Month: August 2013

The south Indian state of Karnataka opened the financial bids for an allocation of a capacity of 130 MW. Karnataka is expected to issue Letters of Interest (LoIs) to 16 developers for this allocation. The lowest successful bid is of INR 5.51/kWh by Sun Pharma and the highest successful bid is of INR 8.05/kWh by Welspun Solar and Heidelberg. The average bid across all successful bids is INR 7.06/kWh.

The return on equity for the lowest bid projects will not be attractive enough to justify investment

The devaluation of rupee has led to an increase in cost for importing modules and an increased cost borrowing from banks

With only a limited decrease in capital costs, the recently quoted tariff of INR 5.51/kWh in Karnataka and INR 5.78/kWh in Tamil Nadu do not seem workable

We believe that for the lowest bid of INR 5.51, the return on equity for the projects will not be attractive enough to justify the investment. Even if the optional acceleration depreciation (AD) is availed, it can only amount to an equivalent increase of INR 1-1.5 in tariff, which still may not make adequate financial sense for developers. Further, with the devaluation of the Indian Rupee and the possible imposition of the anti-dumping duties, the cost of importing modules and BOS would rise, increasing the overall costs of projects. The devaluation of the rupee has also triggered an increase in the interest rates of banks, which means that the increased cost of borrowing also adds to the overall costs to developers. Moreover, as compared to Rajasthan, where projects have recently been allocated at a tariff of INR 6.45/kWh, most parts of Karnataka receives relatively low levels of irradiation.

Overall, BRIDGE TO INDIA believes that the average tariff for projects in Karnataka turns out to be INR 7.06/kWh, which is workable for most developers.

The recently quoted tariff of INR 5.51/kWh in case of Karnataka and the tariff of INR 5.78/kWh proposed by the Tamil Nadu Electricity Regulatory Commission (TNERC) do not seem to be in tune with a limited decrease in capital costs over the last few months. If we suppose similar tariffs to be quoted under the phase two of the NSM, based on the current draft, wherein the pre-determined tariff offered by the government is assumed to be INR 5-6/kWh, the government would end up paying nothing for the Viability Gap Funding.

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On August 8, 2013, as predicted by BRIDGE TO INDIA, the Gujarat Electricity Regulatory Commission (GERC) dismissed Gujarat Urja Vikas Nigam Limited’s (GUVNL’s) petition seeking a retrospective revision in tariffs for solar projects in the state. The GERC concluded that the petition is ‘not maintained’, however, the GUVNL is free to appeal to the Appellate Tribunal.

Petition was dismissed on the basic premise of delay in appealing for review of the order

Other grounds deeming the contract ‘not maintained’ included ‘non-jurisdiction’, ‘no provision for reopening of PPA’ and ‘incomplete information’

The comprehensive document dismissing the petition will hopefully reinstate some confidence in investors

Last month, GUVNL filed a petition with the GERC asking for a downward revision of tariff from INR 12.54/kWh to INR 9/kWh claiming that actual project costs incurred by developers were significantly lower than initially assumed while determining the tariff.

Our last blog covering this issue emphasized that the dismissal of the petition would be crucial for India’s solar future. (refer). After holding hearings on the 25th of July as well as on the 5th of August to hear out from the 88 respondents, the GERC finally deemed the petition ‘not maintained’. The primary ground for dismissal was cited as the delay in seeking a review. The commission pointed out that as per regulations, an order can be reviewed only when the petition is filed within a period of 60 days, however in this case, GUVNL appealed for a review after more than three years.

In addition to that, the Commission also explained that it does not have the authority to re-negotiate the PPA as requested by GUVNL as this function does not fall under its jurisdiction. Therefore, it stated that ‘the re-determination of tariff as requested from the commission by the petitioner is not warranted’. Further, regarding the revision of tariff and re-negotiation of the PPA, the document (Refer to the document) says that PPAs can be re-opened only for the purpose of incentivizing non-conventional energy projects and not for reducing the incentive. Moreover, the PPAs hold no clause for such a revision of tariffs, unless and until there is an agreement from the developers’ end. It is only a change in legislation can warrant the opening of a finalized PPA.

The GERC also mentioned that the GUVNL had provided the details of only 10 companies that have benefited from the lower costs of project development or have not met the 70:30 debt equity criterion. The information provided is also largely one-sided and no consideration has been given to the views of the developers. Therefore, the case against the developers was considered incomplete. The GERC finally concluded that the petition is dismissed on the above grounds.

This dismissal has provided some relief to the developers but it would take time to restore overall investor confidence, especially in the wake of uncertainty surrounding the other policies in Tamil Nadu and Andhra Pradesh. However, BRIDGE TO INDIA believes that GERC’s comprehensive document dismissing the petition on several lawful grounds will help reinstate the confidence of the investors in due time.

