In a significant development, the Ministry of New and Renewable Energy (MNRE) has issued a letter (reviewed by Mercom) directing Solar Energy Corporation of India (SECI) to set the maximum permissible solar tariff at ₹2.50 (~$0.036)/kWh without safeguard duty and ₹2.68 (~$0.038)/kWh if  safeguard duty is levied.

The letter from MNRE has been issued  after the Minister of Power, Raj Kumar Singh, reviewed solar bids from NTPC’s 2 GW solar auction held on August 13, 2018, in which tariffs of ₹2.59-2.60 (~$0.037)/kWh were quoted inclusive of safeguard duty. MNRE has confirmed the issuance of this letter to Mercom.

In the letter, SECI has also been directed to set the future solar bids in lot sizes of 1,200 MW with no upper cap (maximum bid size) and minimum bid size is to be set at 50 MW. The tendered capacity was believed to be reduced as it was felt there wouldn’t be enough competition in bigger tenders. The reason behind setting the lot sizes at 1,200 MW is to generate more competition as it has been observed that the recent large auctions (2 GW or more) have not generated sufficient interest or competitive tariffs to satisfy the government agencies. The other motive is to narrow the gap between the lowest (L1) bid and the other winning bids.

“This feels like the government is setting a feed-in tariff rather than conducting a reverse auction.  Essentially, whatever the market conditions may be, the bids can only move in one direction. However, the projects of size 250 MW or more will have 24 months to completion from the date of PPA signing,” said Raj Prabhu, CEO of Mercom Capital Group.

“The downside will be that all other state and government agencies will want to set similar tariff levels no matter what the project economics are in that state and we have seen this happen over and over on the past years. The tender and auction activity typically comes to a halt after something like is announced as agencies will now look to retender and re-auction projects,” added Prabhu.

Hopefully the tariff upper ceiling will be adjusted in the future based on prevailing market conditions. It remains to be seen if this directive will prevent future auction cancellations.