Another PSU solar tender set for a lukewarm response

14 June 2021 |

Bid submission date for Indian Renewable Energy Development Agency Ltd (IREDA)’s 5,000 MW solar tender has been extended again to 15 June 2021. This is the third such tender issued under MNRE’s 12,000 MW PSU phase II scheme, which mandates that all power must be sold to government owned entities and PSUs for their captive consumption. Only domestically manufactured cells and modules may be used in such projects.

  • The decision to reduce tariff and capital subsidy is perplexing as most capital costs have shot up by 20-25% over last year;
  • Proposed VGF amount is barely adequate to cover extra costs of procuring modules domestically;
  • Merits of continuing the scheme with a considerable subsidy cost to the exchequer are questionable in view of the proposed BCD and production-linked incentives;

The bid submission extension follows recent amendments to some key provisions of the PSU scheme. Fixed tariff for sale of power has been reduced from INR 2.80/ kWh to INR 2.45/ kWh, flat over 25 years. Maximum viability gap funding (VGF, a capital subsidy) has also been reduced from INR 7.0 million (USD 96,000) to INR 5.5 million (USD 74,000) per MW, while commissioning deadline has been increased to 30 months. The VGF support is provided to cover cost differential of 20-25% between domestically manufactured and imported modules.

The rationale behind reducing tariff and capital subsidy is hard to comprehend. While module prices were on a downward trajectory until July 2020, all input costs have been firming up for nearly a year now. There has been a significant surge of 20-25% in costs for modules, other components, labour as well as freight arising from increasing commodity prices and recent supply chain bottlenecks. Incidentally, capital costs have shot back up to same level as in 2019, when the PSU phase II scheme was launched. We believe that the reduced tariff and VGF amount would not be viable for project developers.

Response to two previous tenders under the PSU scheme has been underwhelming. Only 2,026 MW capacity was awarded in two auctions conducted by SECI for 3,500 MW capacity due to lack of bidding interest.

Figure: Capacity awarded under PSU scheme, MW

Source: BRIDGE TO INDIA research

NTPC is the biggest beneficiary winning nearly 80% of all allocated capacity. The company is intent on aggressively growing the renewable business and should again be bidding a relatively large capacity.

Designed exclusively to support domestic module manufacturers, the PSU scheme has been of little help so far because of relatively small volumes and slow progress. Most of the awarded projects are facing completion delays. Finding willing offtakers and tying up open access arrangements is not proving to be easy even for PSU giants. We also question persisting with the scheme at a considerable cost to the exchequer – this tender has a budgeted VGF outlay of INR 27.5 billion (USD 370 million) – when the government has already announced steep duty barriers and production-linked incentives to support domestic manufacturing.

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