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Bilateral solar power purchase agreements — the in-thing in India

According to reports, Kiran Energy’s declaration of intent to put up a 50 MW solar power plant in Tamil Nadu and a 100 MW plant in Karnataka to sell power directly to industrial consumers, heralds the ushering in of a new trend — selling of solar power under bilateral power purchase agreements.

Selling power directly to industrial consumer has been happening in this country for a long time. This is done through what is called the ‘captive’ model, under which the buyer becomes shareholders of a special purpose vehicle that owns the power project. Of course, selling power to ‘non captive’ consumer is also technically possible, as ‘open access’ is allowed, but this approach is fraught with difficulties, such as regulatory restrictions and high ‘cross subsidy’ charges, and is generally not preferred.

Solar power project developers are now getting into direct selling of electricity. Two factors will aid this. First is the withdrawal of ‘accelerated depreciation’ benefits for the wind power developers, which was an attractive tax break. This benefit powered the sector’s development and the deleterious effect of the withdrawal is already in evidence in terms of slackening capacity addition. (India added 3,168 MW of wind power last year, this year will be less than half that.) Those who are looking for ‘accelerated depreciation’ benefits will now have to become shareholders of solar power companies.

The second is the ‘renewable power obligation’, which ‘obliges’ certain named power consumers to purchase power from renewable sources, including a mandated slice of solar power. While the enforcement of this obligation is a big question mark, industrial consumers (as opposed to state-owned electricity distribution companies) are coming forward to meet their obligations.

Companies like Kiran Energy are dressing up to serve this market.

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