While solar installations in India have picked up speed, tender and auction activity have been slowing down over the last couple of quarters. According to the Mercom India Solar Project Tracker, about 1.9 GW of solar was tendered in Q1 2017 (1 GW of this was a retender) compared to 3.4 GW in Q4 last year. There was 1.3 GW of solar projects auctioned in Q1 2017 compared to 255 MW in Q4 2016. The slowdown in activity has been disconcerting to developers and manufacturers that have been positioning for much higher levels of activity based on India's solar installation goal of 100 GW by 2022.
India needs to install 18 GW of solar per year through 2022 to reach the 100 GW installation target set by the Modi government. The pace of tenders and auctions must pick up quickly if the government wants to meet its solar installation goals and show the investment community and the industry that it is serious. Companies who have invested hundreds of millions to expand to meet the demand and build projects are anxiously waiting for activity to pick up.
Some of the reasons for decline in tender and auction activity include poor financial condition of distribution companies (DISCOM), transmission issues, weaker power demand and increases in captive generation by commercial and industrial companies. DISCOMs that are continuing to struggle financially are not taking on new generation that is more expensive than coal, which is leading to curtailment of solar and wind projects as well as payment delays to developers.
In some states, weak power demand is removing the urgency to speed up the pace of solar tenders and auctions. Increases in captive generation by industrial customers have compounded the situation since they are requiring less power generation from DISCOMs.
The World Trade Organization (WTO) ruling against India's domestic content requirement (DCR) has resulted in continuous cancellations and postponements of planned DCR tenders.
The recent record low bid of Rs.3.30 (~$0.494)/kWh at the REWA solar park auction is playing a big role in the slowdown of auction activity as government agencies and states are stalling to renegotiate PPAs that are more expensive than the bids received at REWA.
For DISCOMs, coal is still the cheapest option available. According to Mercom's December Solar Quarterly Report, DISCOMs have resorted to sporadic curtailment from some solar projects in Rajasthan and Tamil Nadu because cheaper power is available on the power exchanges. Even when there is demand, several states have complained that the DISCOMs are resorting to power cuts instead of buying power on the exchanges to save on costs.
Mercom has previously reported that power purchase agreements for 1.1 GW of solar in Jharkhand are yet to be signed because the state DISCOM is not accepting the quoted tariffs. According to Mercom's India Solar Project Tracker, tariffs quoted in the state ranged from a high of Rs.5.59 (~$0.0824)/kWh to a low of Rs.5.08 (~$0.0749)/kWh. The state had tendered 1.2 GW of solar since December of 2015 in an effort to achieve its 2,650 MW solar target by 2020, but there has been no activity since. In this case the DISCOM was unwilling to sign the PPAs for tariffs above five rupees per kWh claiming it is not viable for the DISCOM. The situation will get even more challenging after the recent REWA auction. Due to aggressive renewable energy targets in some states like Rajasthan and Tamil Nadu, solar grew even at high tariff levels only to leave the states struggling with finances a few years later and finding it difficult to take on new solar generation.
"It has been disappointing with the delay in tenders. After September 2016, tenders have slowed down for IPPs. It is less likely we will see new tenders after the REWA bid as each bid is now being expected to meet the REWA numbers, which is ridiculous. The Kadapa Solar Park tenders are postponed as Andhra Pradesh has pulled out because they now have surplus power and their cash flow situation is bad. DISCOMs are currently of the belief that solar tariffs are falling, so let us wait, with states claiming that they are power surplus and don't need any kind of power, let alone solar, stated a large developer while in conversation with Mercom.
Raj Prabhu, CEO of Mercom Capital Group warned about this after the REWA auction in his statement: "Although this is the lowest tariff ever recorded in India, this auction has several special attributes which makes it hard to directly compare with previous low bids. The size and location of the projects, payment guarantees, deemed generation benefit, longer construction timeline, the recent solar module price crash, and yearly tariff escalation for 15 years - all make the low bids unique." Prabhu continued, "The fear is that media, government officials and analysts will hype up the low bids and other states will then start pressuring developers to match bids from the REWA auction tariffs, which has happened in the past."
