Both so­lar and wind tar­iffs have fallen steeply in re­cent years, but ex­ces­sive em­pha­sis on low­er­ing tar­iffs is now threat­en­ing In­dia’s re­new­able en­ergy suc­cess story.


In end-Septem­ber 2018, there was a strong mar­ket buzz that the US-based in­vest­ment firm Mac­quarie was about to ac­quire some eq­uity in the coun­try’s largest re­new­able en­ergy com­pany, Re­New Power, buy­ing from Gold­man Sachs, which al­ready holds a size­able stake in it. Re­New, with around 6,000 MW of so­lar and wind pro­jects, backed by sev­eral mar­quee in­vestors, apart from Gold­man Sachs – the Canada Pen­sion Plan In­vest­ment Board (CPPIB), the Abu Dhabi In­vest­ment Au­thor­ity (ADIA), the US-based Global En­vi­ron­ment Fund (GEF) and Ja­pan’s JERA, and more – seemed an ex­cel­lent choice. It was also then set to launch an ini­tial pub­lic of­fer­ing (IPO) of ` 2,600 crore, fol­low­ing which its val­u­a­tion was ex­pected to rise. But nei­ther the in­vest­ment nor the IPO hap­pened.

An­other lead­ing so­lar en­ergy player, ACME So­lar, with 5,500 MW of pro­jects, has also de­ferred the IPO it had been plan­ning since last year for rais­ing ` 2,200 crore. A third heavy­weight, Azure So­lar, with around 3,000 MW of pro­jects in dif­fer­ent stages, and the only In­dian re­new­able en­ergy com­pany listed on the New York Stock Ex­change, has seen its share

fall 25 per cent to $12.50 when it listed two years ago.

The sit­u­a­tion is a di­rect re­sult of re­cent de­vel­op­ments in the re­new­able sec­tor and the ag­gres­sive bids (in some cases be­yond the where­withal) by some play­ers. Though Su­mant Sinha, Chair­man and Man­ag­ing Di­rec­tor, Re­New Power, claimed the Mac­quarie story was mar­ket spec­u­la­tion, he ad­mit­ted that the cur­rent times were tough for at­tract­ing in­vest­ment in re­new­able en­ergy. While bankers are stay­ing away be­cause of their own chal­lenges, the ag­gres­sive bids by com­pa­nies (which are com­mit­ting to sup­ply­ing power at lower rates than ever to win the con­tract) are mak­ing the sit­u­a­tion worse. In the ab­sence of sec­tor-ori­ented non­bank­ing fi­nance com­pa­nies, many play­ers are putting in cap­i­tal by liq­ui­dat­ing their eq­ui­ties. “This is now wor­ry­ing most in­vestors,” one of the CEOs told Busi­ness To­day.

So­lar in In­dia has been a great suc­cess story, at least till last year. Set a tar­get of 100,000 MW by 2022, the coun­try has in­creased its so­lar ca­pac­ity from 2,600 MW in 2014/15 to 24,330 MW (till end- Oc­to­ber 2018). But while 9,362 MW was added in 2017/18, ca­pac­ity could rise only 2,661 MW till end- Oc­to­ber. The slow­down is even starker in wind en­ergy, where In­dia, start­ing much ear­lier than in so­lar, and chas­ing a tar­get of 60,000 MW by 2022, had set up 34,980 MW till end-Oc­to­ber. This im­pres­sive fig­ure con­ceals the fact that only 1,767 MW were in­stalled in 2017/18 and just 841.35 MW in 2018.

To­gether, Cen­tral and state agen­cies had in­tended to get around 15,000 MW of so­lar and wind pro­jects in­stalled in 2018, but now may fall way short of the tar­get. They also planned to bid out an­other 30,000 MW of pro­jects, of which 20,000 MW have been auc­tioned so far. But of these 9,100 MW were sub­se­quently scrapped. In the next fis­cal, the worry is about the money.

