India’s efforts to grow solar energy has suffered some setbacks recently. The solar industry is trying to overcome the recently announced safeguard duty but the recent cancellation of auctions has been another blow for solar companies.
A feasible tariff, which is acceptable to both the project developers and government agencies, has been a challenge since the inception of India’s solar program. To put the issue in perspective, approximately 4 GW of solar auctions have been cancelled by multiple agencies in recent months.
Three large auctions have been cancelled recently, all in quick succession.
Solar Energy Corporation of India (SECI) cancelled 2.4 GW out of a 3 GW Interstate Transmission System (ISTS) connected solar auction held in July 2018. SECI confirmed the cancellation of the auction, though it is yet to issue an official notification. The capacity was tendered in February 2018 and was oversubscribed by 2.1 GW.
The Uttar Pradesh New and Renewable Energy Development Agency (UPNEDA) cancelled the 1 GW auction for grid-connected solar projects across the state held in July 2018. It had tendered the capacity in January 2018 and later issued an amended request for procurement (RfP) after certain modifications to the competitive bidding guidelines were issued by the Ministry of New and Renewable Energy (MNRE) for solar PV projects in April 2018.
The Gujarat Urja Vikas Nigam Limited (GUVNL) also scrapped the auction for the development of 500 MW of grid-connected solar photovoltaic (PV) projects in the state held in March 2018. It had tendered the capacity in February 2018.
These cancellations are troubling especially after a spurt in auction activity in the previous months. The month of July saw the highest auction activity in the year so far with 6 GW of solar projects auctioned, more than all of the solar projects auctioned in the first six months of 2018.
“If you cancel an auction after all the parties involved have played by the rules, you are essentially setting a precedent that any auction can be cancelled if the results don’t please the government agencies. This is just bad for investor sentiment in the sector,” said Raj Prabhu, CEO of Mercom Capital Group.
Agencies have stated that high tariffs and wide gaps between winning bids are the reasons for cancelling these auctions.
For example, Gujarat Urja Vikas Nigam Limited (GUVNL) tendered 500 MW of grid-connected solar projects in February 2018. The auction was held in April 2018, and Kalthia Engineering and Construction emerged as the lowest (L1) bidder by quoting a tariff of ₹2.98 (~$0.046)/kWh to develop 50 MW of grid-connected solar PV projects. Other winners were GSECL (150 MW), ACME (100 MW) and Azure Power (200 MW).
Just to compare, this tariff was 12.5 percent (₹0.33 (~$0.005)/kWh) higher than the L1 tariff of ₹2.65 (~$0.0413)/kWh quoted by GRT Jewellers India Private Limited in the previous 500 MW auction held by GUVNL in September 2017. Tariff comparisons over time can be misleading as market conditions in solar change almost on a daily basis.
Similarly, Mahoba Solar (UP) Private Limited (Adani) emerged as the lowest (L1) tariff by quoting ₹3.48 (~$0.050)/kWh to develop 250 MW of projects at UPNEDA’s 1 GW solar PV auction in July 2018. Other bidders like Maheshwari Mining & Energy Private Limited (MMEPL) quoted ₹3.48 (~$0.050)/kWh to develop 20 MW. ACME Solar Holdings bid ₹3.54 (~$0.0515)/kWh to develop 150 MW of solar PV projects and ₹3.55/kWh to develop another 150 MW of solar PV projects.
There were reasons behind the higher tariff in this auction such as a lower capacity utilization factor (CUF) in Uttar Pradesh, reduced timeline for project completion (13 months in place of 24), and poor rating of its DISCOMs.
Sanjay Gupta, director at Rays Power Infra, whose 50 MW capacity was cancelled by UPNEDA commented saying, “This was an absolutely ridiculous thing for UPNEDA to do after so much in bank guarantees. The ratings of DISCOMs are not good and based on those parameters, we bid for the project. Nine out of ten companies were in a similar situation, where the price difference is much lower. So, just for seven paisa, they cancelled it. The state will lose the confidence of developers.”
