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Independent power producers unhappy with price for Tamil Nadu solar tender

According to reports, Independent power producers are unhappy with the price fixed by Tamil Nadu to procure solar power from them, as they feel it is too low and banks will hesitate to back their projects at that rate.

The state’s power utility, Tamil Nadu Generation and Distribution Corporation Ltd, has fixed Rs 6.48 per kilo watt hour as a negotiable price for its mammoth tender to generate solar power in the energy-deficient state. Almost all successful solar power projects in the country so far have been priced at least Rs 7 per unit.

Tamil Nadu, which is facing a huge deficit of 4,000 megawatts, is betting big on solar, with Chief Minister J Jayalalithaa drawing up an ambitious plan to add 3,000 MW through this route by 2015.

It launched the single biggest solar tender process for 1,000 MW last year, but received a tepid response—bids came in only for 500 MW—as power producers were worried about the financial health of Tangedco as well as clauses in the contract.

“If one has to get a 15% return on equity, the price should be more than Rs 7. This was clearly evident with the average bids coming in at Rs 7-Rs 8 for the solar tender,” said Tobias Engelmeier, managing director of Bridge to India, a solar research and consulting firm that expects Tamil Nadu to add a mere 150 MW from the tender.

The solar promise was part of the manifesto on the basis of which Jayalalithaa’s AIADMK contested and won the 2011 elections. Jayalalithaa, who inherited the present mess in the power sector from the previous DMK regime, has found the path to resuscitation difficult.

For the tender, the state adopted the “L1” method, where bidders are asked to match the lowest bid. The tender also provided for a 5% price escalation clause for the first 10 years.

However, the L1 process failed to attract a viable price, with the lowest coming in at Rs 5.47 per kwh, by liquor maker Mohan Breweries which bid for 10 MW. This prompted Tangedco to fix Rs 6.48 per kwh as the negotiable price.

Most independent power producers like Sun Edison, Welspun and Lanco had bid for Rs 7-Rs 8 per kwh. Out of the 500 MW, 40% had bids in this range.

“We are still talking with our banks. It is a very good price for developers availing the accelerated deprecation benefits. However, for independent power producers like us it may not be viable, given that we raise foreign debt,” said Pashupathy Gopalan, managing director of SunEdison for South Asia and Sub-Saharan Africa, which has bid for 50 MW.

Developers with other business can avail accelerated deprecation benefits for both commercial and non commercial ventures of 80% from the first year, leading to savings on income tax. Independent power producers do not have this benefit.

Gopalan said the state should consider having different tariffs for independent power producers and those availing accelerated depreciation, which is the case in Gujarat.

Vineet Mittal, managing director of Welspun Energy, which has bid for 30 MW echoed similar views. “We are still discussing this price. The banking sector has serious apprehensions over Tangedco’s credit worthiness at the moment and their track record of payments to Wind sector in the last one year is a serious concern to them.”

Currently, Tangedco has accumulated losses of over Rs 40,000 crore.

Mittal suggests that Tangedco should improve its payment security mechanism through an escrow account on all receivables from solar. “Any shortfall in receivables to Tangedco on account of purchase of solar power should be topped up by the State government as a special incentive to the sector.”

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