According to reports, another nail was driven into the coffin of future solar energy projects in India a few days ago, when the role model for business among Indian states did something to rattle investors and solar project developers.
Gujarat Urja Vikas Nigam Ltd (GUVNL), the off-taker for 852 Mw of installed solar capacity in the state, petitioned the Gujarat Electricity Regulatory Commission (GERC), stating projects commissioned before January 29, 2012-around 80-were awarded too fat a tariff, giving developers windfall profits.
The tariffs-Rs 15/kwh for the first 10 years and Rs 5/kwh for the remaining 15 years (which works out to an average of Rs 12.54/kwh)-were predicated on a capital cost of Rs 16.5 crore/Mw. GUVNL says most developers have been able to set up their projects at a capital cost of only Rs 9 crore to Rs 12 crore, which means the tariff for these 80 projects should be lowered to Rs 9 per unit. “This will have a significant negative impact on the whole industry if it goes through,” says Sanjay Chakrabarti, partner and national head, Cleantech, Ernst and Young. “International investors will not be able to distinguish between Gujarat and India.”
It is too early to tell whether GUVNL’s assertions are credible or not –or on what legal standing they hope to effect this change–but they aren’t the only ones to have attempted scuttling prior agreements. Andhra Pradesh, for instance, recently decided after the bidding process was completed that Rs 6.49 per unit was all it could afford as a tariff.
Therefore, it isn’t very surprising to see that Ernst and Young’s latest Renewable Energy Country Attractiveness Index shows India slipping substantially in its solar rankings, from a lofty third position to a lowly eighth in just one quarter. But the fact is, the reversals in Gujarat, Andhra Pradesh and elsewhere took place much after the data for the report were being churned. “The main focus was on the policy landscape and doing business in India was perhaps not such a big factor before,” says Chakrabarti. “Eighth place sounds about right. Third was too optimistic. It’s a reality check,” says Tobias Engelmeier, managing director, Bridge to India, a solar consultancy in New Delhi. Still, Engelmeier thinks India has made significant strides in solar in just a few years. “Today, solar is less tax-driven and more sustainable. More and more, evaluations are taking place on the merit of project rather than the promoter,” he says. Engelmeier also feels lenders are increasingly getting more comfortable with solar projects here.
Yet basic business risks-such as approved tariffs being revoked or the enforceability of contracts in general-are unlikely to boost the confidence of investors or project developers. There are other serious roadblocks. “Land acquisition is one of the biggest challenges today,” says Chakrabarti. The Ernst and Young report also mentions “that the bankability is jeopardised by the high cost of financing and significant infrastructure barriers”. If these aren’t bad enough, the 32 per cent depreciation of the rupee since 2011-10 per cent in the last quarter alone-has neutralised whatever gains could have been made because of plummeting prices of panels. This is where it hurts the most, considering solar prices have been falling by about 50 per cent year-on-year, making solar power not only far cheaper than diesel but even a better deal than grid power for commercial power consumers in Maharashtra, Delhi and Kerala-even if you strip away the subsidies-according to both Bridge to India and Deutsche. Recently, French developer Solairedirect bid an all-time low Rs 7.49 per kwh for its proposed 5-Mw plant in Pokhran, Rajasthan, versus a national average of around Rs 4 per kwh from a coal-based plant. Others have gone even lower since then.
Whether these astonishingly low bids can be economically sustainable or not is always worth asking. However, many analysts say even in the US, which has now entered the ‘Golden age of gas’, thanks to its shale boom, renewables are as much a part of the future if not more. “The perception of renewables as an expensive source of electricity is largely obsolete, given the huge cost reductions achieved in recent years,” says a recent Citi report.
This is because it will soon become uneconomical to extract shale gas at a price below $5/mBtu (million British thermal units) due to its huge environmental implications, which then puts gas at just about competitive with wind at $6/mBtu.
Plus, “utility-scale solar is rapidly approaching parity with wholesale electricity prices in a number of countries, including Italy, Spain, the US and China,” adds the Citi report.
There’s no question that India needs all the energy it can get. “Today’s peak deficit of 12 per cent will simply keep rising if we grow at around five per cent to six per cent. We can have as much coal and gas and renewable and we still have a challenge meeting our needs,” says Ernst and Young’s Chakrabarti.
But for Solar to meet its promise here, it will have to negotiate India-specific problems (dust is a major issue for PV modules; shoddy components is another), maintain a policy-friendly environment and most importantly keep its tariff promises.