According to industry sources, in a meeting with the developers of solar and wind projects, the Ministry of New and Renewable Energy (MNRE) has proposed the removal of tariff caps, which, if it happens, would come as a huge relief to the renewable energy industry.

Mercom has been consistently reporting on how tariff caps are slowing down auction activity in the sector. Developers have denied bidding at the tariff levels specified by state agencies instead of a market-based auction, where the lowest bid wins. This has been the reason for most tender deadlines to be extended or retendered after raising the upper tariff ceiling. This trend of tender extensions and retenders has also led to a delay in auction activity.

Sources have also told us that MNRE is contemplating the extension of earnest money deposits (EMD) against performance bank guarantee (PBG) requirements of successful bidders. Earlier, successful bidders had to provide the PBG independent of the EMD. After concluding the verification of the total PBG, the guarantee submitted towards the EMD would be returned to the successful bidder. This, in turn, would affect the liquidity of developers as the EMD and PBG used to be blocked for a particular period.

Speaking to Mercom, a credit risk officer at a major public sector bank lending to renewable projects, commented, “There is enormous scope for solar if the tariff cap is removed. Tariff caps are causing tenders to slow down.”

In June 2019, Mercom reported that reverse auctions drove down tariffs, and developers are fighting for every penny to make a decent return on their investment. In this ultra-compeititve environment, tariff caps have added a new challenge for them. A tariff cap is set by the auctioning agency and acts as an upper limit when bidding for a project. So, a developer can only bid lower than the set tariff, which becomes a challenge if the tariff cap is deemed too high for a project developer to make a healthy return on investment.

Another officer at a government non-banking financial institution lending to renewables told Mercom, “Tariff caps are stalling the tender participation and tenders are getting canceled. Since auctions are delayed, developers haven’t approached us for financing for a while now.”

Looking at some of the major solar and wind tenders that were issued and re-issued in 2019, the ceiling tariff for over 13,500 GW of solar and wind projects were revised and the tender submission deadline extended. Tariff caps were increased anywhere from 3% to 14% to attract participation from the developers who were reluctant to participate because of low tariff caps.

The Maharashtra State Electricity Distribution Company Limited (MSEDCL)  reissued a tender for 1,350 MW of solar projects to be developed across 30 districts. The tender was initially floated in September 2019 and the ceiling tariff was raised to ₹3.30 (~$0.04)/kWh, up from ₹3.15 ($0.044) /kWh.

Similarly, Solar Energy Corporation of India (SECI) increased the tariff ceiling for its 500 MW (Phase-1) solar tender that was floated in April 2019. The amended tariff cap was ₹2.93 (~$0.04)/kWh compared to the previous tariff of ₹2.85 (~$0.041)/ kWh. Further, the bid submission date was also extended. The initial submission date was May 27, 2019, which was extended to June 27, 2019.

The National Hydroelectric Power Corporation extended the bid submission deadline of its tender for 2 GW of solar projects. The original tender for the project was issued in September 2019. The deadline was was September 27, 2019, which was later extended to October 17, 2019. The date was again extended to January 10, 2020. Also, the minimum tariff payable to the project was revised to₹2.78 (~$0.04)/kWh from ₹2.65 ($0.037)/kWh. Initially, the NHPC had set a tariff ceiling of ₹2.95 ($0.041)/kWh. But later, the ceiling tariff was revised to ₹2.65 ($0.037)/kWh.

In another case, SECI increased the capacity of the manufacturing linked solar tender, which it had initially floated in January 2019. The capacity was increased from 6 GW to 7 GW of solar projects linked with 2 GW of the manufacturing component. SECI set the maximum tariff payable to the solar developer at ₹2.93 ($0.041) from earlier ₹2.75 ($0.039)/ kWh, an increase of 6.5%.

With its wind project, SECI issued an amendment revising the tariff ceiling for its 1.2 GW wind tender that it floated in September 2019. The ceiling for the tariff was initially set at ₹2.85 (~$0.040)/kWh. However, SECI, in its latest amendment, revised the tariff upwards to ₹2.93/kWh (~$0.041).

Auctions worth 8.4 GW were undersubscribed by 4.4 GW in 2019 attributable to tariff caps.

Tenders from SECI and GUVNL, which are typically considered bankable because of their creditworthiness, were undersubscribed because the tariff caps were considered too low by developers.

It is clear from multiple tariff cap changes and under-subscribed tenders that tariff caps were priced aggressively and too low to be attractive to investors.

“Once you put a cap on bidding, it is not an open market-based auction anymore. It is always better to let the markets determine the right tariff based on the risks – openly and transparently. Too many auctions have failed and slowed the momentum in the solar industry, making it very difficult to meet reach PM Modi’s target of 100 GW of solar by 2022,” said Raj Prabhu, CEO of Mercom Capital Group.

“Removing tariff caps could be the single most important action at this time to revive the solar sector and send a message to the investment community that the government is serious about its solar targets,” Prabhu added.