanced technology to increase the return on investments.

According to another developer, “The introduction of a 20-year PPA framework could potentially reshape the tariff landscape, with the industry adapting subsequently. The provision for projects to exit after 20 years could be appealing to accept higher tariffs upfront.”

Short-duration PPAs have greater acceptability by the distribution companies (DISCOMs), who are otherwise reluctant to sign power sale agreements. However, a challenge that developers are concerned about is whether DISCOMs will be willing to accept higher tariffs in bids for these shorter-duration PPAs. This is an issue developers hope will be addressed.

In its note to the parliamentary committee earlier, the Ministry of Power pointed out that one reason for DISCOMs’ financial inefficiency was the PPAs with higher tariffs than the current market prices. A shorter PPA term could allow generators to sell power in the market and ease the financial burden of DISCOMs.

Bid Structure and Capacity Limits

The guidelines mandate bidders to quote within 2-5% of the lowest tariff (L1) bid. Earlier guidelines did not specify this range for other bidders with regard to the L1 tariff.

This is to persuade developers to bid realistic and sustainable tariffs.

According to Mercom India Research, restricting e-reverse auction bids to 2-5% above the lowest bidder’s tariff is expected to optimize auction tariffs and prevent project delays linked to cost overruns.

According to a solar project developer, bids that are considerably higher than the L1 bids are generally under question and, more often, may not be approved by the regulators. Between the conclusion of the auction and the tariff adoption process, a lot of time is lost if the bids are not approved or canceled. The clarity that bids should be within the 2-5% range would leave no room for such delays.

The new guidelines restrict a single bidder from securing more than 50% of the specified capacity in the tender. The cap at 50% can enhance market competition and tariff optimization by allowing greater participation in bids. But the downside is that larger projects may miss out on economies of scale that generally result in lower bids.

The developer commented that these amendments could spur participation but have the risk of increased tariffs that DISCOMs are generally unwilling to accept.

Revised Power Procurement Mechanisms

According to the guidelines, the procurer can purchase excess energy generated beyond the maximum capacity utilization factor (CUF) at the PPA tariff price. This is a change from the earlier norm, where excess power could be bought at 75% of the PPA tariff.

According to a developer, this enables generators to realize the total value of their surplus energy. This empowers generators to receive the complete tariff value, a notable improvement compared to the previous framework that involved a 25% loss when selling through the procurer.

Project Commencement Timeline

Projects with up to 1,000 MW capacities are now required to commence power supply within 24 months of signing the PPA. In contrast, projects exceeding the 1,000 MW threshold have been granted a timeline of 30 months to kickstart power supply.

Under the previous guidelines, projects specified to be set up in a solar park were required to be commissioned within 15 months from the date of PPA execution, while projects not specified to be set up in a solar park had a commissioning period of 18 months from the date of PPA execution.

Considering the challenges in terms of time required to acquire land, developers welcome this amendment.

Mercom had recently reported on the continued land acquisition challenges for renewable energy project developers.

Penalties for Delays

The revised guidelines have also incorporated penalties for project delays. In cases where the project is delayed by more than six months from the scheduled commissioning date, the contracted capacity will be reduced. Furthermore, the PPA for the remaining contracted capacity that has not yet commenced power supply will be terminated.

Generators that incur delays also face the prospect of debarment.

The penalties are designed to discourage project developers from waiting for module prices to decrease, subsequently delaying their projects.

While penalties are there to ensure the projects are completed within the specified timeline, developers argue that they work toward commissioning projects on time or before unless faced with an issue entirely out of their scope. Policy flip-flops and lack of evacuation infrastructure are major reasons that affect project completion, which developers want the government to resolve before penalties are imposed.

Scope and Energy Storage Inclusion

The amended guidelines extend to all forthcoming solar power projects, whether integrated with energy storage systems or not. The previous guidelines did not have any mention of energy storage.

The addition of energy storage systems will address the intermittency drawback of solar and allow DISCOMs to fulfill their Energy Storage Obligations.

The new guidelines for tariff-based competitive bidding in grid-connected solar power projects are being introduced to make the process more efficient.

The developers, however, feel that even though the guidelines have some notable amendments, they hope for the government to provide a more flexible ‘Change in Law’ clause benefit for the developers to manage challenges out of their scope more effectively with the support of the implementing agencies.