Business Today

Crashing Tariffs

Solar and wind power tariffs are falling, based on assumptions which may change.
By Anilesh S. Mahajan   Delhi     Print Edition: March 26, 2017
Crashing Tariffs

In the first week of February, bids for Rewa Ultra Mega Solar Park in Madhya Pradesh took everyone by surprise. The price per unit fell below Rs3. Three companies - Mahindra Renewables, Acme Solar and Sweden's Solenergi Power - committed to provide electricity at a levelised tariff of Rs3.29 a unit; the first-year supply would be at Rs2.97 per unit. The lowest bid before this was Finland-based Fortum Finnsurya Energy's Rs4.34 per unit for 70 MW at Bhadla Solar Park-II in Rajasthan. Over the past 14 months, solar power tariffs have fallen sharply, from Rs5.05 a unit offered by Skypower for 50-MW in Madhya Pradesh itself.

By end-February, wind power followed suit in the first reverse auction, as companies such as Mytrah, Sembcorp, Inox Wind and Ostro committed a tariff of Rs3.46 a unit.

These two events could change India's renewable energy story, though for that to happen, India would need more investments in transmission. In both these bids - to reduce the risk for developers - the government committed evacuation and off-take of power. In December 2016, India decided to pump in $1.8 billion to lay transmission lines to transmit 20 gigawatts from 34 solar parks in 21 states. The Madhya Pradesh government reduced another risk by committing to hand over the land.

While this seems good news, officials at financial institutions believe that even if governments reduce risks, many calculations done by developers are too risky for debt financing. Bankers said most operators were assuming that panel prices and interest rates would fall and the currency not depreciate much. In a bad year, all these three factors could turn against the developers.

The existing model allows operators to achieve financial closure within six months of the state government transferring land. Another six months are needed for construction of the park. Operators plan to order panels six months later, giving them scope to gain from further reduction in costs. In fact, the crash in tariffs has increased dependence on Chinese imports. China has excess capacity to manufacture panels to generate 80 GW; it also offers 17 per cent export benefit to its companies. "What if China decides to withdraw this benefit?'' asks the banker. "We have seen how road and ultra mega power projects have fared in the past. We don't want to repeat that folly again."

However, the risk worked well for the players last year. Construction cost fell from Rs6 crore a MW to Rs4 crore as the cost of panels fell 26 per cent and interest rates slipped to 8.5 per cent from 10-12 per cent. While operators believe the trend will continue, banks want more equity participation from operators.

Wind energy faces a different challenge now. Various states via feed-in-tariffs were paying Rs4-6 a unit, but the old model of procurement had become dysfunctional with delays in signing PPAs, rising incidence of grid curtailment and payment delays of up to 18 months. The move towards reverse auction may lead to a temporary hiatus in the market. Existing market leaders in manufacturing equipment like Suzlon, Gamesa might be hit. These players had over the years developed a business model banking on the preferential tariff regime to bundle together land, turbines and EPC work. This allowed them to command significant price premium and subsequently dominate the market. The auctions will provide opportunities for independent power producers and may break wind turbine manufacturers' domination. But Tulsi Tanti of Suzlon says this will spur growth for everyone.


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