Two Rupees makes no sense!

27 November 2020 |

On 23 November 2020, SECI conducted an auction for a 1,070 MW vanilla solar tender where a new tariff low of INR 2.00 (USD cents 2.7)/ kWh was discovered. The low tariff was bid by Saudi Arabia’s Aljomiah (200 MW), a new market entrant, and Sembcorp (400 MW). NTPC was the other successful bidder, winning 470 MW capacity, with a tariff of INR 2.01/ kWh. The tender was oversubscribed heavily with bids totalling 4,350 MW submitted by Sprng, SJVN, Solar Arise, Vector Green, Tata Power, Juniper, Axis Energy, Ayana, Jakson, Amp Energy and O2 besides the three successful bidders.

  • Bidding interest for vanilla solar projects is very high as many small-mid size developers who have recently raised money are not keen on complex hybrid schemes;
  • Tariffs have fallen sharply only because of anxiety of the winning bidders to scale up;
  • The low tariffs will distort expectations of other DISCOMs and increase risk of cancellation or renegotiation of projects with tariffs higher than INR 2.50/ kWh;

As seen in the last two SECI solar auctions, bid intensity has suddenly shot up over the last few months. A look at the names of participating bidders shows that the tender received interest mainly from small-mid size developers (other than the exception of Tata Power and NTPC). Most of these developers have either recently raised money and/ or are in advanced stages of completing construction of their pipeline projects and hence, are keen to win more capacity. The developer interest was also particularly strong in this tender because of firmed up offtake (from Rajasthan) and straight forward execution for vanilla solar projects in Rajasthan. The developers are concerned both about weak power demand – SECI has nearly 18,000 MW of allocated projects without back-to-back demand from DISCOMs – and execution challenges associated with complex hybrid schemes.

Solar power tariff has fallen by 15% in five months. There is no good reason for such a sharp fall other than anxiety of the winning bidders to scale up. Projects under this tender will be connected to state grid with risk of higher downtime and curtailment in comparison to projects connected to the national grid. Module prices have been volatile, firming up over last four months, and betting on significant fall within the execution timeline is dangerous. The only mitigation in comparison to other projects being developed in Rajasthan is that power would be consumed within the state; the state development fund charge of INR 200,000/ MW per annum – equivalent to about INR 0.14/ kWh in tariff terms – will therefore not be applicable.

Our financial calculations show project level equity IRR of sub-10%, deep water territory. The following chart shows interesting bid price differential for different developers. We believe that the prudent tariff for the tender was in the INR 2.25-2.40 range.

Figure: Bid capacities and tariffs

Source: BRIDGE TO INDIA research

The implications of the unrealistically low tariff are not palatable both for the winners in this tender and for winners of other recent tenders. It distorts expectations of DISCOMs and increases risk of cancellation or renegotiation of projects with tariffs higher than INR 2.50/ kWh.

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