Five years after it was introduced, the government has decided to consider alternative options for e-reverse auctions following complaints from the industry that it is leading to unviable tariffs due to unhealthy competition.

The announcement to phase out e-reverse auctions was made by the Secretary, Ministry of New & Renewable Energy (MNRE), Indu Shekhar Chaturvedi, at a conference recently.

The e-reverse auction was introduced to promote competition. However, aggressive bids have led to lower profit margins, sometimes to the point where the winning bid is unviable.

What went wrong with e-reverse auctions? If the government intends to do away with the auctions, what is the way forward? Mercom spoke with representatives of the wind energy sector for their views on these issues.

According to Manish K. Singh, Secretary General, Indian Wind Energy Association, the e-reverse auctions for wind projects introduced in 2017 spawned unhealthy competition to win bids. “The low tariffs at which these bids were won had no relationship with the estimated costs. A few ventures or companies wanting to be IPPs bid very low rates to win the projects in the hope that costs could be managed. It created a situation where the tariffs were not sustainable, leading to the non-completion of projects.”

The annual installed wind capacity plummeted from 5.4 GW in 2016-17 to 1.2 GW to 2 GW in subsequent years. Wind power tariffs dropped to a record-low of ₹2.43 (~$0.030)/kWh in the GUVNL 500 MW auction held in December 2017. This was lower than the lowest solar tariff of ₹2.44 (~$0.031)/kWh quoted in the Bhadla Solar auction in May 2017.

During the last five years, the Solar Energy Corporation of India (SECI) has auctioned around 16 GW of wind projects but awarded only around 12.5 GW of capacity.

“Bidders did not show any interest in 3,500 MW of projects. Out of 12,500 MW auctioned projects, only around 3,000 MW of projects have achieved closure,” Singh said.

Course correction

Kasthurirangaian, Chairman of the Indian Wind Power Association, welcomed the move to scrap the ‘flawed’ reverse auctions. “The allocation of projects at the price points was unviable and unsustainable.”

Singh believes more projects would see fruition going forward. “With realistic prices, the year-over-year capacity additions will go up.” He recalled that India recorded its highest annual addition to wind capacity at 5.5 GW in 2016-17, just before the e-reverse auctions were introduced.

Stakeholders have little doubt that doing away with reverse auctions will bring about stability and avoid speculation. According to D V Giri, Secretary General, Indian Wind Turbine Manufacturers Association, eligibility conditions for bidders will infuse more seriousness and lead to sustainable tariffs.

But will scrapping e-reverse auctions alone see the end of the unhealthy competition? Singh adds a caveat. “One cannot say with certainty that floor price alone would obviate unhealthy competition. In fact, questions could be raised on the methodology of fixation of the floor price itself. Given the wind potential in various states, cost of land, etc., the floor price could vary from state to state. Since bids are not site-specific, determining a floor price would be a complicated process. It would be better to proceed based on closed bids in large tenders.  Of course, if the bids are called for specific sites, an exercise can be done to fix a floor price.”

Giri maintains that closed bidding is the way to go. “Closed bidding is a well-known practice both in defense and infrastructure projects. The closed bidding should not be based on L1 but on the bucket filing process. Closed bidding should cover a minimum of 5-6 states with a total bid size of 4 GW, and each state will have its own tariff. The tariff will have to be pooled and sold to distribution companies.”

“The last five years have seen capacity addition of 1.5 GW per annum against the target of 10 GW to reach 140 GW by 2030. Many auctioned projects are not implemented due to unviable tariffs or project execution issues. Closed bidding spread across five to six states with identified land and connectivity will ensure timely execution and also give visibility and certainty to the OEMs (original equipment manufacturers), who have now switched over to exports with an uncertain domestic market,” he said.

Kasthurirangaian also supports the closed bidding mode.

“In fiercely competitive e-reverse auctions, because of the low response time limits, bidders quote below the competitors’ bids without any objective assessment of costs. In closed bids, the potential bidders would submit bids based on realistic assumptions of costs, IRR, etc. The temptation to outbid the other bidders would be low. Despite their objective bids, if a company loses the bid, it is their bad luck alone,” Singh said.

In the last few years, the wind industry has not kept pace with its solar counterpart in the renewable industry. While the government has said it wants to end e-reverse auctions, it is yet to make clear what mechanism will replace them. On its part, the wind industry is pitching for the closed bidding route so that the true price of projects is reflected in the bid price. It hopes the government will respond positively to its recommendation.

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