Insights into Editorial: India’s solar mission can cause new debt problems

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Insights into Editorial: India’s solar mission can cause new debt problems


 

solar power

 

Summary:

Viability of solar power projects in India has become a serious cause for concern. The recent decision of the Supreme Court not to allow a revision of the tariff charged by Tata Power Co. Ltd and Adani Power Ltd for their 4,000MW (megawatt) and 4,620MW Mundra ultra-mega power projects (UMPPs) based on Indonesian coal has added to the woes.

 

What you need to know about the process of allocation of solar power projects in India?

In 2006, it was decided to build UMPPs to take care of India’s crippling power woes. The allocation process was through a reverse tariff competitive bidding process, and the bid tariff was as low as Rs1.19 and Rs2.26 for domestic and imported coal-based UMPPs. But all these years later, only a few of them have been commissioned.

One of the reasons for the failure of UMPPs was that when the bids were submitted, coal prices were very low. Subsequently, prices went up, making the projects unviable. The astonishing fact is that contrary to both common sense and international best practice, power purchase agreements (PPAs) with tenures of 25 years were written without a provision for a revision of terms.

 

Challenges faced by the solar sector in India:

  • The power purchase agreements are for fixed terms (25 years) without any escalation clause, even though there are many recurring expenses over this period. Subsequently, after failing to keep up with the changing market trends, projects become unviable for the operators.
  • Internationally, levelized cost of electricity for solar is around Rs9/kWh while that for coal is approximately Rs4.8/kWh. An expert elicitation survey on solar technologies predicted that by increasing research and development funding by 50%, the cost of solar would come down to Rs4.45/kWh by 2030. From these studies, it is difficult to justify why the solar bid prices in India are so low. Bids in India have gone as low as Rs3.15/kWh.
  • India’s solar programme is heavily dependent on imported solar cells and modules, mainly from China. In 2015-16, India had imported $2,34 billion worth of cells out of which 83.61% were from China. China uses predatory pricing and dumps cheap thin film solar cells to capture the Indian market in the absence of any anti-dumping duty imposed by India.
  • India also lacks a robust manufacturing base for solar components and systems. It also does not have any infrastructure for raw material production. The increased reliance on thin film technologies has augmented the dependence on specific elements like “rare earth” metals in which China has a near monopoly. Under such circumstances, Indian solar project developers may find their projects unviable in the event of currency fluctuations or changes in China’s policy on solar cell and module exports.
  • For both coal and solar power projects, the auction format used for reverse bidding is that of a sealed bid first price auction. The theory of auctions suggests that the use of a sealed bid auction format can lead to a winner’s curse in industries characterized by high uncertainty, or projects with very high time durations. Winning bidders can end up regretting their aggressive bids.

 

What needs to be done?

  • To end the uncertainty in bidding process, the solution is to go for a dynamic auction format where bidders can start from a maximum tariff and go downwards, after observing the pattern of bidding by others. This allows market information to become public, and reduces uncertainty for bidders.
  • The other way of reducing uncertainty is to adopt a counter-cyclical policy of tendering projects. The global commodities boom of the 2000s led to a bull market for power projects. Companies raised debt capital, mainly from public sector banks at concessional terms, and external commercial entities, on risky terms, to finance power sector projects that were being tendered out by the government. This is an important cause of the current non-performing assets crisis.
  • Instead of riding the global commodities boom by encouraging public sector banks to lend to private companies, and giving project clearances, the government should be a restraining influence in such circumstances. Better governance of public sector banks is urgently needed.
  • There should also be a clause for periodic review of power purchase agreements. Even if they are for fixed term, there should be escalation clause.

 

Conclusion:

In the absence of such measures, despite our best intentions, the experience of thermal power will only be repeated in our solar mission. For government to achieve its ambitious goal of adding 60GW (gigawatt) of medium- and large-scale grid-connected power plants out of a total capacity addition of 100GW by 2022, a careful and informed policy is necessary.