Higher Solar Tariff Ceiling Isn't Necessarily Good For Private Bidders

The tariff ceiling quoted by public-sector generation companies at the latest auction for solar power projects points to even higher pricing in the future. Yet, private players may find them inadequate as the sector is beset by rising costs.The central public sector enterprises set a tariff limit of Rs 2.45 for every kilowatt hour—up from Rs 2.20 previously—at the Indian Renewable Energy Development Agency’s latest auction for 5 GW of grid-connected solar power projects.The tenders said the projects can be set up anywhere in India on build-own-operate basis, with the power generated to be used for captive purposes or by government entities, directly or through distribution companies. The tender was oversubscribed by 1,960 MW, according to Mercom India Research, with NTPC Ltd. bidding the highest for 1,990 MW..The government has set a target of generating 175 GW through renewables, of which 100 GW is to be met through solar, by the year end. Solar power producers are already facing the risk of states cancelling contracts, lack of buyers and rising input costs. That has increased tariffs.Tariffs cited at solar auctions, according to Antique Stock Broking, have risen 23% over the last nine months.The latest CPSE auction was based on reverse bidding of viability gap funding per megawatt—a facility available only for central government undertakings. Viability gap funding refers to capital grants, subsidies or equity from central or state governments to render projects under public private partnership financially viable. The higher tariff ceiling by state-run generators means private firms would follow suit, Sabyasachi Majumdar, senior vice president at ICRA Ltd., said, implying that rates for discoms would rise. The quantum of tariff revision would depend upon demand-supply situation for the equipment given the rising prices of solar photovoltaic cells and modules over the past six to eight months as polysilicon have become costlier, he said.Private bidders, however, don’t have this buffer and need to bid competitively.RE Power and Sembcorp Energy India Ltd. didn't respond to BloombergQuint's emailed queries..And rising equipment prices is not the only factor.Till October, 70% of the gross contract value was considered as supply of goods (solar power generating systems) to levy 5% GST, he said. Following Oct. 1, that has been hiked to 12%. The remaining 30% is considered as a service and comes under 18% GST.In all, the average cost of large-scale solar projects, even after accounting for government subsidy, has risen 13.5% year-on-year to Rs 3.86 crore for every megawatt in April-June this year, according to Rohit Natarajan, associate vice president of research at Antique Stock Broking.Solar tariffs, Natarajan said, are a combination of ratings of the discom and the EPC costs—or expenses the project owner is liable for once the contract for construction is signed.“Should the discom’s rating be poor, developers quote higher tariff. Case in point: Gujarat Urja Vikas Nigam Ltd., with exceptionally good ratings, gets the lowest tariff,” he told BloombergQuint. “[But] EPC costs have seen an uptick with hardening prices of raw materials, duties and now even GST which has direct bearing on the tariff profile.”This may lead to tariff distortion as the ceiling of Rs 2.45 per unit implies that power can be sold below this level. Especially by CPSEs that get viability gap funding.Majumdar of ICRA said that in such cases, private firms may not choose to bid if rates quoted by the CPSEs turn unviable.

Higher Solar Tariff Ceiling Isn't Necessarily Good For Private Bidders

Solar power projects in India, which have been facing multiple problems of late, may have one more to contend with.

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