Irrational Solar bidding in India

Concerns have been raised numerous times over the irrational bids made during Indian solar power auctions. Despite high fund costs, power offtaker and currency risks, Indian solar power has seen new record lows of below INR 5/kWh. This has led to questions about the long term sustainability of the sector and many serious power players have not entered the solar market, despite its vast growth potential. Some companies such as SunEdison have gone bankrupt, with the projects left in a limbo. While new solar developers have kept entering the Indian market, it seems that for now the irrationality might be coming to an end. The large volume of tenders in the past one year (almost 10 GW), would have reduced the financial and management bandwidth for most players. Companies for now would be focused on execution and would be wary of taking in more business at such low margins and returns.

A 400 MW solar auction in Andhra Pradesh saw only 6-7 developers bid for the projects and that too with a relatively high price. SECI usually uses a Viability Gap Funding (VGF) model to attract developers. The recent auction saw a VGF of as high as INR 74.5 lakhs/ MW with a levelized tariff of INR 4.43/kWh. This would imply that the bidders would be making tariffs of almost INR 5.2/kWh, which is quite high when you consider the Softbank and SunEdison bids of INR 4.63/kWh in AP auctions over the last one year.

Also read Solar Tariffs on a declining spree in India.

While SECI is not considered as good a credit counterpart as NTPC, still the company is backed by the government of India and has large funds at its disposal. This has meant that the bids are higher in SECI auctions, as compared to NTPC auctions. However, the limited number of bidders and the high prices mean that sanity may once again be returning to India’s solar power sector.

Tata Power has now become aggressive in solar auctions, after remaining a silent spectator in earlier auctions. The other companies were also large companies with solid financial backing. Fotowatio is one of the largest Spanish developers, while Acme is backed by French energy giant EDF. It is good to see that the small time players looking to flip the projects, were not seen in this tender. If India’s solar plans need to succeed, the large investors, developers and utilities will need to step in, while the small time flippers need to be weeded out. While one auction is not representative of a new trend, it certainly marks a good omen for the Indian solar industry.