He further added, “As of now, we have decided not to bid for anything as they can cancel it next time as well. It is a waste of time. We put in so much resources and bank guarantees and they do this. It is very disappointing.”
UPNEDA later retendered 500 MW of grid-connected solar capacity and fixed an upper tariff ceiling of ₹3.10 (~$0.045)/kWh. It will retender the remaining 500 MW after the auction of first 500 MW.
Moreover, SECI also partially annulled its recent 3 GW ISTS-connected solar auction. In the auction, ACME emerged as the lowest (L1) bidder by quoting a tariff of ₹2.44 (~$0.0355)/kWh to develop 600 MW. Barring the ACME bid, the entire capacity was cancelled. Though there has been no official clarification from SECI, later, Adani’s subsidiary Mahoba Solar, filed its BSE filing stating that the 300 MW SECI tender won by it stands annulled. It had quoted the tariff of ₹2.71 (~$0.0395)/kWh. This was part of 3 GW of the ISTS- connected solar projects to be developed across the country.
In the auction, ACME had emerged as the L1 bidder by quoting a tariff of ₹2.44 (~$0.0355)/kWh to develop 600 MW. The tariffs quoted in this auction ranged between a high of ₹2.90 (~$0.0423)/kWh and a low of ₹2.44 (~$0.0355)/kWh, a ₹0.46/kWh (19%) difference between the lowest and highest bid.
Speaking to Mercom, a developer said, “All other bids except for the L1 bid of ₹2.44 (~$0.0355)/kWh is proposed to be cancelled by SECI in the 3 GW auction with the reason being that there is a wide difference between the L1 bid and the L2 to L6 bids.”
As stated by a GRIDCO official, “The L2, L3, L4 and L5 bidders have been asked to match the lowest (L1) tariff of ₹2.79 (~$0.0406 )/kWh as the difference between the tariffs is more than ₹0.40 (~$0.0057)/kWh.”
Further elaborating, the GRIDCO official said, “We buy solar power from the Solar Energy Corporation of India (SECI) from ₹2.57 (~$0.036)/kWh to ₹2.81 (~$0.0402)/kWh. Our board is of the opinion that a tariff above ₹3 (~$0.0429)/kWh mark is not financially feasible for GRIDCO. If such a tariff prevails, then GRIDCO would scrap the capacities for the other bidders.”
Now the entire premise for the cancellation of auctions by the agencies, because of high tariffs, seems to contradict the market reality (at least in the short-term), as developers will factor in the cost of the safeguard duty while bidding for future auctions. This will likely increase the tariff, defeating the very purpose for which the earlier auctions were cancelled, unless these auctions are delayed enough so the module procurement timeline falls after the safeguard duty expires.
When Mercom asked if the imposition of a safeguard duty would increase the tariffs that are going to be re-auctioned, UPNEDA official said “It depends, there is 21 months’ time for commissioning, so if the LoI (letter of intent) is signed in October-November, then you have to add those 21 months and see if the safeguard duty is applicable in or not for the project. But even if the tariff increases after the safeguard duty imposition, it will not be ₹3.48 (~$0.050)/kWh. We have also put a ceiling of ₹3.10 (~$0.045)/kWh now. If you see the NTPC auction after the safeguard duty, the lowest (L1) tariff of ₹2.59 (~$0.0372)/kWh was quoted. ”
Following these developments and to avoid future auction cancellations, the Ministry of New and Renewable Energy (MNRE) has recently issued a letter 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 a safeguard duty is levied. This letter was issued after the Minister of Power reviewed 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.
Commenting on the development, Prabhu added, “The downside is 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 this has happened over and over in the past. The tender and auction activity typically comes to a halt after something like this is announced as agencies will now look to retender and re-auction projects,” added Prabhu.
According to Mercom’s recent market report on Q2 2018, solar installations in Q2 2018 declined after four consecutive quarters of growth.
Image credit: Solaire