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Gujarat rides roughshod over developers


28 January 2019 | BRIDGE TO INDIA

Gujarat rides roughshod over developers

Gujarat has cancelled the Banaskantha solar park based 700 MW utility scale solar tender for which an auction was conducted in December 2018. Winning bidders were SB Energy (250 MW, INR 2.84/ kWh), Fortum (250, 2.89) and Engie (200, 2.89).  Reason for cancellation is same as ever and arbitrary – the winning tariffs are “too high.”

  • Main reason for high tariffs is the extremely high solar park charges fixed by another arm of the Gujarat government;
  • 5,300 MW of valid winning bids have been cancelled by different agencies in the last year in the expectation that they can keep driving down tariffs ever lower;
  • Arbitrary tender cancellations are taking the shine off India’s solar story and threaten to turn the investors away;

Winning bids were about INR 0.40/ kWh higher than in the last solar auction conducted by the state in September 2018. Main reason for high tariffs is that solar park charges in Banaskantha were fixed at extremely high levels (by another arm of the Gujarat government). We have computed net present value of these charges at INR 8 million (USD 0.1 million)/ MW, about 2.5 times the cost of similar services in the open market. If the charges were set at more reasonable levels, the winning tariffs would have been lower by about INR 0.30/ kWh. We understand that the winning developers argued this point with the Gujarat government and offered to reduce tariffs if solar park charges are made more competitive but with no result. Curiously, unlike other states, Gujarat does not specify any ceiling tariffs in its tenders. So, there is no formal guidance to bidders on acceptable tariff range.

This cancellation comes after a previous cancellation of a 500 MW tender by the state in April 2018 where winning tariffs came in the range of INR 2.98-3.06/ kWh. In that instance, cancellation was partly justified as the auction took place just weeks before announcement of safeguard duty and the developers duly added a fat risk buffer to the tariff. Three months later, the state got much lower tariffs of between INR 2.44-2.45/ kWh but the reduction was largely due to sharp fall in module prices and clarity over safeguard duty risk. Unfortunately, the procurement agencies have learnt the wrong lessons and cancelled 6,725 MW of valid project bids in the expectation that they can keep driving down tariffs ever lower.

Figure: Utility scale solar capacity – tender progress since January 2018, MW

Source: BRIDGE TO INDIA research

Gujarat attracts leading international developers to its tenders because of its sterling reputation, highly rated DISCOMs and prompt payment track record. But the state is damaging its standing by repeatedly cancelling tenders and runs the risk of turning investors away.

Indian RE has faced many challenges in the last year. Many players, hurt by adverse risk profile and low returns, have exited the sector. There are clear signs of consolidation in the bidding activity and the number of active, deep-pocketed bidders is down to about ten. Government agencies need to beware – they need to provide attractive investment environment to attract capital. Solar is growing in many other parts of the world and international capital, in particular, can be fickle.


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