Why Upcoming Renewable Project Auctions May See Higher Tariffs
Risk of states cancelling contracts, lack of power buyers and now rising input costs. Bidders in India’s upcoming auctions for renewable projects will have to factor in all these concerns, possibly pushing tariffs higher.
The Solar Energy Corp. of India plans to auction almost 9.2 gigawatts in capacity over the next two months to hasten the renewable energy push, according to a statement. It comprises a mix of solar and wind farms in Tamil Nadu and Rajasthan, among other states.
India’s installed renewable capacity stood at 97GW as of February. The Narendra Modi-led administration plans to hit 450 GW by 2030 as it seeks to curb fossil-fuel pollution. Almost half of the world’s 30 most polluted cities, according to the World Bank, are in India.
Yet, Uttar Pradesh and Andhra Pradesh have put the sanctity of bids in question by reneging on their contracts. And projects with a combined capacity of 13.5GW have yet to sign power-purchase pacts. India’s move to impose duties to boost local manufacturing and rising import prices have added to worries, at least for the short term.
“The basic customs duty on imported solar equipment is expected to have an obvious outcome of increased tariff in new solar projects in the near future,” said Vipul Tuli, chairman of the FICCI Power Committee. Tuli is also the managing director of Sembcorp Energy India.
The recent auction by SECI for 1,070 MW of solar projects in Rajasthan resulted in bids at a tariff of Rs 2 per kilowatt-hour by Sembcorp Energy India Ltd., NTPC Ltd. and Saudi Arabia-based Al Jomaih Energy and Water Co.
In December, NTPC, Torrent Power, Aditya Birla Renewable and Al Jomaih placed bids at Rs 1.99 per unit—the lowest by any firm—in an auction conducted by Gujarat Urja Vikas Nigam for 500 MW capacity.
According to Kashish Shah, a research analyst at Institute for Energy Economics and Financial Analysis, solar tariffs in India are now below even the fuel costs of running existing coal-fired power plants.
The low tariffs stemmed from the enthusiasm of foreign firms to enter the Indian market, lower borrowing costs and expectations of fall in module prices, said Prashant Sinha, chief risk officer at L&T Infrastructure Finance Co.
In March, India approved a basic customs duty of 25% on imported solar photovoltaic cells and 40% on imported solar PV modules from April 1, 2022. Imported module prices have also risen as input costs jumped and plants shut down in China. The components contribute half the cost of a project.
Sabyasachi Majumdar, senior vice president at ICRA Ltd., sees project costs rising nearly 23-24%. That would push tariffs higher by 45-50 paise a unit but still below Rs 3 a unit, he said.
Subrahmanyam Pulipaka, chief executive officer of the National Solar Energy Federation of India, forecasts a rise of at least 25-30%.
The industry will have to factor in transmission charges, currently borne by thermal power plants and waived for renewable projects till mid-2023. Pulipaka said the industry has written to the Ministry of New and Renewable Energy to extend the waiver till December 2023 so that under-construction projects aren’t affected.
If interstate transmission charges remain, that will prompt companies to set up projects in consuming states, Tuli said. The other possibility is that depending on the new charges introduced, firms may continue to invest in high-sunlight or high-wind states and pass on the additional transmission costs to customers, he said. “Either way, the policy framework for renewables will have to evolve to ensure energy transition continues.”
Elephant In The Room
While the upcoming auctions might fill in some gap, doubts persist over their sanctity with states like Uttar Pradesh and Andhra Pradesh cancelling or revising bids after the process. The two states did that to benefit from lower tariffs discovered in subsequent auctions.
A letter of cancellation, according to information available on the website of UP’s New and Renewable Energy Development Agency website, was sent to three winners of the reverse auction held in February 2020.
Earlier, Andhra Pradesh Chief Minister YS Jagamohan Reddy revised power purchase agreements of solar and wind projects worth around 8,000 MW in the southern state. And that happened after the companies had signed power purchase agreements with the previous government. The matter is now before the Amaravati High Court.
Existing projects are still to find buyers for power. As of December 2020, around 13.5 GW of SECI projects are yet to get power sale agreements, according to data from India RE Navigator portal. That’s more than twice the capacity that’s likely to coming up for auctions in the next three months.
Apart from the cancellation of winning bids, said Rohit Natarajan, associate vice president of research at Antique Stock Broking, what’s more worrisome is the trend of unsigned power sale agreements.
Ironically, these very projects and jilted winning bidders may stand to gain if future auction prices rise. “Therefore, it’s advisable for electricity distribution companies to lock in with an earlier rate of prices discovered,” Natarajan said.