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Indian State Government’s flip flops put Solar investors in a tizzy

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Renewable energy is a relatively new area compared to fossil fuel power, where rapid technology advances and higher costs make it a risky proposition. Investors typically need a higher return from solar investing compared to say a thermal power plant. Stable government policy and regulations are also a prerequisite before investors would put money into green energy. India despite its lofty ambitions of installing 100 GW of solar power from 4 GW now is not a paragon of virtue on this count. Both the central and state governments have changed their policy and targets numerous times, putting investors on a weak wicket. While there is tremendous excitement amongst the financial and investor community over the renewable energy growth, the risks are nothing to scoff about.

The high competition in this sector has already reduced returns to just about 15%, which is not very high considering that risk free Indian government bonds give you 8% without breaking a sweat. On top of this high competition is the whimsical actions of government authorities. The latest government to do this is the MP government. A recently held reverse auction of 300 MW saw bids as low as Rs 5.05/kWh, which translates to around 8c/kWh. This is a very low price considering the extremely high interest rates in India. The highest bids which were successful were around 10% higher at Rs 5.5/kWh. These bids are also very competitive when you consider the overall environment. Many analysts questioned if any decent returns could be made by bidders such as Renew Power and others based on these low prices. However even at these prices, the MP government is not willing to sign a LOI with developers. They want the higher bidders to match the extremely low price bid by Sky Power at Rs 5.05. This makes no sense to me. The developers such as Hero won fair and square based on the tender rules, which had around 300 people bidding. Some large developers had bid Rs 6/kWh, which means that the Rs 5.5 bid by the winning bidders is quite competitive. However, the government is changing the rules of the game after the play has been made.

These frequent changes and not following the rules make the investment case of India quite weak. On the one hand, you have the government indulging in corruption by awarding billions of dollar without tenders. Here you have a very competitive tender and still the government does not want to play fair. MP government is not alone in increasing the risks for the RE investors. Gujarat and Chhattisgarh have done the same. The Gujarat government has insisted on lowering the feed in tariffs which were guaranteed while the Chhattisgarh government changed the mode of evaluation. As any bidder for a government tender will tell you, the bureaucrats don’t care a shit about the rules. They can act whimsical when they feel like it. While the Modi government touts its ease of doing business improvement and “Make in India” campaign, it needs to iron out these basic issues, before India can become an economic powerhouse.

PG

Sneha Shah

I am Sneha, the Editor-in-chief for the Blog. We would be glad to receive suggestions, inputs & comments on GWI from you guys to keep it going! You can contact me for consultancy/trade inquires by writing an email to greensneha@yahoo.in

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