India’s quest to reach 100 GW of solar installations by 2022 has been made a little more challenging with government agencies canceling auctions after results have been announced. Since the beginning of 2018, various government agencies such as the Uttar Pradesh New and Renewable Energy Development Agency (UPNEDA), the Grid Corporation of Odisha (GRIDCO), Gujarat Urja Vikas Nigam Limited, and others have canceled nearly 5 GW of solar auctions.
The primary reason cited for the cancellation of these auctions by both central and state agencies is the inability to arrive at a mutually agreeable tariff. In most cases, the final tariffs are either too high, or there is a wide gap between the L1 tariff and the rest.
For example, UPNEDA canceled the auction stating that the final tariff is too high in which the lowest bidder quoted ₹3.48 (~$0.050)/kWh to develop 250 MW of projects at UPNEDA’s 1 GW solar PV auction in July 2018. The cancellation happened despite legitimate reasons behind such a tariff of lower capacity utilization factor (CUF) in Uttar Pradesh, the reduced timeline for project completion (13 months in place of 24), and poor rating of its DISCOMs. UPNEDA later retendered 500 MW of solar capacity and set an upper tariff ceiling of ₹3.10 (~$0.045)/kWh for those projects.
Similarly, the SECI canceled 2.4 GW of auctioned solar capacity as 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 difference between the lowest and the highest bid. The ₹2.44 (~$0.0355)/kWh was also the lowest solar bid in a reverse auction in India.
When looking at the winning auction, the government agencies also tend to compare the tariff over time instead of all other variables, which can be misleading as market conditions in the solar sector keep changing. For example, the depreciation in currency or the imposition of the safeguard duty can have an upward effect on costs.
Last year, speaking at an investment summit, R.K. Singh, Minister of Power, had said, “We will accept bids which are reasonable. If we come across bids which we consider to be excessive, we will cancel them”.
However, the cancellation of the auction in such an arbitrary manner has a financial as well as other tangible repercussions.
“There are certain costs involved in participating in an auction such as the processing fee, bank guarantee, etc. Many tenders are floating in the market at the same time. Once the bank guarantee is encashed for a tender and its auction is canceled, then it takes a couple of months for the bank guarantee to be returned. In such cases, the interest cost is borne by the developer”, said Sumit Sood, Deputy General Manager of Sukhbir Agro.
On the question of how much does it take to participate in a tender, Manoj Gupta of Fortum, whose 250 MW was canceled by the Gujarat Urja Vikas Nigam Limited (GUVNL) in January 2019 said, “The deposit needed to participate in an auction is different from tender to tender. You do get the bank guarantee back, and only the nominal bank guarantee charges and processing fee are what you have to bear. However, we have to see the cancellation of the auction from a broader perspective. This affects the reputation of our industry as many leading multi-national companies work in the sector and participate in the auction processes. Multiple auction cancellations give a negative signal to such investors. We must be thoughtful about what kind of message that is going out about the country in general and the solar sector in particular,” he added.
Similar sentiments were shared by other developers who have participated in auctions that have been canceled by the agencies.
“Aditya Birla Renewables had quoted L1 tariff of ₹2.79 (~$0.0406)/kWh to develop 75 MW of solar capacity whereas we have quoted ₹3.19 (~$0.0464)/kWh to develop 25 MW. The Grid Corporation of Odisha (GRIDCO) canceled 125 MW out of the 200 MW capacity after it asked other bidders to match the L1 tariff. Now, this is very demotivating for a developer to bid for a GRIDCO auction. They can again ask to match the L1 tariff in the future. This creates a lot of uncertainty, and we are not looking to bid in that state again,” Sumit Sood, the deputy general manager of Sukhbir Agro said.
Does the auction cancellation after the culmination of the entire bidding process have any effect on the companies hiring for the workforce? To this, he added –
“Every developer has his team irrespective of how many tenders are around. Therefore, it is not that we hire people only when we have a project. However, it is true that work hours are lost when an auction is canceled, and it is demotivating for the entire team.”
When asked about the reaction of an investor in the event of the cancellation of an auction, he added,
“Until we sign the power purchase agreement (PPA) with DISCOMs or the power off-taker, we don’t approach an investor. This is a post-award activity.”
Complete transparency in the auction process could remove some of the uncertainty in the process. The government agencies could disclose ahead of time if the auction will be based on matching the lowest bid. They can also disclose if the auction will be canceled if the agency does not like the winning bid levels – disclosing the rules of the game.
“Investors are comfortable when the industry demanding such a large investment is driven by a stable policy. If you are looking at 100 GW, there is a huge amount of investment needed, both in terms of equity as well as debt. If the position of the industry is not stable in terms of the policy, and bidding guidelines, both lenders and equity investors will be apprehensive. This may result in them shying away from future bids which may derail the entire program,” an executive for a solar developer told Mercom.
“Can predetermining the upper tariff limit in the tender document prevent the future cancellation of auctions?” a company official whose winning bids have been canceled multiple times asked.
“Most auctions that were canceled had an upper tariff limit. So, despite quoting lower than the upper tariff limit, the auctions were canceled. It was the CERC/SERC, which used to earlier determine the upper tariff limit before announcing reverse auctions which are not the case anymore. In this situation, without a specific pricing methodology to determine the tariff, randomly reducing the upper tariff limit is inept. Such decisions also demonstrate disregard to varying market and financial conditions. If there must be a tariff cap, it should be determined by a regulatory body and not based on the whims of implementing agencies,” he added.
“The solar project auction activity is likely to pick back up after the end of the general elections. A guideline that ensures transparency and a market-based auction where results cannot be changed at the whim of government agencies will bring much-needed enthusiasm back into the project development and investment community,” said Raj Prabhu, CEO of Mercom Capital Group. “The auction process right now is unsustainable.”
The Indian solar market added 8.3 GW of solar in 2018, down 15.5% compared year-over-year according to Mercom India Research’s Q4 & Annual 2018 India Solar Market Update.
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