Cloud over solar sector: Curbing tender cancellation and a couple other moves can bring sunshine back
India’s renewable energy sector has notched up substantial growth over the past few fiscals in terms of both capacity and generation, but that may not be enough. Capacity additions have slowed in the recent past, which means the 175 GW renewables generation – including 100 GW solar – target set for 2022 could become distant.
In the past five fiscals – up to January 2019, actually – installed solar capacity has rocketed almost 10-fold to ~25 GW. To meet the 100 GW target, another ~25 GW needs to be added in each of the next three years. That’s a mammoth ask, given that policies have not been particularly supportive.
First and foremost is the frequent cancellation of auction bids. In July 2018, the Solar Energy Corporation of India (SECI) nixed all but the lowest-priced bid when auctioning 3 GW capacities because the bid tariffs were higher than the government’s own expectations. The lowest tariff was Rs 2.44 per unit for a capacity of 600 MW, while the remaining 2,400 MW had winning bids in the range of Rs 2.64 to Rs 2.71. And developers weren’t ready to match the L1 tariff. Therefore, SECI decided to junk the bids. State level auctions ran to a similar script recently.
But higher tariff discovery is not the only reason for bid cancellations. They were also disregarded owing to infrastructure issues. For example, in August 2018, SECI canned a 2 GW auction after it was under-subscribed because the attendant transmission infrastructure was inadequate.
Then there is the example of the executive arms unintendedly working at cross-purposes: the government’s expectation of very low tariffs comes at a time when the overall cost of imported solar modules has gone up because the government raised the duty wall higher. While the price of module has remained in the 0.21-0.23 per watt range for the past six months, the slapping of additional safeguard duty of 25% on solar imports from China and Malaysia on July 30, 2018, has cranked up the overall cost for solar project developers.
A majority of India’s solar module imports are from China and Malaysia. The steep duty has also meant chances of the tariff expectations of solar power developers converging with that of the government are less. That, in turn, could adversely impact solar capacity addition in the road ahead.
The imposition of safeguard duty, cancellation of solar auctions and capping of tariffs have wrought uncertainty and, not surprisingly, capacity addition in 2018 turned very subdued. That domestic banks have shied away from funding the solar sector is not surprising.
On the other hand, the story of foreign capital presents a stark contrast – too much money is chasing too few projects, leading to aggressive bidding. Another concern is that to offset thin operating margins, solar developers may cut corners by buying cheaper modules. Typically, modules account for ~50-60% of a project’s cost. Given that the average efficiency of a solar panel is only ~20%, anything of substandard quality would severely impact generation and hit cash flows.
A back-of-the-envelope calculation indicates that for a 1% drop in capacity utilisation factor (CUF), tariffs need to increase by around 12-13 paise per unit just to keep returns intact. Consequently, given the low margins, a drop in CUF owing to module quality will render projects unviable. The lifespan of sub-par modules will also be of concern to lenders.
On their part, distribution companies (discoms), too, have anxieties. To wit, higher proportion of renewables in a grid leads to greater grid instability and makes controlling electricity flows a challenge. That’s why discoms are chary of increasing their renewable including solar energy sourcing.
The primary problem of the solar sector can be resolved only if the government adopts an integrated approach, such as by bundling renewables with conventional energy. Today, that’s feasible considering the significant improvement in the cost economics of solar energy.
Also, the tariffs discovered during competitive bidding should be considered and adopted rather than artificially capping them. On their part, investors also need to curb bidding aggression which can skew the cost economics, as has happened in thermal generation.
Not facilitating a systemic revival will mean lenders could end up staring at another set of bad loan millstones.
Source: timesofindia.indiatimes
