Declining solar tariffs cast shadow on clean energy deals
NEWDELHI: Declining solar power tariffs have resulted in fewer clean energy deals because of concerns that electricity off-take commitments at higher tariffs may not be honoured.
Deal makers and experts say the proposed transactions for solar projects with high tariffs are increasingly being put on a back burner in the backdrop of record low tariffs of ₹2.44 per unit recorded last week at Bhadla in Rajasthan.
This is due to concerns over whether electricity distribution companies (discoms) will honour their commitments for projects earlier awarded at high tariffs and not waver on signing power purchase agreements (PPAs).
“The recent spate of sub ₹3/ unit price of solar energy has created significant uncertainty in the transaction space of Indian power industry. Leave aside assets that don’t have PPAs, investors are increasingly getting cagey even about buying assets—solar or thermal—with firm offtake agreements, specially those struck at higher tariffs. There are concerns on whether discoms will honour the PPA terms or force generators to reconsider the offered tariff.
Solar power tariffs have declined sharply because of plunging prices of solar modules. Also, overseas developers with deep pockets have made a bet on the Indian solar space driven by its scale and their own outlook of a benign interest rate regime.
“From a deals perspective, the last few months’ outcome has definitely put investors in a cautious mode. There are many questions in their minds. So far, in deals, pipeline was a big consideration around valuations/pricing. With wind also moving towards auctions, and given the way prices for both wind and solar are headed, the first big question that arises— is there a pipeline concept anymore? Can this specific player be sure of winning projects in auctions? What pricing to take in valuing this pipeline?” said Manish Aggarwal, partner and head of corporate finance at consulting firm KPMG in India.
There are worrying signs. Some discoms are wavering on signing PPAs for projects awarded at higher tariffs, according to consulting firm Bridge to India. Some believe activity in the deal space will return with more clarity.
“The whole din around low prices needs to settle down and it needs to be seen whether older contracts are honoured. As long as they are willing to do so, the deal activity will recommence. However, given the residual risks, the valuations could be altered. Any such disruption automatically disrupts the status quo,” said Anish De, partner at the infrastructure and government practice at KPMG.