Rationalising Tariffs: Need of the hour

Need of the hour

Sanjay Aggarwal, Managing Director, Fortum India

Whenever tariffs touch a new low, opinions start floating about the unsustainability of the tariff. That may well be the case, but its sustainability is best left to the winning bid developer to figure out. The purpose of reverse auction is price discovery, which is determined solely by market forces. Of course, it is disruptive, but we cannot run away from disruption. The whole idea of bidding was to create transparency and remove discretion. There will always be a winner and a loser in any competition, and the loser would always wonder how the winner succeeded. But that is the very essence of competition. It makes everybody run harder and nobody can be complacent. The winner pushed the envelope; perhaps he made a mistake, took a wrong call, but that is what the market is all about. The market will punish him, he will not get funds or will earn lower returns and ultimately, on realising his folly, will recalibrate the next time. But we need to realise and respect the fact that every company is different and has its own approaches and vision.

Every bid should be seen as a separate bid influenced by a host of specific circumstances and we should not rush to conclude that the discovered tariff is the new benchmark. Reverse auction results should be respected. Once the bidding is done, irrespective of whether the results are comparable to other auctions or not, lower or higher, the results have to be honoured. Every situation is different. The results will not always be to one’s liking, but the sanctity of the auction has to be maintained. If that is not done, investor confidence will be shaken and the whole process will be vitiated.

Evolving technologies will always result in disruption. Solar module production has grown exponentially in the past five years and the demand-supply dynamics have shaken up prices. The prices of modules have come down drastically and alongside, new technologies are improving efficiencies. The net result is a reduction in tariffs. Modules constitute approximately 60 per cent of a solar power project’s total cost and their prices declined by nearly 26 per cent in 2016 alone.

The tariff pattern is also affected by the competitive bidding dynamics prevalent in the country. Bidding in the sector has been very aggressive, which has forced developers to bring down costs and build an optimistic base-case scenario.

Given the current situation, what policy changes can interest bidders?

Although the steep fall in tariffs may have a bullish impact on the industry in the long run, in the short run, the industry is facing inevitable challenges. With tariffs plummeting significantly over a very short duration, there is apprehension amongst electricity buyers regarding the bottom and, as the wait for the bottom continues (which is difficult to predict), there is a marked slowdown in solar bids. As a result, hardly 1,000 MW of capacity has been offered by the central agencies and 2,250 MW by the states in 2017. Consequently, the capacity addition in this space has seen a marked slowdown. In addition, almost all tenders have been oversubscribed and this unpredictable nature of the tariff structure is becoming a cause for concern. Although some concerns have already been moderated post facto by a sharp decline in module prices, falling tariffs are unsustainable. Regulatory challenges pertaining to renewable purchase obligations and their compliance are also causing delays in payments from distribution utilities and are posing a risk of forced withdrawal by the utilities. Core challenges aside, issues pertaining to the timely possession of land and availability of power evacuation infrastructure remain two of the many challenging factors for players operating in the industry.

However, this is likely to be a temporary phenomenon. Although some speed bumps are imminent in the short term, the trajectory is more or less clear. While the pace at which it is progressing may slow down in the near term, in the long run, it will gain significant momentum. The existing projects should not be allowed to languish unnecessarily. Moreover, investors expect more clarity prior to the submission of bids.

If subsidies are removed/reduced, is it likely to provide a level playing field to the industry?

The imposition of anti-dumping duty or safeguard duty on imported solar panels is likely to result in its own uncertainty and challenges. While the merits of such duties are expected to be analysed and deliberated by competent authorities, it will surely create some uncertainties for projects that are under construction or for new bids that are under way. Ongoing investments need protection against unpredictable changes in the duty structure. Besides, any dislocation in the source of procurement of modules or price stabilisation is likely to spell trouble for the winning bidders.

The manufacturing capacity for solar cells and modules in India may not fully meet the demand of the industry and pose execution challenges. Although raising capital is somewhat challenging for many small- and medium-sized developers, as evident from the significant lag in tendered and installed capacity, the sector has, by and large, been benefiting from rapid falls in solar module prices, which is significantly easing financial and execution challenges.

Looking ahead

India offers enormous potential in the sustainable and clean energy sector in the solar space. However, a lower tariff structure, which is poised to provide a huge demand push for solar power in the long run, is posing some inevitable challenges in the short run.

The unsustainable nature of the rapidly falling tariffs has affected the cost competitiveness of pre-existing projects and the economics of new projects. Capacity addition in solar is estimated to be 55 per cent in the current fiscal. However, the net capacity addition by 2018 may witness a minor slowdown. Although there has been a flurry of investments despite squeezing bottom lines in the sector, bidders are losing interest owing to the rapidly falling tariff rates and its potential future implications.

The government is aware of the problems and is putting in place the right risk mitigation instruments, which would act as support mechanisms for the renewables sector in India, strengthen the ecosystem and harness the true potential of solar energy in the country.