Indian solar market appears to be in rude health. The country added total solar capacity of 5 GW in 2016 registering a growth of 145% over 2015. New capacity addition for 2017 is expected at 8.8 GW making India the third biggest solar market worldwide. About 12.4 GW of projects have completed auctions and are in execution stages right now. There is huge interest in private developers for these projects – recent tenders have got oversubscribed by 8-10 times – and tariffs continue to come down sharply.
Falling prices seen in Rewa and Kadappa tenders are great news for consumers and a perfect demonstration of the economic potential of solar technology. Greenfield solar power at prices around Rs 3.00/ kWh is very attractive and should create strong demand pull. But it also raises many challenging questions for policy makers, DISCOMs, project developers, investors and lenders. First, it is leading to buyer’s remorse for projects already built and under development. In particular, some states that have completed auctions with higher prices in the last two years (Jharkhand, Andhra Pradesh, Haryana) are refusing to sign power purchase agreements, which is creating uncertainty in the market.
Second, falling prices mean that projects that have already signed PPA’s and have commenced or even completed construction face a growing DISCOM default risk over time. Will the DISCOMs honour older PPAs at tariffs of around Rs 5-6/ kWh after say, 5 years, when new projects are available at tariffs of Rs 2/ kWh or even lower? Despite good progress with UDAY scheme, concerns linger about DISCOMs willingness and ability to buy growing amount of solar power. Tariff disputes in thermal power sector, even for competitively bid projects, are fairly common. We have already had one instance of renegotiation attempt in the solar sector in 2014 when Gujarat DISCOMs tried to seek post-facto reduction in tariffs, which was rightly and promptly dismissed by APTEL. It seems that Andhra Pradesh is also seeking renegotiation of recently signed wind PPA’s since the completion of 1,000 MW wind auction by SECI at record low tariff of Rs 3.46/ kWh.
There is a material risk that some DISCOMs, under commercial or popular pressure, will try to renegotiate or back out of older PPA’s over time, particularly if power demand doesn’t grow sufficiently and/or if there are transmission grid related problems. Equity investors and lenders are becoming increasingly cautious about direct DISCOM exposure.
It is extremely important for long-term growth of the entire energy sector that the central government and regulatory agencies clamp down heavily on any tariff renegotiation attempts. The best way for DISCOMs to cope with falling tariffs is to scale up solar energy procurement gradually. In other words, buy less initially when the tariffs are high and progressively more as tariffs fall. This approach allows for easy absorption of the impact of historically high tariffs and reduce costs in the long-term. However, national (and state) level targets do not permit this flexibility. And unfortunately, states such as Andhra Pradesh (installed plus tendered capacity of 74% as against 2021-22 target), Telangana (70%) and Karnataka (69%) have front loaded their solar rollouts.
Third major issue for the sector is the slowing pace of new tender announcements and completed auctions in the last year (down 68% and 59% respectively). Southern states, except perhaps Tamil Nadu, are bound to slow down. Amongst other large states, Maharashtra and Gujarat, like many others, have surplus power availability and remain unenthusiastic to new solar power. That mainly leaves northern states but here, the only state with reasonable growth prospects is Uttar Pradesh.
Overall, we expect that the utility scale solar market in India will level out after 2017 until power demand-supply situation becomes more favourable and storage technology becomes commercially and technically more attractive.
By: Vinay Rustagi (Managing Director, BridgeToIndia)