23 September 2014 | BRIDGE TO INDIA
Around this time last year, after a lot of mid-course process changes, quick fixes and haggling, Tamil Nadu’s power generation company TANGEDCO (acting as a process manager) signed power purchase agreements for 708 MW. They had a “workable” tariff of INR 6.48/kWh and a 5% escalation (equivalent to around INR 8.3/kWh on a levelized basis). However, this tariff was rejected by the state electricity regulator (TNERC) on the grounds that it was not pre-approved by the them and all the projects stalled. Next, the electricity regulator published a consultative paper, proposing a lower tariff of INR 5.78/kWh without escalation, dashing all hopes for a quick resolution Now, a year later, the same regulator has published a final order that offers a fixed solar tariff of INR 7.01/kWh (without depreciation benefits) and INR 6.28/kWh (with depreciation benefits) (refer).
- BRIDGE TO INDIA still believes that Tamil Nadu should have a strong solar market. It just makes a lot of sense for the state
- Today India’s pipeline for state and central solar allocations is at an all-time high
- Tamil Nadu should push more aggressively into the distributed solar market
Since the regulator’s suggested tariff is not in sync with the tariffs on the signed PPAs, the allocated projects continue to be stuck. One way out could be to renegotiate the tariffs to a range close to the values suggested by TNERC. However, this would open the government up to claims from earlier, unsuccessful bidders as well as from the PPA counter-parties. Another option for the government is to appeal against the TNERC order. In either case the government and the developers will have lost a lot of time, money and enthusiasm.
With so many flip-flops, Tamil Nadu is a perfect example of how not to manage solar project allocations. To begin with, the the regulator should have decided a benchmark tariff before – not after – the allocation process. Then, despite one quick fix after another, the situation is still unresolved and projects are in limbo. And along the way, the state has lost a huge amount of credibility in the eyes of the investor community, which will be difficult to regain. (Refer to our Policy Brief on the Tamil Nadu policy from December 2012 for an early analysis of the flaws in the policy.)
BRIDGE TO INDIA still believes that Tamil Nadu should have a strong solar market. It just makes a lot of sense for the state. Also, the policy included good, new ideas, such as the Solar Purchase Obligation (SPO) mechanism. If only the state had done all the homework before implementing it, it might by now be India’s leading solar market. Now, it is anyone guess, when the solar in Tamil Nadu might emerge.
Today, India’s pipeline for state and central solar allocations is at an all-time high. At the state level, over 1.5 GW of allocations are planned over the next one year (refer). A revamped National Solar Mission (NSM) might allocate over 2 GW by itself over the same timeframe (refer). With such large capacities to go around, any new allocation by Tamil Nadu might not find takers for a bidding-based allocation process starting at the low benchmark tariff fixed by the regulator.
Now, it might be best if the state cancels the existing PPAs and just calls for all interested investors to set up projects at a fixed tariff, approved by the regulator, on a first come first served basis (perhaps giving those who had earlier signed PPAs a preference). Also, Tamil Nadu should push more aggressively into the distributed solar market. We hope that the state will be able to make up for the lost opportunity and investor confidence.