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Why the discoms may be pushing their luck too far on renewable power pacts

The sharp decline in the tariffs of renewable power projects is again giving the government headaches. It also exposes the sector to a massive interest rate risk, as data shows most of the dip is built on cheap money. 

Early this year, once the bidders had been forced to live without dirt cheap solar modules from China, prices had shot up to Rs 2.92 per kWh (kilowatt hour). But as 2020 draws to a close, prices have slid back massively. A 500-Mw solar auction conducted by Gujarat Urja Vikas Nigam Limited saw four companies offer the winning bid of Rs 1.99 including NTPC, Torrent Power, Aditya Birla Renewables and Saudi Arabia-based Aljomaih Energy and Water Company. Like a 100-metre race, the number clipped a paisa off the Rs 2 per kWh recorded just a month ago. 

The latest bids are just handshaking distance from Rs 1.90, a rate India was supposed to reach ten years later, according to a joint report by New Delhi-based The Energy Research Institute (Teri) and US-based Climate Policy Initiative. The report was released in 2019. 

Policy makers can be excused for being surprised. The deflationary trend in prices of electricity from solar power projects is not new. They have declined by 70 per cent in less than three years according to Vibhuti Garg, energy economist at Institute for Energy Economics and Financial Analysis. The problem is that their pace is not slackening off and that is making financial experts worried. 

The dips and the expectation of future ones also create problems for the ministry of new and renewable energy. In January this year, the ministry’s arm Solar Energy Corporation of India (SECI) was faced with a new sort of risk. Prices of electricity from solar projects had risen reversing a long period of decline. Adani Green Energy and Azure Power won bids at two auctions for Rs 2.92.

Power distribution companies (Discom) in all states fed with the relentless fall of power rates at solar farms were not willing to buy at the higher rates. The lower rates have made the discoms believe correctly, that each subsequent bid shall lower rates even more. This gave the discoms an opportunity to put pressure on developers to renegotiate the older rates. 

Some succumbed but all complained to the central ministry about the arm twisting. The ugliest of those was in 2019 between the Andhra Pradesh Discoms and a clutch of renewable generation companies. The former refused to honour the long-term Power Purchase Agreements the previous government had signed with these companies. 

To bring sanity, SECI decided to step in this year. It began to bundle higher priced projects with lower priced ones. For instance it combined the Adani and the Azure bids with a lower winning bid of Rs 2.50 made by SoftBank, AMP Energy, EDEN Renewables, ReNew Power Winners in a subsequent auction in February. The SECI-pooled tariffs were offered to the Discoms as Power Sales Agreement (PSA). Since these are also potentially tradable paper they can eventually do away with the rigid Power Purchase Agreements that locked in tariffs for over twenty years. It also removed the need for Discoms to find out a balance between them and their retail tariffs. It was a bright idea. It was also understood that SECI shall do this exercise twice a year.

The snag is that the cash-strapped Discoms had seen what was happening and were willing to wait it out till fresh lower bids came in again. Power minister R K Singh has recently acknowledged that most of these PSAs are lying unsigned with SECI. In September they were of the order of 16.8 Gw. The sum has ballooned even more and now with the latest offer of Rs 1.99, the game has just got merrier. 

The risks, as Mudit Jain, Head, Research at Tata Cleantech, which finances renewable sector projects pointed out at a webinar organised by JMK Research & Analytics was these new rates were hanging by a slim edge. Technology has helped prices in solar power sector to dip no doubt, but they do not change frequently enough to warrant the yo-yo changes in the Indian renewables market. The change in rates from January to December this year was financed by the sharp drop in domestic interest costs, Jain said. 

So any upward move in rates by the RBI can challenge the cost economics of these companies. As inflation clouds the rate cutting energy of RBI and even spurs banks to be less accommodative, the developers could be locked into a higher cost trajectory. “The current discovered rates in the solar auctions leave no breathing space available, for them”, says Garg.

An indication of the worsening metric is the cost of insurance cover. Since last year, the insurance companies have turned distinctly uncomfortable about cutting premium rates for renewable energy projects. This year, despite the economic downturn, the rates have hardened as insurers weigh the risk of receivables from some of these projects going sour. 

What could this mean for the PSAs lying unsold on the table of power minister R K Singh? It is possible that as the new year dawns, Discoms might figure that prices are unlikely to come down further and so it makes sense to buy them at the current prices? The alternatives are not pleasant for them. The renewables sector in India is going through an inevitable phase of consolidation. The successful bidders in the mega projects this year are the big companies like ReNew Power, Adani Green and the latest entrant into the space, NTPC. Garg points out NTPC has been able to generate low cost financing at an average of less than 7.75 per cent, while the others are raising low cost funds from abroad. 

These companies will be able to negotiate strongly with the Discoms as NTPC, for instance, has done for off take from its coal plants, shutting off supplies for non payment. 

The larger generators will be able to sustain the higher costs once the tide of low-cost finance leaves the shores. It is plainly a risky bet for the Discoms to play for more gains in this environment. The minister may have reasons to feel cheerful soon.

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