Several other developers told Mercom that as of now Bihar, Jharkhand, Tamil Nadu, Rajasthan, and Maharashtra are the problem states. According to Mercom's Solar Project Tracker, tendering activity has declined in these states with most of the old tenders being continually extended.
The Tamil Nadu Generation and Distribution Corporation (TANGEDCO) had tendered a total of 1,000 MW of solar in two separate tenders, but received tepid response due to TANGEDCO's reputation of curtailing power, as well as delaying payments.
What we are hearing from Developers and Government Agencies
Project developers have told Mercom that tender delays and extensions have been discouraging and there is increasing pressure to meet REWA bid numbers. If other states want us to offer REWA tariff rates, it is not possible and is leading to delays and tender extensions, stated a solar project developer.
The WTO ruling has stalled most activity in the DCR category and only a small number of DCR tenders are coming out, further stalling progress, stated another developer.
With all the challenges, we do not want to risk money by bidding in a problem state where the DISCOM might not want to sign the PPA on the price quoted, stated another project developer.
This is called the "RUMS (REWA Ultra Mega Solar) Effect", stated an official at National Thermal Power Corporation (NTPC). The REWA auction in Madhya Pradesh was pathbreaking and all other states are strategizing to put forth tenders at par with the REWA auction. Tenders that have been issued have been delayed. Also, due to states asking for a preferential tariff (a tariff at which the state can afford buying power), some NTPC tenders have been delayed, commented the NTPC official.
Close to 20 GW of solar have been tendered out of which more than 10 GW have been installed - our pipeline is huge. Plus, tendering work is done on a financial year basis, so if you consider the months of December, January, February, and March, these are just fill-overs, stated an MNRE official. The Madhya Pradesh REWA auction has also put a sort of wrench in the works as states are trying to rework their respective tenders in accordance with it, added the MNRE official.
We invited an expression of interest (EoI) from developers for 100 MW of solar at Sambhar facility, Rajasthan, but we have not issued the tender after receiving the EoIs. The REWA auction has forced us to reconsider the tender and the directives therein, stated an official at Sambhar Salts Limited.
Another MNRE official stated, tendering is in the hands of state nodal agencies and state governments. The state decides RPOs and execution, and all [states] have slowed down tendering as everyone wants cheaper solar power.
In Rajasthan, unless the previously tendered projects are commissioned, there will be no new rooftop solar tender, stated an official at Rajasthan Renewable Energy Corporation Limited (RRECL).
Reluctance on the part of DISCOMs to buy from solar generating projects in the presence of cheap power from other sources, is the main culprit, stated an official at New and Renewable Energy Development Corporation of Andhra Pradesh (NREDCAP). The transmission system also needs to be developed in the state to allow optimum utilization of solar projects. This is another reason tenders have slowed down in the state, added the NREDCAP official.
Many tenders have been delayed as we want to meet developer's demands. In REWA, the state got a low price by providing guarantees and other incentives. We would like to do the same in Telangana, and this has resulted in a slowdown in tenders so we can revamp, stated an official at Telangana New and Renewable Energy Development Corporation.
Officials at most state nodal agencies reiterated the fact that tender rejigging in light of the REWA auction is behind the delay or slowdown in solar tenders.
"We hope this is a short-term issue which, once resolved, tariffs will get down to realistic levels and there will be a big spurt in activity. However, if some of these pressing issues are not resolved quickly, growth will stall." said Raj Prabhu, CEO of Mercom Capital Group. "There needs to be a policy mechanism put in place to avoid the stop and start in tender activity every time there is an outlier in terms of a low bid. However, if states revise their tenders to include all of the positive aspects of the REWA tender, it could be a win-win for all".
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