Celebrate progress… with caution INFLEXION POINTS

On February 10, bids for what will become one of the world’s largest solar photovoltaic power plants reached historic lows. The lowest bid for the levelised tariff for the 750-megawatt (MW) Rewa Ultra Mega Solar Plant in Madhya Pradesh was ~3.30 per kilowatt-hour (kWh), with the first year tariff at ~2.97/kWh or 4.4 US cents. In fact, three companies — ACME Solar, Solengeri Power, Mahindra Renewables — bid first year tariffs below ~3. Do these tariffs indicate that renewable energy (RE) has finally come into its own in India? Yes and no.

Solar tariffs have been falling in India since 2010. From ~10.95/kWh in December 2010, they fell, for utility-scale projects, to ~5.5/kWh in August 2013 and went through the ~5 floor in 2016. A project in Telangana bid ~4.66/kWh ($0.07) in May 2016 and another in Rajasthan dipped to ~4.34/kWh ($0.06) in July. Reverse auctions for solar (project proponents bid below a benchmark rate) have increased competition, reduced margins and set a steady pattern of falling tariffs. Yet, these were not the lowest tariffs in the world. In May, a project in Dubai quoted $0.0299 per unit; Chile had a lower bid in August at $0.0291; and Abu Dhabi hit $0.0242 in September. The record low tariffs in India have to be evaluated against even lower prices elsewhere. One of us (Chawla), along with Manu Aggarwal, investigated these bids carefully and concluded that the real difference was not as much due to the cost of the modules, balance of systems, or operation and maintenance costs. The reason was the cost of finance i.e. return on equity and debt servicing. Whereas it accounted for about 50 per cent of the Dubai tariff, it was more than 70 per cent of the Telangana bid — twice as much, in dollar value, as the cost of finance in Dubai.

Between last summer and now, the fall in solar module prices cannot account for the low prices in Rewa. The winning bids have likely found significantly cheaper financing than even a few months earlier. It is encouraging that two of the three lowest bids are from Indian firms, which face currency risks when they raise foreign capital. But it would be premature to celebrate without caution. If the cost of finance were going to dominate, then which persistent risks would keep costs high?

First, transmission uncertainties are major risks for RE projects. Once upfront capital costs have been incurred, the power generated must be sold, without payment delay or default, in order to avoid recurring losses. The technical capacity of the grid to absorb renewable power is critical. States like Jharkhand and Telangana have plans to add more RE capacity than thermal power capacity for the foreseeable future. But RE capacity gets installed much faster than the five-six years it takes to roll out transmission infrastructure.

There is growing curtailment of RE power. In Tamil Nadu, for instance, 5,000 million units (MU) of wind power were lost to curtailment in 2015-16 (lost revenue of ~1,750 crore). Back-down losses have, in fact, risen from 1,155 MUs in 2012-13 and 3,240 MUs in 2013-14. In the case of a single 74-Mw wind plant, our colleagues calculate that it could sell only 56 per cent of the electricity generated in 2015.

Secondly, financial factors also influence backdown. Project developers find it harder to predict curtailment when the financial health of distribution companies is at play. The power purchase agreements (PPAs) might oblige DISCOMs to offtake power, but enforcement varies from state to state. Renewable purchase obligations (RPOs) are also weakly enforced in many states. Thirdly, delays in land acquisition add to construction and commissioning risks, adding to the cost of finance. The difficulty of securing large, contiguous tracts of land has made developers intentionally scale down projects. State governments vary in their policies regarding converting land for RE purposes. Governments could acquire land through the respective state industrial development corporations or RE development agencies. Insurance-backed title warranties for solar parks are another option.

The Rewa bids stand out because the project responds to these challenges. To minimise risks of technical constraints, there is a clause for deemed generation. In case the grid is not available, the developer will still be paid for power generated. To reduce counter-party credit risk (delays and defaults in payments), the state government has underwritten the PPA with a guarantee. The Solar Energy Corporation of India also backs the tenders. And to reduce project delays and risks of commissioning, Rewa solves for the land constraint by offering developers land within the solar park in advance.

At least for now, however, Rewa is an exception, not the rule. Not all RE projects have land secured in advance, have state guarantees for payments, or benefit from deemed generation. Not all projects are within large-scale solar parks, although the latest Budget announced plans for another 20,000 Mw via solar parks. For non-park bids and rooftop installations, there is need for market instruments to secure developers on the same counts as in the Rewa case.

India has one of the most dynamic and competitive RE markets in the world. The long road to a clean energy future will be smoother if governments and investors continued to reduce and/or hedge against prevailing risks.