Sense of déjà vu as RE tenders soar again

14 January 2019 |

In the last six weeks starting December 2018, 22 utility scale tenders aggregating 15,453 MW of capacity have been issued for wind and solar power projects in India. This spree has come as MNRE announced a revised plan in December 2018 to issue tenders for an aggregate capacity of 80,000 MW by March 2020 – equivalent to a phenomenal monthly average of 5,000 MW.

  • It is encouraging to see more demand for RE from leading power consuming states such as Maharashtra, Gujarat and Uttar Pradesh;
  • Progress on tenders last year was very poor as multiple tenders were undersubscribed and/ or cancelled resulting in weakening investor confidence;
  • Issuing more and more new tenders without addressing operational and financial constraints faced by the sector is a pointless exercise;

In total, there are now 24,862 MW of utility scale projects for which tenders have been issued but auctions are yet to be held. Most of these tenders are for solar project development. Share of wind and EPC tenders has been steadily falling. It is pleasing to see a surge of issuance in Maharashtra, the biggest power consuming state and a relative laggard in the sector.

Figure: Project location for tenders issued for which auctions are yet to be held

Source: BRIDGE TO INDIA research

Note: Jammu & Kashmir tender is for supplying power to other states.

MNRE has been keen on issuing more tenders since December 2017. However, actual progress has been much slower due to multiple instances of tender undersubscription and cancellation. Private sector response has dimmed in response to poor tender design, low tariff expectations and transmission sector bottlenecks. Ratio of successful project allocation to tender capacity issuance fell to a record low last year.

Figure: Tender issuance and auctions, MW

Source: BRIDGE TO INDIA research

As MNRE goes on another tender issuance spree, there is a growing sense of déjà vu. Lessons have not been learnt from past failures and this makes us believe that 2019 would be a repeat of the last year. First, power demand growth simply does not merit issuance of new tenders at such scale. Demand has picked up in the last six months to about 8% but we believe that this is a temporary boost ahead of the general elections as industrial activity remains subdued. Many DISCOMs are cautious about buying more RE power despite record low tariffs because of RE’s intermittency problem.

Second, we don’t see any room for tariffs to go down in the near-term as costs are expected to remain stable while economic and political environment is likely to be somewhat volatile. At the same time, competitive intensity in the private sector is falling. In such a scenario, investors are expected to be more cautious with capital raising posing significant challenges for most of the year.

In essence, there is a growing divergence between expectations of DISCOMs and procurement agencies on one hand, and project developers and their investors and lenders on the other hand. Unless the market becomes more investor-friendly, bidding environment is expected to remain challenging.

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