Fixed Tariff model for India’s Solar industry

Indian solar sector has seen a huge amount of success using the reverse auction tender method, which has led to massive competition amongst solar developers and discovery of declining prices for solar power. Unlike other countries, India has not been burdened with high subsidies that need to be paid for green power. However, this method has been criticized by solar developers for having shortcomings.

Some of these are that non-serious bidders have entered the space and bid irrationally low. This might lead to problems later on if these projects are not built, or some of these developers using low quality components might fail going forward. As the sector has matured and prices have become sufficiently low, the government is examining a new method to grow the solar power capacity in the country in a stable and a predictable manner, which will allow the private sector to earn reasonable returns and also let the government meet its ambitious target of putting up 100 GW of solar capacity by 2022.

NTPC which has been used by the government as one of the main procurers of solar power has been mulling a new model to buy solar power for its next phase of 5 GW of solar energy procurement. Earlier NTPC had been buying solar power through reverse auctions and selling it to discoms by bundling non-committed cheap thermal power from the central pool. However, solar power has not become cheap enough for it to sell, without bundling with thermal power. NTPC might now use a new method where it will set a reference price of 7 cents/kWh for buying solar power. Bidders may bid for a discount or a premium and win the tender for selling to NTPC. This is similar to the SECI method which has a VGF instead of a tariff.

This INR 4.5/kWh will set a reference price for the country and many state governments may follow a similar method of procuring solar power going forward. Given a more stable and consistent regulatory regime will allow most solar power developers to bid in a planned manner. This will ensure a greater success rate of tenders.

Currently India has bid out 20 GW of solar tenders, out of which more than 8GW of capacity has signed PPAs in place. This rapid rate of tendering is expected to continue in the future, given the government’s strong focus on increasing the solar capacity. However, as the industry matures alternative models should be examined for selection of solar developers.