Unsigned Power Sale Agreements – A Major Hurdle for Growth in the Solar Sector

The Indian solar industry added just 3.2 GW of solar in 2020 as the market slumped by 56% due to COVID-related disruptions. However, Mercom expects 2021 and 2022 to be two of the strongest years to date. But, the reluctance of the distribution companies (DISCOMs) to sign power sale agreements (PSAs) with the Solar Energy Corporation of India (SECI) is threatening to slow down growth.

Many renewable energy projects are staring at an uncertain future as the nodal agency has not been able to find buyers for the electricity generated by solar and wind projects.

In the bidding process that SECI conducts, the tariffs discovered are much lower than if the state DISCOMs called for those auctions. With SECI, the counterparty risk is considered lower, and the robust payment security mechanisms tend to attract competitive tariffs. Even with all these positives, SECI has been struggling to sign PSAs.

Backlogs Keep Piling on


The huge backlog of unsigned PSAs makes it difficult for developers to secure debt funding from lenders who rightly insist on signed PSAs.

According to Mercom India Research,  PSAs for about 19 GW of solar power projects are yet to be signed.

Vinay Kumar Pabba, Founder and CEO at VARP Power, finds the backlog disconcerting. “The SECI bidding paradigm has ensured a build-up of renewable energy capacity (solar and wind) in resource-rich parts of the country. All this capacity connected to the interstate transmission system (ISTS), coupled with the current exemptions for the use of the ISTS network, has meant that the DISCOMs across states have become agnostic to plant locations and have been able to source power cheaply and sustainably,” he said.

Solar and Hybrid Projects by SECI Awaiting PSA Signing

“Given this context and the dropping solar tariffs, it is a bit disconcerting that SECI has a huge backlog of PSAs.  The obvious narrative for this is that DISCOMs don’t want to get locked into high-priced PSAs in a scenario of falling prices. While this is the main reason for the lack of interest in signing PSAs, other factors have also contributed to this,” he said.

SECI, the nodal agency for developing renewable energy projects, signs power purchase agreements (PPAs) with the winning developers in competitive auctions and subsequently inks PSAs with state distribution companies to sell electricity from these plants. But the lack of interest from the DISCOMs has put many projects in limbo and slowed down the pace of implementation.

Pabba explained that the situation is further complicated by the considerable unutilized capacity in the thermal sector.

“The fixed cost portion of thermal PPAs is sunk costs for the DISCOMs. As long as the variable cost portion of thermal energy is lower than the solar or wind tariffs, there will be no inclination to buy renewable power. Only when the solar tariffs have breached the ₹2 (~$0.027)/kWh mark, which happened only recently, has this equation tilted.  At these price levels, solar tariffs are lower than the variable cost portion of the two-party thermal tariffs.  Falling prices, lower demand, and poor RPO compliance have all contributed in no small measure to this problem,” he said.

For thermal power (coal, lignite, and gas-based), the central electricity regulatory commission has been adopting a two-part tariff – capacity or fixed charges (for recovery of annual fixed costs) and energy charges (for recovery of primary fuel costs). In case of either curtailment or scheduled back down of thermal power, the fixed cost component will still have to be paid to the thermal energy generators by the distribution companies.

Manufacturing-Linked Solar Projects Pose a Big Challenge

SECI has been actively looking for ways to ensure that PSAs are signed on time and the construction activity can move forward. The agency’s manufacturing-linked solar projects have posed a massive challenge due to the high tariffs (₹2.92 (~$0.040)/kWh).

SECI had decided to pool the tariffs discovered in competitive bidding every six months. The pooled tariff is the weighted average of the tariffs discovered in the competitive bidding process for a specific period. SECI was also planning to bundle manufacturing-linked projects with solar projects to bring down the average rates of the tariffs.

A SECI official told Mercom, “Basically, manufacturing-linked projects are a major risk right now. The power from the remaining 3,000 MW solar projects will be sold. There is a good demand for hybrid projects, and they are virtually sold. We plan to offer more tenders to meet the growing demand for hybrid projects. But tariff pooling is not working anymore.”

The official said that SECI was trying to sell power from projects with a tariff of ₹2.36 (~$0.032)/kWh and making good progress. “It will be sold. Then we will go to the next lot,” he added.

Tariffs Hit a New Low

Solar tariffs have dipped to a record-low of ₹1.99 (~$0.0269)/kWh. Regardless of the reasons behind such low tariffs, DISCOMs now want to wait to sign PSAs hoping the tariffs would be as low if not lower in the future. This has left higher tariffs in previous auctions with no takers.

SECI is now hoping the tariffs in the future auctions are higher considering the rise in project cost owing to the module price increases. Any further fall in tariffs will pose a challenge to sign PSAs from previous auctions.

Way Out

There are no clear solutions in sight for SECI’s problem in finding buyers for power generated by renewable energy projects.  SECI has toyed with the idea of blending costlier tariffs with cheaper ones and offering them to DISCOMs. However, these tariffs have not been received well either.

According to Vinay Pabba, a way out is to cancel the letters of award issued for the high tariff bids and re-tender them.

“This may invite backlash and negative publicity apart from shaking the confidence in the bidding process.  We are given to understand that some developers whose PPAs are yet to be signed have been dropped broad hints to lower their tariffs. This again has drawn a blank,” he said.

In the instance where the Gujarat DISCOM tried to cancel the letter of award for 700 MW of solar projects, the developers who participated in the auction have pleaded to the Appellate Tribunal for Electricity which has ordered to maintain the status quo of the letter of award for two weeks.

Pabba feels that given the low demand situation and lack of appetite, regulatory interventions like cracking the RPO whip may have limited impact. “The simplest way out of this chaos is to cancel the PPAs and re-tender them at the risk of inviting developers’ wrath. SECI in the future needs to test the waters for demand before floating the tenders.  There is no point in pushing ahead with a challenging tender pipeline if demand is weak,” he said.

To ensure the continued interest from global and domestic investors, the government needs to be consistent in implementing policies and ensure the ease of doing business on the ground. More importantly, the implementing agencies should make sure that the provisions of PPAs are adhered to and enforced at all times.

“In most markets, utilities sign PPAs with the developers. SECI, as an implementing agency, has reduced the counterparty risk for developers by inserting itself between the generator and procurer. However, a signed PPA is losing value because there is no guarantee of a PSA being signed. The process has become so dysfunctional that we are now hoping for tariffs to increase in the future, so DISCOMs sign the PSAs,” said Raj Prabhu, CEO of Mercom Capital Group.

Something similar happened in 2017 when a ₹2.44/kWh record low tariff was discovered in the Bhadla auction. Tenders ground to a halt, and Auctions began getting canceled as DISCOMs in every state wanted developers to match the lowest tariff. Unfortunately, the industry lost more than six months as the procurement activity stopped.

“We cannot let history repeat itself because the impact on the Indian solar market that is just coming out of one of the worst years would be too great. The government needs to step in and treat the PSA situation as a grave threat to investments and jobs and get the issue resolved immediately,” added Prabhu.