Low Tar­iff Ob­ses­sion

In wind, the slow­down be­gan with the shift from a feed-in tar­iff regime – where ev­ery wind-en­ergy pro­duc­ing state’s power reg­u­la­tor set what it con­sid­ered a rea­son­able tar­iff ev­ery two or three years – to auc­tions, in which pro­jects were awarded to the low­est bid­ders. The first auc­tion con­ducted by So­lar En­ergy Cor­po­ra­tion of In­dia (SECI), a pub­lic sec­tor unit un­der the Min­istry of New and Re­new­able En­ergy (MNRE), in Fe­bru­ary 2017, saw a win­ning tar­iff of ` 3.46 per unit, which was way lower than the feed-in tar­iffs – vary­ing be­tween ` 4 and ` 6 per unit – set by dif­fer­ent states at the time. (In sub­se­quent auc­tions, the low­est wind tar­iff has fallen fur­ther to ` 2.43 per unit.) It con­vinced state dis­coms that they had been pay­ing too much for wind en­ergy, and vir­tu­ally all of them promptly stopped ap­prov­ing any more pro­jects on the ba­sis of feed-in tar­iffs. With no cer­tainty of get­ting con­nected to the grid, many wind pro­jects stopped mid­way, and with not enough auc­tions be­ing held, ca­pac­ity ad­di­tion re­duced steeply. Tar­iffs have fallen even more steeply in so­lar, mak­ing both wind and so­lar en­ergy a per­fectly vi­able al­ter­na­tive to ther­mal power in terms of cost. While as late as 2010, so­lar power used to cost ` 17 per unit, the low­est tar­iff reached in two auc­tions of 2017 and 2018 was ` 2.44 per unit. But in­vestors are in­creas­ingly feel­ing that in their ea­ger­ness to bag pro­jects at auc­tions, de­vel­op­ers in both wind and so­lar have bid and won pro­jects at tar­iffs that are plain un­vi­able. They be­lieve the tar­iffs were quoted mak­ing un­ten­able as­sump­tions – that in­ter­est rates will re­main sta­ble and gov­ern­ment poli­cies and reg­u­la­tions

re­lat­ing to the seg­ment will be fur­ther lib­er­alised in com­ing years.

Since around 90 per cent of so­lar pan­els and mod­ules used in In­dia are im­ported, mostly from China and Malaysia, they also main­tain de­vel­op­ers have erred in ex­pect­ing so­lar panel prices, which have, in­deed, fallen greatly in re­cent years, to stay the same or con­tinue to fall even lower, and that the In­dian ru­pee will not de­pre­ci­ate. In fact, the ru­pee de­pre­ci­ated around 12 per cent against the US dol­lar in 2018. In end- Oc­to­ber 2018, rat­ing agency CRISIL warned that as a re­sult of such de­pre­ci­a­tion de­vel­op­ers, who had won so­lar pro­jects in the last nine months, would find pan­els sub­stan­tially more ex­pen­sive than they had es­ti­mated.

“Bankers are not buy­ing the com­bi­na­tion of as­sump­tions de­vel­op­ers have made and are ask­ing us to put in more eq­uity be­fore agree­ing to fi­nan­cial clo­sure for our pro­jects,” says the CEO of a re­new­able en­ergy com­pany, not want­ing to be named. “This is forc­ing us to di­lute our stake to bring in more funds, or to use up our in­ter­nal pro­ceeds.” This does not ap­ply to the wind seg­ment, where tow­ers and tur­bines are all man­u­fac­tured lo­cally.

Ceil­ing Tar­iffs

If de­vel­op­ers have been in­ju­di­cious, the gov­ern­ment has also made mat­ters worse with its ex­ces­sive em­pha­sis on low­er­ing tar­iffs.

In Septem­ber 2018, MNRE sent SECI a note in­struct­ing it not to al­low so­lar tar­iffs above ` 2.50 per unit. SECI had al­ready be­gun set­ting “ceil­ing tar­iffs” in both its so­lar and wind auc­tions, but now its so­lar ceil­ings can­not go be­yond this limit. De­vel­op­ers find the very idea of ceil­ing tar­iffs un­fair. “This is very un­nat­u­ral and re­duces our flex­i­bil­ity when we are plan­ning bids,” says Su­nil Jain, CEO, Hero Fu­ture En­er­gies, which has around 1,200 MW of wind and so­lar pro­jects. The im­pact of MNRE’s note was seen in SECI’s 2,000 MW auc­tion that fol­lowed, which at­tracted to­tal bids of 3,200 MW – a tepid re­sponse, con­sid­er­ing SECI auc­tions are usu­ally heav­ily over­sub­scribed. An auc­tion of the same 2,000 MW size held by NTPC, around the same time, drew, in com­par­i­son, to­tal bids of 6,300 MW, sim­ply be­cause it did not im­pose any cap on tar­iffs.

