Winning Tariff of ₹2.20_kWh in the GUVNL Solar Auction Hasn't Factored BCD

The Indian Government’s endeavor to encourage domestic manufacturing of solar modules and cells led to the imposition of BCD (Basic Customs Duty) on solar modules with HSN Code 85414012 BCD (40% BCD), and solar cells with HSN Code 85414011 (25% BCD), from April 1, 2022.

With the new order in, there is an expectation that project costs will skyrocket.

In January 2021, the Gujarat Urja Vikas Nigam Limited (GUVNL) had floated a request for selection (RfS) to purchase power from 500 MW of grid-connected solar photovoltaic (PV) projects to be set up in the state in Phase XII.

The tender had received a good response and was oversubscribed. Despite being the first auction after the BCD announcement, there was no significant increase in the quoted tariffs.

Sprng Ujjvala Energy, NTPC Renewable Energy, Coal India, and TP Saurya, a Tata Power subsidiary, were declared winners in the auction to purchase power from 500 MW grid-connected solar projects.

Sprng Ujjvala Energy won a capacity of 120 MW quoting ₹2.20 (~$0.030)/kWh. NTPC Renewable Energy, Coal India, and TP Saurya won 150 MW, 100 MW, and 60 MW, respectively, quoting ₹2.20 (~$0.030)/kWh. SJVN had quoted ₹2.21 (~$0.030)/kWh for 100 MW but won 70 MW capacity under the bucket filling method.

Since this was the first auction after the announcement of BCD, bidders were forewarned to take the duty into account while quoting tariffs in all future bids where the last date of bid submission fell after the notification dated March 9, 2021.

The lowest quoted tariff was up just 11% compared to GUVNL’s previous auction for 500 MW of solar projects, which set a new record for the lowest tariff with ₹1.99 (~$0.0270)/kWh in the auction.

Mercom spoke with stakeholders to understand the implications of such low bids winning tenders, especially with the imposition of BCD.

One of the winning bidders, who spoke to Mercom, said that GUVNL is particular about regulatory approvals before signing the power purchase agreement (PPA). “As a bidder, we are assured that there is no uncertainty regarding the project’s future. So, a developer can take a call on importing modules before the BCD imposition. Some parties may import all of it in one go before the duty kicks in. Others may take a 50-50 approach towards importing from China.”

The developer said that the GUVNL tender had enough window to factor in BCD, but future tenders won’t allow bidders the same margin. “We expect everyone to get the modules before April 2022.”

According to the developer, who wished to remain anonymous, if the whole BCD is factored in, the tariff will be higher, at around ₹2.50 (~0.034)/kWh. “The biggest challenge with SECI (Solar Energy Corporation of India) auctions is that the tariff approval is delayed from CERC (Central Electricity Regulatory Commission), and so is the PPA. Lenders don’t invest unless the PPA is approved. If we want to import all the modules, we will have to open all letters of credit (LCs). LCs can’t come from equity loans, and 60% of the project cost needs lenders’ money. For the lenders, these regulatory approvals are significant.”

Another successful bidder in the GUVNL tender said that BCD was not factored in when quoting the tariff. According to the developer, the prices had gone up, and many developers had burnt their fingers, “There is a lot of uncertainty in the market regarding pricing. There was a lot of confidence in the market earlier, but now there is talk of variation and rising price trends. The price is rising because of BCD.”

He said, “In the GUVNL tender, the BCD was not directly factored in. However, the BCD has impacted the market and pushed the module prices upwards. The supply chain will push prices whether developers are sourcing from India or China. We have spoken to several module manufacturers. No one feels confident enough to make any predictions about the market at this point.”

According to the developer, the industry was earlier expecting a fall in module prices. “Instead, we see an upward trend. This can be attributed to the shortage of raw materials as well. There is also a supply chain disruption which can also be attributed to Covid-19. However, I feel there is a possibility of the Chinese rigging the prices which can lead to costs going up.”

The developer claims that major players like Tata Power and L&T face issues since the big Chinese module manufacturers broke their contracts, as BCD will affect their future consignments.

“The Chinese manufacturers broke the contracts which quoted 17-19 cents, and now they are demanding 25-26 cents. The Chinese see more scope in earning profits in the present contracts than in the future contracts. India generates a huge demand for the Chinese suppliers, and with BCD implementation, the equation will change,” the developer said.

“However, the spike in module prices will not sustain for long, and by the second or third quarter, they will come down. For the market to be in a good zone, the prices should be arrived at using scientific methods that ensure the product’s longevity in the market. Else, it will become a speculative market, which was the norm a few years ago,” the developer said.