Low tarrifs cast shadow on solar projects

Record low tariffs may cast a shadow on solar projects as low bids mean little financial buffer in case of hurdles such as cost overruns or implementation delays.

Over-aggressive bids in the recent past may risk derailment of solar energy projects in the years to come. Even chief economic advisor Arvind Subramanian has aired his worry by saying that renewable power comes with hidden costs which cannot be ignored.

According to a report by India Ratings & Research, there are counter party and grid challenges, too, affecting solar space.

“Weak counter parties in the power sector pose a risk to renewable projects. Solar projects, except those in Tamil Nadu, are witnessing receivable days less than 90 days across counter parties. However, uncertainty prevails when a weak counter party starts delaying payments. Low tariffs in recent bids do not have the headroom to absorb revenue loss due to grid curtailment,” the report stated.

In states such as Andhra Pradesh, Telangana and Karnataka, where renewable capacity is burgeoning, the possibility of grid curtailment could be high. This is based on the demand-supply situation, transmission infrastructure and grid management expertise. Infrastructure requirements and forecasting capabilities by setting up renewable energy management centres would address some concerns about grid management.

On Thursday, Arvind Subramanian, speaking at an event organised by The Energy and Resources Institute. He placed emphasis on the use of ‘clean coal’ while stating that coal will and should remain as primary energy source apart from suggesting to have a joint policy for renewable and coal, both.

Mumbai-headquartered CleanMax Solar, a firm providing on-site solar power agreed that there is a need for caution.

Gajanan Nabar, chief executive officer of CleanMax Solar said, “People feel that there is so much growth happening and you become very strategic in the approach and don’t really look at the hard realities.” According to him, in India, firms aren’t knowingly giving a bad quote.

“Some of the numbers floated in the market are very aggressive based on very aggressive assumptions. In some cases, there is no room for any contingencies or any turn of event,” said Nabar.

Earlier this year, Solar Energy Corporation of India and NTPC's ultra mega solar power project in Rewa, Madhya Pradesh, marked the beginning of low tariffs in this space. The bid for the first-year tariff was Rs 2.97 per unit of electricity and a levelised tariff of Rs 3.30 per unit over the term of 25 years.

When NTPC was asked whether there are financial concerns with solar parks due to over aggressive bids, its CMD Gurdeep Singh had replied, “I can’t predict future. We will see when it comes, but what apprehensions you just said, many are saying this too. But at this juncture, we can’t say that.”

On the concerns, Singh said, “We should be happy with that (low tariffs). If a transparent bid has happened and if somebody has agreed to give power for a lower price, on what grounds should we say that it will not work? As far as our own investment is concerned, we are doing it through a very transparent process or bids. We even take care of the quality of equipment, construction as well as reliability of the plant. Equipment prices, too, are coming down. We feel that the solar power price should be in the range of Rs 3 to Rs 3.25/kwH and this is without relying on cheap funds. Cost of capital is coming down so is capital cost.”

On the cost of capital, Ind-Ra report stated that developers seem to be favouring US dollar bonds for financing because of ease of placing large issuances. Rupee bonds for renewable projects have taken a backseat owing investor perception of fast-changing dynamics and doubts about long-term sustainability.

...& ANALYSIS

• Counter parties pose a risk. Uncertainty prevails when a weak counter party starts delaying payments
   
• In states where renewable capacity is burgeoning, the possibility of grid curtailment could be high