Indian Power Developers fail to learn – 10% Rupee fall to kill their Solar Project IRR

Indian power developers seem a dumb lot with little risk management. They blundered big time in 2008 when they bid low for massive thermal power plants of 4 GW size betting on cheap coal imports from Indonesia and Australia. When these countries turned the screws on coal exports by levying taxes and royalties, the power companies started to cry. Some of them stopped building the plants in total contravention to the singed contracts. Tata Power went ahead and built the plant but is losing money with every watt generated. The Indian government has now finally bailed them out by giving them higher tariffs. Not a good outcome for Indian consumers who are bearing the costs of bad risk management by these huge power developers.

All solar thermal plants are delayed because of one reason or another and if the contractual guidelines are followed, they would have to pay a penalty of Rs 230 crores. However, in our country crony capitalism rules the roost and the RE secretary wants to give these plants anextension of 10 months. Note India’s power regulator and ministries have been known to give more sops to corporate groups, even when they don’t meet the language of the contract. In the recent UMPP case, all big power companies such as Adani Power, Tata Power and Reliance Power are set to get higher power rates despite the contract clearly stating the price of the contract to be a fixed one.

Many of the projects which have bid too low might not get built, as developers might lose more money from building a plant than losing the bank guarantee for the project. Same thing will happen as what had happened with the large thermal power plants. The developers will not build the power capacity till the government bails them. The end consumer will be the biggest loser as he will not get power for a long time. When he ultimately gets it, the cost will be much higher.

Bloomberg

The rupee’s 9 percent slide this quarter to a record may reduce returns for $670 million of solar power projects in India as higher imports costs hurt developers grappling with a rise in panel prices.Purchases could be postponed as equipment such as panels and inverters comprising 60 percent of the expenditure to build a plant is either imported or based on U.S. dollar prices, said Gaurav Sood, managing director of Solairedirect SA’s local unit. Ajay Goel, chief executive officer at Tata Power Solar Systems Ltd., said as much as 80 percent of module components such as anti-reflective glass have few or no local substitutes, raising costs.Project developers who raised overseas debt will face an increase in hedging costs and also have to repay more in rupee terms, said Bloomberg New Energy Finance’s Bhushan.