Tariffs are expected to tumble to record lows in the upcoming SECI 3 GW Inter-State Transmission System (ISTS)- connected solar auction.  As of June, the tender was oversubscribed by 2.1 GW.

There is a lot of pent-up demand for these projects and competition is expected to be intense. The expectation is that the winning bid will drop below the previous record low tariff of ₹2.44 (~$0.0355)/kWh, which was realized in the 500 MW Bhadla Phase-III Solar Park Auction in May 2017 and matched again recently on July 2, 2018. ACME solar was the lowest bidder both the times.

Even the government officials have been surprised by how low the bids went so fast.

The expectation of drastic module price declines in China due to recent policy changes is a major consideration in bid calculations. Other contributing factors include the amendment of competitive bidding guidelines that extended the timelines for financial closure, land acquisition, and the commissioning timeframe.

Another factor is the increase in maximum allowable bid capacity by a single company to 1,800 MWs. Softbank was the only company that bid for the maximum allowable capacity of 1,800 MW in the recently concluded technical bidding. Many large developers have complained to the MNRE that the maximum capacity allowed is too big and could make it difficult for smaller developers to be competitive especially when it comes to land acquisition, transmission infrastructure, and financing. Developers have also argued that large foreign developers will have an unfair advantage at the expense of smaller players.

But there is still a lot of risk involved.

ISTS connectivity has been a challenge and has already caused delays in a large number of solar auctions. The ISTS-connectivity issues are acute in areas that have a high concentration of proposed projects. This typically tends to be in high irradiation areas. Government officials also worry that solar developers are not as experienced as wind developers when it comes to assumptions and challenges around ISTS-connectivity.

The rapid depreciation of the rupee is another concern and has a direct cost impact on projects. It is almost impossible to forecast where the currency will be in a year, adding to the risk. Considering the current economic conditions, interest rates are expected to increase as well.

The biggest assumption in making these low bids is the expectation that Chinese module prices will crash – But how low will it go? What if China opts for a soft landing and the decrease in demand is not quite as drastic? We all know what happened after the lowest bid in Bhadla last May – prices started going up instead of down.

These are just some of the risk factors for developers to consider as they bid to win ‘at all costs.’