Government Mulls Feed-in-Tariffs for State-Specific Renewable Energy Projects

With the floor price missing in reverse auctions, developers bid aggressively with minimal margins


The government is contemplating feed-in-tariffs for state-specific renewable energy projects in place of the electronic reverse auctions. The announcement was made by the Secretary, Ministry of New & Renewable Energy (MNRE), Indu Shekhar Chaturvedi, at a conference hosted by the Confederation of Indian Industry (CII).

According to Mercom sources, the government plans to set a feed-in tariff based on detailed research. These feed-in tariffs will apply to state-specific projects of up to 2 GW per annum. This is likely to come into effect from April 1, 2023.

Renewable energy tariffs have fallen drastically in the e-reverse auctions. Power distribution companies (DISCOMs) prefer competitive bidding because it delivers lower tariffs as compared to feed-in tariff-based mechanisms.

If the research-based feed-in tariff is high and the DISCOMs do not agree to procure power at that rate, the government will reconsider its decision. If the plan works well and the auction activity expands, the government will continue with the feed-in tariffs. But reverse auctions will continue parallelly, added the industry stakeholder speaking to Mercom.

The e-reverse auction was introduced to promote competition. However, aggressive bids have led to lower profit margins, sometimes to the point where the winning bid is unviable.

“Developers have been making overly aggressive and unrealistic assumptions to win projects for years. Most times, the ground reality and challenges are not reflected in the bids, which leads to delays and cancellations, causing missed government targets.

Another option could be setting a floor price on reverse auctions where the lowest bid does not fall below the set floor price, which will be set based on viability calculations done by the government agency to assure that these projects are feasible. If the floor price is too low for developers based on their own assumptions, they can always bid higher,” said Raj Prabhu, CEO of Mercom Capital Group.

Since the implementation of the reverse auction, the sector has seen record low tariffs across the wind and solar segments.

In December 2020, Gujarat Urja Vikas Nigam’s (GUVNL) (Phase XI) auction for 500 MW of solar projects set a record for the lowest tariff of ₹1.99 (~$0.025)/kWh.

Wind power tariffs had dropped to a record-low level of ₹2.43 (~$0.030)/kWh in the GUVNL 500 MW auction held in December 2017. This was lower than the lowest solar tariff of ₹2.44 (~$0.031)/kWh quoted in the Bhadla Solar auction in May 2017.

The steep fall in tariffs in auctions has been due to aggressive bids by developers with access to low-cost funding (lately, public sector undertakings have been the low bidders in many auctions) and the pent demand when auctions are held far between.