Is Uttar Pradesh ready for business?

10 July 2017 |

Two months ago, we wrote about how Uttar Pradesh (UP) could be the dark horse for solar power demand in the country. Since then, the state has announced a 750 MW tender with Solar Energy Corporation of India (SECI) in Bhadla and a new solar policy to build 10.7 GW of solar capacity by 2022. But UP can be a tough place to do business as proven yet again by the state renewable nodal agency, UP New & Renewable Energy Development Agency (UPNEDA), asking developers to reduce tariffs for a 215 MW state tender closed in 2015. UPNEDA claims to be acting on behest of the state electricity regulator (UPERC), which is apparently refusing to approve power procurement at tariffs ranging between INR 7.02 – 8.60/kWh even though the benchmark regulated tariff for the tender was INR 9.33/kWh.

  • Many project developers are already wary of entering UP and the state’s move to renegotiate tariffs after signing PPA’s will further damage its credibility;
  • It makes no sense for UP to renegotiate tariffs for a mere 165 MW of capacity when it wants to add more than 10 GW of solar capacity in the next 5 years;
  • Such unilateral, post-facto moves to renegotiate tariffs detract from the Indian government’s ambitious plans and need to attract more private capital in the sector;

Only 130 MW of projects have been completed under this UP tender so far and several projects have been granted ad-hoc extension. UPNEDA may feel that it is justified in seeking lower tariffs when capex costs/ tariffs having been falling across the sector. But such a move is short-sighted as the harm to the state’s credibility and the negative impact of this step on future tenders will far outweigh the benefit of any tariff reduction.

Project developers already attach a very high risk premium to UP. The state is notorious for poor law and order situation and has a low ‘Ease of doing business’ ranking, 14th among Indian states. Our recent report, Assessment of utility scale tender results in India, showed that UP tariffs have been higher than other state tariffs by up to 50% after adjustment for radiation, timing and other factors.

But UP is also the most populous state in India with a population of 220 million (17% of India’s population) and per capita electricity consumption of only 532 kWh as against 1,537 kWh for Gujarat and 1,192 kWh for Maharashtra. The new BJP government has a huge economic opportunity to turn around the state’s economy by exploiting cheap renewable power and reforming the local power transmission and distribution system. It has indeed made reliable power supply as one of its core policies. UP has already cancelled over 7 GW of planned thermal projects and is believed to be planning to procure another 1,500 MW of solar power in the near future. In such a scenario, it makes no sense for the state to renegotiate tariffs for a mere 165 MW of capacity.

Moreover, any unilateral, post-facto move by any state to renegotiate tariffs detracts from the overall national growth story and Indian government’s attempts to attract more private capital in energy and infrastructure sector. The national and state governments, together with the regulators, need to clamp down on such regressive short-term measures.

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