Weekly Update: Draft guidelines for batch one of phase two of the NSM released, serious concerns remain

The Ministry of New and Renewable Energy (MNRE) has today announced draft guidelines (refer) for setting up of 750 MW solar PV capacity under Phase 2, Batch 1 of the National Solar Mission (NSM).

Viability Gap Funding will be provided with an upper limit of 30% of the project cost for a maximum capacity of 100 MW
The VGF amount will be handed over in three installments, and the SECI can claim assets equal to the VGF amount if the plant remains inactive or if any assets are sold
A mechanism is needed to ensure that there is a match between states willing to buy power at the pre-determined prices and developers’ preference of location for the projects

As per BRIDGE TO INDIA’s predictions in the October 2012 edition of the India Solar Compass (refer), the allocations are based on Viability Gap Funding and the maximum capacity that a developer can bid for has been increased to 100 MW.

The allocation process, signing of Power Purchase Agreements (PPAs) and handing out of VGF will all be handled by the Solar Energy Corporation of India (SECI). According to the draft, a fixed tariff INR 5.45/kWh will be awarded to projects not availing accelerated depreciation and a fixed tariff of INR 4.95/kWh will be awarded to projects availing accelerated depreciation. Over and above this, VGF will be provided with an upper limit of 30% of the project cost or INR 25m/MW. The exact quantum of VGF will be determined by a reverse bidding mechanism.

A key concern with regards to the implementation of the VGF is its impact on the long term performance of projects and the scope for developers to execute low quality projects for short term gains. The MNRE has provided some safeguards to prevent this. As per the draft guidelines, it has been decided that a hand-out of the VGF amount will take place in three installments. The first installment of 25% will be handed out after the delivery of at least 50% of the equipment, another 50% will be handed out on successful commissioning of the project and the remaining 25% will be handed out after one year of successful commissioning. The draft also says that if the plant fails to generate any power continuously for one year during the course of the PPA period or the project is dismantled or its assets sold, SECI will have the right to claim assets equal to the value of VGF granted. However, no real safeguards have been provided to ensure the quality of production. In the current scenario, the developers’ will lend greater focus on reducing the CAPEX against focusing on optimizing plant performance. For example, a developer could buy the cheapest equipment and reduce the plant CAPEX to INR 60m/MW with an equity investment of 18m/MW. On this, the developer could avail tax benefits based on accelerated depreciation, up to INR 15.8m/MW, and, as an example, is able to avail INR 20m/MW as VGF. In such a scenario, the developer would have received back almost 60% of the project investment and almost 200% of the equity investment within one year. This will leave very little incentive for the developer to stay invested in a project with a PPA of just INR 4.95/kWh. This not only has the potential to derail the policy motives but will also put the lenders in doubt about the developer’s intentions.

Another key concern is the location of projects. Currently, the draft guideline states that as and when the Request for Selection (RfS) is submitted by the project developer, the SECI will simultaneously issue “Expression of Interest” to states willing to procure the power. No clarity has yet been provided on which states will be willing to buy solar power at the given prices. There could be a scenario in which all the developers opt to set up projects in Rajasthan but Rajasthan is unwilling to buy this power. For such a situation, there is no clarity on how the SECI will ensure the off-take of the power to states across the country that might be willing to buy the power. There is a need for a mechanism to ensure that there is a match between states willing to buy power at the pre-determined prices and developers’ preference of location for the projects. As the NSM provides the cheapest option for state power distribution companies to meet their Renewable Purchase Obligations (RPOs), most states that are currently not meeting their RPO requirements should be willing to buy this power. We can expect demand for solar power from the NSM to move out of Rajasthan this time as the state is already meeting its RPO requirement. However, given a free reign (as is currently the case), developers would prefer to set-up projects in Rajasthan due its excellent irradiation and large availability of land.

BRIDGE TO INDIA will follow up with the concerned officials and industry leaders to get their thoughts on the issues and also look at possible solutions to these issues. Follow BRIDGE TO INDIA’s blog to keep track of our analysis and opinion on the new phase of the NSM.

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