Gujarat has asked winning bidders in its May 2019 wind auction for 1,000 MW projects to match the lowest tariff of INR 2.80/ kWh bid by Enerfra, a local developer. Seven other winners including Adani, ReNew, Greenko, EdF, Vena, INOX and Powerica, who had bid tariffs between INR 2.81-2.95/ kWh have been told that PPAs will be not signed unless developers reduce tariff to INR 2.80/ kWh. Meanwhile, Acme, India’s largest solar developer, is seeking to cancel its 600 MW winning bid of INR 2.59/ kWh in a 2,000 MW solar auction completed by NTPC in August 2018. The company’s argument is that its project has not been approved by the Telangana state regulator in the stipulated timeframe of 2 months – a condition precedent in the PPA – allowing it to terminate the PPA.
- DISCOMs are reluctant buyers of RE as it is ill suited to meet their peak load requirements and balancing costs are estimated to be high;
- In a highly competitive market, the developers continue to bid aggressively in response;
- Both sides are fixated on prices leading to jitters and increasing risk of bid cancellations, tariff renegotiation, curtailment and poor execution;
Both instances reflect a growing malaise in the RE sector. Gujarat’s rationale for renegotiation is that the tariff premium of INR 0.15/ kWh (+5.4%) in the winning bids is too high. That doesn’t make sense and also goes against the auction rules. The real reason of course is that the DISCOMs are stuck between a rock and a hard place. Deeply stressed financial position and political pressure to keep tariffs low is forcing them to squeeze RE developers instead. Despite wind and solar power being far cheaper than all other sources of power, they are reluctant buyers as RE is ill suited to meet their peak load requirements. They still need to procure more expensive conventional power with high fixed costs. RE also has higher transmission costs and its variable output profile/ ‘must run’ status poses all sorts of challenges to the grid. In a study completed in 2017, the Central Electricity Authority (CEA) estimated additional cost of balancing RE at around INR 1.50/ kWh. Gujarat has already cancelled two solar tenders aggregating 1,200 MW capacity because the tariffs were “too high” and it might do so again.
Unfortunately, the developers have been only too keen to comply. Bidding has stayed aggressive consistently with developers taking a favourable view of the operating and financial environment. Our calculations show that with execution challenges mounting and the financing environment also getting tough, most ISTS solar and wind bids below INR 2.70 and INR 2.90 respectively are not viable. Risk-adjusted equity returns are barely in double digits.
The implications for all stakeholders are unsavoury. It remains to be seen how developers would sustain their aggressive bids. IPO plans are looking unrealistic and the secondary market is also challenging. The risk of bid cancellations, tariff renegotiation, curtailment and delayed project execution is high and rising. Relationships between generators and offtakers are getting fraught and do not bode well for future of the sector.