De­vel­op­ers, how­ever, fear that given the gov­ern­ment’s at­ti­tude, the likes of NTPC, as well as the re­new­able en­ergy agen­cies of state gov­ern­ments, could also fol­low SECI’s ex­am­ple. “It is un­nec­es­sary and un­pro­duc­tive for SECI to set the max­i­mum tar­iff per­mis­si­ble ev­ery time it holds an auc­tion,” says T.R. Kishor Nair, Chief Op­er­at­ing Of­fi­cer, Avaada, which has around 5,000 MW of pro­jects. “It is im­pos­si­ble for it to re­main con­ver­sant with all the tech­no­log­i­cal ad­vances be­ing made in this seg­ment, as well as the fi­nan­cials de­vel­op­ers have to work with.” Sinha of Re­New notes that there is al­ready a gen­eral slow­down. “At a time when banks are not forth­com­ing with debt and in­ter­est rates are be­ing re­worked, bring­ing in a cap on auc­tion tar­iffs is cer­tainly not in­dus­try-friendly,” he says. An­other so­lar de­vel­oper pointed out that set­ting such lim­its prac­ti­cally amounted to re-in­tro­duc­ing the “feedin tar­iff” regime of the past.

At a time when banks are not forth­com­ing with debt and in­ter­est rates are be­ing re­worked, bring­ing in a cap on auc­tion tar­iffs is cer­tainly not in­dus­try- friendly Su­mant Sinha, CEO, Re­New Power

An­other gov­ern­men­tal step that has dis­cour­aged the sec­tor is fre­quent can­cel­la­tion of auc­tions af­ter they have been con­ducted and win­ners an­nounced, be­cause the win­ning tar­iffs were not as low as ex­pected. The re­new­able en­ergy agen­cies of Ma­ha­rash­tra, Gu­jarat, Ut­tar Pradesh and Kar­nataka have all done so. “Bids have to fac­tor in sev­eral as­pects in­clud­ing the fi­nan­cial strength of the pro­curer, the strength of so­lar ra­di­a­tion in the area where the pro­ject will be set up, the trans­mis­sion fa­cil­i­ties avail­able there, the cost of procur­ing the equip­ment and more,” says the CEO of a so­lar de­vel­op­ment com­pany. “Ev­ery bid can­not be lower than the ear­lier one. Be­cause of dif­fer­ent credit rat­ings of state dis­coms and Cen­tral PSUs, tar­rifs will dif­fer.”

Short-sighted Duty

While push­ing hard to lower tar­iffs on the one hand, the gov­ern­ment has also im­posed a “safe­guard duty” on im­ported so­lar pan­els and mod­ules on the other – 25 per cent for the first year, fol­lowed by 20 per cent for six months and 15 per cent for an­other six. Con­sid­er­ing so­lar equip­ment is mostly im­ported, such duty is bound to raise tar­iffs rather than bring them down. (The MNRE’s Septem­ber note to SECI recog­nises this and al­lows for an in­crease in tar­iff of 18 paise per unit if safe­guard duty has to be paid.) The step was taken fol­low­ing a com­plaint by do­mes­tic man­u­fac­tur­ers of so­lar equip­ment to the Direc­torate Gen­eral of Trade Reme­dies (DGTR) that im­ports were caus­ing the lo­cal in­dus­try se­ri­ous in­jury.

No doubt, lo­cal man­u­fac­tur­ers were un­able to com­pete on price with Chi­nese and Malaysian ones, be­cause the lat­ter have ad­van­tages of scale and their gov­ern­ments’ sup­port. The In­dian gov­ern­ment ini­tially tried to help its man­u­fac­tur­ers by hold­ing sep­a­rate so­lar auc­tions, in which de­vel­op­ers pledged to only us­ing lo­cal equip­ment could par­tic­i­pate, but this ran afoul of WTO norms and had to be stopped. Since then, lo­cal man­u­fac­tur­ing has been in the dol­drums, with at least one lead­ing player, In­doso­lar – sad­dled with losses of ` 58 crore in 2017/18, and ear­lier ac­cu­mu­lated losses of ` 141 crore – headed for bank­ruptcy. It gets such few orders that it utilises barely 10 per cent of its in­stalled ca­pac­ity. Most of its peers are not do­ing much bet­ter. But whether safe­guard duty – an­nounced in July 2018, and im­posed from Septem­ber, af­ter lit­i­ga­tion op­pos­ing it had been quashed – will ac­tu­ally boost do­mes­tic man­u­fac­tur­ing has been ques­tioned.

