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November 23, 2013Pros and Cons of Solar Bonds
November 26, 2013Gujarat wants a Retroactive Cut in Tariffs
The Gujarat government has been touting the success of the solar power scheme enacted by the state government, which led to almost 60% of the solar installations in the country being installed by Gujarat alone. Almost 1 GW of solar power has been installed in the state by developers taking the advantage of solar feed in tariff scheme started by the government. This solar subsidy scheme has now been shut down, since the government exceeded its targets by a huge margin as a large number of developers set up the plants in the state. Note Gujarat is a relatively well-off government which means that it has enough money to pay solar developers and the land values in the state are also reasonable. The government administration is also much better than other parts of the country which made it an attractive option for many companies who have set up multi megawatt power plants in the state.
Read more about Gujarat Solar Power here.
But now the success of this scheme is biting the state electricity utility which is finding that the outflows due to the solar tariffs is adversely affecting its financials. The utility had earlier appealed to the regulator to cut down the solar tariffs as it was leading to windfall profits for developers. The utility in its appeal said that the construction costs of the solar power plants were over inflated by the developers, when in fact they were much lower. The tariffs had been set based on a reasonable ROE figure for developers but in reality has turned out to be much more.
The regulator had rejected the claims of the utility in retroactive cut of tariffs. Note this problem has been faced by governments around the world. High FITs have led to super normal profits for developers in Spain, Czech, Italy etc. While the scale of the problem in Gujarat is much smaller, it is a problem for the utility all the same, as it will have to pay feed in tariffs for 1 GW of solar plants for 25 years. The developers are not amused as they feel the goal posts have been changed in the middle of the game. Retroactive changes in laws is always an unwelcome development for investors everywhere but a fact they have to live with. This gives rise to unexpected risks for the companies and investors. Gujarat government is in no mood to give in and has appealed to overturn the GERC decision by going to the Appellate Tribunal for Electricity. The government wants a cut of roughly 30%, which seems quite large to me.
Investors make a lot of decisions based on expected IRRs and cash flows. They also take execution and other risks which cannot be quantified. The government cannot claim large profits for developers as a reason to cut tariffs which were fixed for 25 years. Changing the rules of game in the middle means investors will put higher risks on green energy projects, which will raise the cost of capital making green power more expensive for everyone ultimately. The government made a mistake and it should bear the costs. Private developers made a huge mistake by bidding too low for the thermal power plants in UMPP tenders. They should now bear the costs of that mistake as Tata Power which is losing huge amounts from selling power from the Mundhra Power Plant. The government should not allow the tariffs from these plants to be raised after the private power companies have already signed the contact. They should bear the sins of their mistake.
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Gujarat, India plans to retroactively reduce high FITs for 1 GW of Solar Plants in the state.
The state government has approached the Appellate Tribunal for Electricity (Aptel) challenging dismissal of its petition seeking lowering of solar power tariff by the Gujarat Electricity Regulatory Commission (GERC).“Yes, the Gujarat Urja Vikas Nigam Limited (GUVNL) has filed an appeal with Aptel challenging dismissal of its petition by the electricity regulator,” confirmed a senior official, requesting anonymity.The Aptel is expected to hear GUVNL’s appeal on November 11, said a solar power project developer. GUVNL had signed 25-year power purchase agreements for 971.5 MW solar power with 88 developers in 2010. It also came out with a solar power policy to attract fresh investments.
Earlier this year (in May), GUVNL had approached GERC seeking reduction in tariff paid to solar power developers citing excessive profits earned by them. It had sought a levelised tariff of around Rs9 per unit instead of the current tariff of Rs12.54.