Tariff Caps are Slowing Solar Auction Activity

The solar market in India is extremely competitive. Reverse auctions have driven tariffs lower and lower, and developers are fighting for every penny to make a decent return on their investment. In this tough environment, tariff caps have added a new challenge for developers.

A tariff cap is set by the auctioning agency and acts as an upper limit when bidding for a project. So, a developer can only bid lower than the set tariff, which becomes a challenge if the tariff cap is deemed too high for a project developer to make a healthy return on investment.

An executive at a large power producer said, “With the tariff caps, projects are failing. Wind and hybrid projects are undersubscribed. Why did Madhya Pradesh solar projects succeed? There was so much planning that went in. Nobody is following that model.”

Developers have become reluctant to bid at the levels prescribed by state agencies instead of a market-based auction where the lowest bid wins. This has caused several developers to refrain from participating in these auctions, and several auctions have been undersubscribed recently. For example, the Solar Energy Corporation of India (SECI) had tendered 1,200 MW of ISTS-connected solar-wind hybrid power projects (tranche-II), which was undersubscribed by 300 MW.



In another instance, bidders were reluctant to participate in the tender floated by Gujarat Urja Vikas Nigam Limited (GUVNL) for 1,000 MW of grid-connected solar photovoltaic projects at Dholera Solar Park (Phase V). The  GUVNL tender floated for 700 MW under Phase III of the Raghanesda Solar Park was also undersubscribed by 100 MW.

“The imposition of caps on tariffs is not in the interest of the reverse bidding process when the developers are already taking a significant amount of risk and bidding under the reverse auction process. The market should be left open to the process and not have a cap, which only adds to the woes of the developers. As things stand in the current bidding environment in India, the developer is only exposed to the downsides with a significant amount of risk exposure,” said Rahul Mishra, CEO of Rays Future Energy India Private Limited.

Nobody seems pleased with reverse auctions and the direction of tariffs, especially after the introduction of tariff caps.

“The caps on maximum tariffs released recently are low compared to the benchmarks, thereby sometimes making a bid unattractive. Other parameters like the park or evacuation costs are unchanged while the reduced tariff keeps the developers thinking about the potential catch in the bid. A lot of recent bids have seen lesser participation which was not seen in the past,” said Rahul Gupta, Managing Director of Rays Power Experts.

According to Mercom India Research data, a total of 37.2 GW in capacity was tendered in FY 2018-2019, of which only 11.3 GW was auctioned.

Mercom India Research data also states that 3.3 GW of tenders were canceled during FY 2018-2019, while only 15 tenders totaling 2.2 GW from FY 2018-2019 were extended to the next fiscal.

Amidst all the criticism and continuous extension of bids due to poor participation by developers, the government seems undeterred. “We follow due diligence to set an upper tariff ceiling for solar PV tenders. The tariffs that have been quoted in the past auctions conducted by SECI are considered when fixing a tariff cap for the new tenders. Tariff caps are reflective of the current market dynamics. It is the mad dash for making profit that is affecting tenders with tariff caps as the bidders feel that lower tariff caps mean low profit margins. If the project cost is going down, why shouldn’t the tariff paid by the consumers go down?” commented an official from Solar Energy Corporation of India’s (SECI).

Mercom India research forecasts India to install approximately 9 GW solar capacity in the calendar year 2019. The report estimates solar installations in India to reach 71 GW by the end of 2022, 30% less than the government’s targeted figure of 100 GW.

The MNRE issued a letter directing SECI to set the maximum permissible solar tariff at ₹2.50 (~$0.036)/kWh without a safeguard duty and ₹2.68 (~$0.038)/kWh if a safeguard duty is levied.

Raising concern over the proposal by the government to impose caps on solar tariffs, the Solar Projects Developers Association (SPDA) wrote to the Union Power Minister R.K. Singh. The SPDA raised concerns saying that the decision to cap tariffs at ₹2.50 (~$0.0344)/kWh needs to be reversed because it is likely to make solar projects unviable. Bids are determined by taking into consideration a range of issues like the changes in module prices, currency risks, and varied solar radiation across states, the SPDA letter had explained.

“The tariff is a derivative of project cost and generation. If you fix or cap one variable, such as a tariff, it will impact the other two variables. Project tariffs are impacted by a range of factors such as overall changes in module prices, currency risks, interest rates, solar irradiation varying from state to state, any new government duties and these must be considered to arrive at economically viable tariffs,” explained Pinaki Bhattacharyya, CEO, AMP India.

This trend of putting a cap on bid tariffs is not justified and is unviable since the tariffs are being capped based on the lowest tariff discovered. It is creating unwarranted pressure on the developers to quote lower tariffs and is, in turn, affecting the viability of projects. Additionally, true market derived pricing cannot have a cap if there is no floor. This is having an adverse impact on project quality, overall project viability, dampening investor interest and is slowing down the sector, Bhattacharyya added.

There is also worry that tariff caps are inadvertently pushing smaller developers out of the market.

“Another executive from a large developer added, “Due to tariff caps, there is not enough participation in auctions, and that is the reason bids are getting unsubscribed. In due course, the bigger challenge is that the number of developers will be reduced as several developers who cannot make it will sell their portfolio and exit the market. By removing the tariff cap, we can increase participation, which will result in healthy competition.”

The only way around tariff caps right now is to skip the reverse auctions and wait for the government agencies to retender again with a lower cap to attract interest.

“The reverse auction procurement system in solar and wind was designed to award projects to the lowest bidder. What we have now is a reverse auction where opening bids are set and can only go in one direction – down,” said Raj Prabhu, CEO of Mercom Capital Group. “In essence, tendering agencies don’t trust that reverse auctions can produce a low enough tariff to their liking and believe that they can accurately price risk in the market better than the developers.”

In the meantime, we may continue to see auctions getting postponed and tariff caps adjusted downwards multiple times until it is viable enough for developers to bid while project commissionings are also pushed forward making it harder and harder to reach the 100 GW target by 2022.