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The Tamil Nadu Electricity Regulatory Commission (TNERC) has published a consultative paper titled ‘Comprehensive Tariff Order on Solar Power’ on 30.07.2013 (click here for the paper). The purpose of this paper is to come up with a common tariff for all solar power projects in the state. The paper recommends an extremely low solar tariff of INR 5.78/kWh (without escalation) for all solar PV projects in Tamil Nadu.

Overriding the bidding process, TANGEDCO fixes a workable tariff of 6.48/KWh (with 5% annual escalation for 10 years)

TNERC’s consultative paper expected to override the tariff fixed by TANGEDCO

Solar instability seems to be the only constant for solar developments in India

Earlier in the year, TANGEDCO carried out a reverse auction to determine the price of solar power. The bids received were in the range of INR 5.97 to INR 18/KWh. After a lot confusion, TANDGEDCO decided to override the bidding process and fix a ‘workable tariff’ of INR 6.48/kWh (with a 5% annual escalation for 10 years). The rationale behind fixing this tariff is not known and has not been communicated by TANGEDCO. BRIDGE TO INDIA has access to Letter of Intents (LoI) that have been signed by TANGEDCO for a tariff of INR 6.48/kWh.

TNERC is the competent authority to sanction any tariff and not TANGEDCO. Therefore, in our opinion, the recent consultative paper issued by TNERC would now again override the tariff of INR 6.48/kWh (with 5% annual escalation for 10 years) arrived upon by TANGEDCO. This means that the LoIs signed by the distribution company would stand void. In retrospect, it is surprising to see TANGEDCO issuing orders on solar tariff, when this is strictly the responsibility of the state regulator TNERC.

Although there were significant concerns on the bankability of PPAs under the Tamil Nadu Solar Policy, there has been considerable interest shown by investors and developers in this state. Such developments would jeopardize the confidence of investors in the state. Policy instability seems to be the only constant for solar developments in India these days. In case of Gujarat, the PPA signing authority is seeking for a downward revision of tariffs as announced in the state solar policy. Earlier this year, we saw the state of Andhra Pradesh also override the bidding process and announce a fixed tariff of INR 6.49/kWh. Now, the proposed division of Andhra Pradesh and creation of Telangana is also a concern for projects to be set up under the Andhra Pradesh solar policy (read our analysis on the subject here). This kind of instability also makes it very difficult for suppliers and project developers to plan for the Indian market and many international companies and investors have already started giving India a miss, at least for the short to medium term.

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On Tuesday, 30th July 2013, the central government in India gave its initial go-ahead on splitting the state of Andhra Pradesh (AP) into two states, i.e., Telangana and Andhra Pradesh. The formalization of the split is expected to take at least another six months. Such a split is bound to have an impact on infrastructure projects in the state. Solar power projects are also expected to be affected as Power Purchase Agreements (PPAs) under the Andhra Pradesh solar policy were expected to be signed soon.

Bankability issues may arise with the restructuring of the state DISCOMS

The possibility of the state’s division may have been considered by the state authorities since the release of the policy

Short-term implications include delays in the signing of PPAs and possible opting out of developers

Splitting of the state will require re-structuring of the state owned enterprises such as the power distribution companies (DISCOMs), which would be the PPA signing authority for solar projects. The jurisdictions of the DISCOMs could be rearranged or they could be divided to form new entities; such a restructuring is going to have an impact on their new customer base as well as their balance sheets.

As per the insights provided by a developer who plans to set up projects in the state, the possibility of the state’s division has been considered by the state authorities since the very release of the state solar policy. The matter was even discussed in the pre-bid meetings. In fact, most projects that fall in the Telangana region would enter into a contract only with the Andhra Pradesh Central Power Distribution Company Limited (APCPDCL), which is the DISCOM operating within that area. This will help avoid any issues related to the jurisdiction and operations of the off-taker. However, some areas in the newly-formed Telangana region will not fall under the jurisdiction of APCPDCL and some re-structuring of the DISCOMs will be required.

Due to the restructuring of the DISCOMS, banks are expected to have some concerns with the bankability of off-taker. Currently, there is very limited clarity on how the re-structuring will happen as the process is yet to begin. Without any clarity as to what can be expected, some developers may lose confidence and pull out before signing the PPA.

There is a very real possibility that the formation of new states can create problems in the short run. For instance, there can be delays in the signing of PPAs as the APTRANSCO may want to introduce revisions in the contracts to accommodate the implications of the split. However, once the ambiguity related to issues of bankability and operation are cleared, the developments would pick up pace. Finally, in the long run there may not be a significant impact on the overall functioning of the projects. Such state divisions have happened before in the country, like in the case of Bihar and UP, and eventually the operation of infrastructure projects has been worked out.

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