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Cash Buffer Lures Risk Averse to India Solar Auction

According to reports, India’s first national auction of solar permits since 2011 offers improved revenue security to investors seeking a foothold in a market where the cost of sun power may equal that of other sources within three years.

The state-run Solar Energy Corp. of India is inviting bids by Jan. 20 from companies to build 750 megawatts of capacity. For the first time, the government will provide as much as 18.75 billion rupees ($302 million) in grants to reduce plant-building costs to entice participation.

That will help lower one of the main hurdles to Indian solar investment: the risk cash-strapped state utilities buying the power will default, leaving plants unable to service debt, said Vineet Mittal, managing director of the country’s biggest photovoltaic developer, Welspun Energy Ltd. The tender still may struggle to draw international firms put off by a volatile rupee, uncertainty before national elections due by May, and a fraction of the solar capacity available in China and Japan.

“Security of payment has been addressed very nicely,” said Mittal, whose company is a unit of Leon Black’s Apollo Global Management LLC-backed Welspun Group. “But I don’t expect companies to queue up. It’s not as lucrative” with panel prices recovering from record lows.

The tender is India’s third under its National Solar Mission, which seeks to drive down the cost of sun power to diversify the country’s energy mix. India suffers from peak-hour power shortages of as much as 25 percent, and renewables offer a way to boost generation without increasing pricey fuel imports.

It may be “the least risky” of at least nine national and state-level auctions held so far in India, said Bharat Bhushan, a New Delhi-based analyst for Bloomberg New Energy Finance. “It should be the most attractive for risk-averse investors.”

More than 2 gigawatts of photovoltaic capacity has been built in India, mostly by domestic developers including Welspun, Moser Baer India Ltd. (MBI) and World Bank-backed developer Azure Power India Pvt. International companies such as France’s Solairedirect SA and St. Peters, Missouri-based SunEdison Inc. (SUNE) have also won projects.

The December 2011 solar auction, the most recent before now, received at least 190 bids, and 28 projects were selected, according to data compiled by Bloomberg.

Previous tenders drew record-low bids that made India among the cheapest destinations in the world for grid-connected photovoltaic plants, according to the World Bank.

That may not happen this time because panel prices are recovering from a three-year slide as a global supply glut eases, Mittal said. The rupee’s 12 percent slide in the past 12 months has also raised project costs because imported components comprise about 60 percent of a plant.

Crystalline silicon modules are selling in India at 35 rupees to 45 rupees a watt, up about 5 percent in the last 12 months, according to Rahul Gupta, director of Rays Power Experts Pvt., a New Delhi-based solar-plant contractor. Local developers may also factor in the cost of possible anti-dumping duties, making future imports more costly, Mittal said.

“I don’t expect that people will be able to offer steep discounts,” Mittal said. “The global oversupply has been removed.”

In an auction in India’s Uttar Pradesh state in December, six companies committed to sell solar power for an average of 8.89 rupees a kilowatt-hour. The average cost of fossil-fuel-based grid power is about 5.5 rupees a kilowatt-hour. Tariffs in sunny Rajasthan state have fallen to as low as 6.45 rupees a kilowatt-hour, according to Chennai-based RESolve Energy Consultants.

The coming auction will offer direct grants for the first time to cover as much as 30 percent of project costs, a model previously used to build roads, ports, and fossil-fuel plants in India. Developers will submit bids specifying the funds they seek, and those needing the least will win.

Plants will sell power at a maximum of 5.5 rupees a kilowatt-hour. That’s equal to the cost of grid power and cheaper than the highest rates paid by many industrial and commercial consumers. It will allow Solar Energy Corp. to find alternate buyers if a state-run distribution company defaults.

That structure may favor India-based corporate groups over clean-power generators, said Vinay Rustagi, joint managing director of Bridge to India Energy Pvt., a New Delhi-based solar advisory. Since grants only get disbursed after construction, developers will need to finance the entire cost upfront. That’s easier to do for industrial houses with greater access to competitive financing, he said.

The grants, as well as a tax break for depreciation, may lead “to a distortion of incentives,” Rustagi said.

Companies with income from other businesses can reduce tax liabilities by investing in a solar plant to claim accelerated depreciation on the asset. Non-power companies such as Mohan Breweries & Distilleries Ltd. and Essel Mining & Industries Ltd. were able to underbid renewable utilities by almost 30 percent in recent state-level solar auctions, according to Crisil Ltd., the local unit of Standard & Poor’s.

“It brings companies looking for a tax shield into the renewable business rather than companies focused on generation,” Inderpreet Wadhwa, chief executive officer of Azure Power. Such policies may skew who bids, said Welspun’s Mittal.

“These incentives are bringing different kinds of investors into the solar sector and facilitating the creation of newer business models,” said BNEF’s Bhushan. “Given the country’s power demand, ultimately there’s room for both type of developers.”

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