“Safe­guard duty is hardly help­ing,” says Gyanesh

We are mon­i­tor­ing ev­ery bid and are speak­ing to all the stake­hold­ers... We will look for so­lu­tions which are a win-win for all R. K. Singh, MNRE Min­is­ter

Chaud­hury, CEO, Vikram So­lar, one of the coun­try’s biggest so­lar panel mak­ers. “Pan­els and mod­ules are still get­ting a ‘pass through’ from Cus­toms, on fur­nish­ing a guar­an­tee the duty will be paid later if re­quired. There is still no in­cen­tive to buy from do­mes­tic man­u­fac­tur­ers.” Safe­guard duty can only be im­posed for a lim­ited pe­riod, dur­ing which lo­cal man­u­fac­tur­ers are ex­pected to scale up to a stage when they can com­pete with their global coun­ter­parts. “The safe­guard duty is help­ing no one. There has to be a com­pre­hen­sive pol­icy to sup­port man­u­fac­tur­ing in In­dia,” says Ashish Khanna, MD & CEO, Tata Power So­lar. The MNRE Min­is­ter R.K. Singh has told them that if they take up the chal­lenge, safe­guard duty could be ex­tended for a lit­tle longer. But they have so much catch­ing up to do and the in­cen­tives are so few, that no com­pany is even at­tempt­ing to. The MNRE had fi­nalised an am­bi­tious so­lar man­u­fac­tur­ing pol­icy in 2017, with many sub­si­dies and con­ces­sions which would have cost the coun­try ` 20,000 crore, but the fi­nance min­istry turned it down.

An­other gov­ern­ment strat­egy to ramp up so­lar man­u­fac­tur­ing has been to link it to pro­jects al­lot­ted through auc­tions, but that, too, does not seem to be work­ing. In June, SECI came out with its first “man­u­fac­tur­ing-linked” ten­der – those bid­ding should also com­mit to man­u­fac­tur­ing 30 per cent of their pro­ject size. In all, it sought to auc­tion 10,000 MW of pro­jects linked to

3,000 MW of man­u­fac­tur­ing. But there were no tak­ers, lead­ing to the auc­tion be­ing post­poned six times, and SECI rais­ing the ceil­ing tar­iff from ` 2.75 to ` 2.85 per unit. Even so, only one bid was re­ceived – for 2,000 MW linked to 600 MW of man­u­fac­tur­ing. “The risk pro­files of so­lar de­vel­op­ers and man­u­fac­tur­ers are dif­fer­ent,” says Jain of Hero Fu­ture. “Nowhere in the world have equip­ment man­u­fac­tur­ers turned de­vel­op­ers or vice versa. The idea is con­cep­tu­ally in­cor­rect.” Amit Ku­mar, Part­ner at Price­Wa­ter­house­Cooper’s In­dia Chap­ter, agrees. “The ges­ta­tion pe­ri­ods for set­ting up so­lar de­vel­op­ment and so­lar man­u­fac­tur­ing pro­jects are dif­fer­ent,” he says. “One im­por­tant rea­son so­lar tar­iffs fell was be­cause man­u­fac­tur­ers and de­vel­op­ers dis­trib­uted the risk. That won’t hap­pen if they are the same com­pany.”

Hop­ing for the Best

“We are still do­ing well, we have deep pock­ets,” says Sinha of Re­New. “But when­ever we bid we do so very cau­tiously. It is true that the sce­nario is mak­ing the debt mar­ket jit­tery.” The pro­jects from the windy states are now dry­ing up, with only Gu­jarat, Ma­ha­rash­tra and Tamil Nadu com­ing up with auc­tions in the last two fis­cal years. They are de­pen­dent on the Union gov­ern­ment-pro­moted SECI for the auc­tions. This is squeez­ing the pipeline for equip­ment man­u­fac­tur­ers. Tulsi Tanti, Chair­man, Su­zlon Group, the coun­try’s biggest wind equip­ment maker, is op­ti­mistic the sit­u­a­tion will im­prove. “The wind seg­ment will bounce back from 2019,” he says. He is pin­ning hope on the 10 GW- odd SECI auc­tions in the last fis­cal. But like him, most wind power com­pa­nies and their in­vestors are wor­ried about the dip­ping tar­iffs.

The MNRE of­fi­cials as yet see no rea­son for course cor­rec­tion. “Re­new­able tar­iffs can go even lower, mak­ing this a lu­cra­tive op­tion for the states,” says one of them, seek­ing anonymity. “De­spite the ceil­ing tar­iffs, de­vel­op­ers are still bid­ding in SECI auc­tions.” But at least one de­vel­oper fears this is not nec­es­sar­ily a sign of the sec­tor’s health. “Com­pa­nies are build­ing their port­fo­lio to swell their eq­uity,” he says. “When debt is hard to come by, funds can only be ob­tained by di­lut­ing eq­uity and the big­ger the port­fo­lio, the more eq­uity that can be di­luted. It may well turn out to be a trap.”

MNRE Min­is­ter Singh was ap­peared more ac­com­mo­dat­ing. “We are mon­i­tor­ing ev­ery bid and are speak­ing to all stake­hold­ers,” he said. “We will look for so­lu­tions which are a win-win for all.”

The wind seg­ment will bounce back from this year Tulsi Tanti, Chair­man, Su­zlon Group


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