Last week, SECI conducted auction for a 1,200 MW utility scale solar tender. The tender received bids for full 1,200 MW but the auction was completed for only 960 MW, equivalent to 80% of the bids received, as per the rules in place. ReNew, Avaada and UPC Renewables won 300 MW each at a tariff of INR 2.71/ kWh; Tata Power won the remaining 60 MW at INR 2.72/ kWh. The developers are free to locate projects anywhere in the country and seek inter-state transmission system (ISTS) connectivity. 

• Tariffs have finally started inching up but the increase is not commensurate with various operating and financial risks assumed by developers;
• The uniquely open and transparent nature of renewable auctions has created an extremely competitive market;
• In the rush to raise more money and build more capacity, most of the leading developers have failed to create any lasting competitive advantage;

The auction is unremarkable for all intents and purposes except that the tariffs have finally started inching up a little. These are the highest ever tariffs in a SECI or NTPC solar ISTS tender. However, the increase is only about INR 0.20 or 6-8% over average tariffs seen in the last two years. Indeed, the surprise is that tariffs have not increased faster in response to various cost increases as well as teething execution and financing hurdles faced by developers. 

How to explain continued investor interest and competitive dynamics in the sector? The answer lies primarily in the massively scaled up, fully transparent auction programme developed by the Indian government. It has (arguably) played a winning hand by creating a near level-playing field and reducing project bidding to a single point online game – tariff. In an already commoditized sector, there is no premium for developers to deploy advanced technology, deliver more reliable plants, reduce land or water requirement, or tailor power output profile to match demand curve. In the process, the government has managed to attract some of the world’s biggest strategic and financial investors including utilities, IPPs, business conglomerates, sovereign wealth funds, pension funds and PE funds. 

On their part, the investors have found lure of deploying huge chunks of capital in a sector with high growth prospects and green credentials too hard to resist. Many of the leading developers have simply followed the motto of ‘raise money, build more’ and struggled to create a lasting competitive advantage. Setting aside financing, it is almost impossible to identify any winning strategy or undertake any meaningful comparative analysis in the project development business. On the contrary, in the rush to raise money and build projects, many developers have cut corners on risk, project quality and long-term business planning. 

Lessons ought to have been learnt after all the problems faced over past two years. For sure, there is more risk aversion and return expectations have increased marginally as evident in the recent tender results. But unless the developers build a true competitive advantage (assuming that the government allows them to), they are likely to be chasing elusive returns in an overcrowded market.