Competitive bidding in Solar Projects: Is This a Sustainable Strategy?

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Competitive bidding in electricity market was the outcome of introduction of electricity act 2003 in which regulators (Sec 63) and subsequently the national tariff policy 2006 mandated the utilities to procure power on competitive basis rather than on the basis of MOUs with the power producers.  Infact from Jan 2011 all the public sector power producers are also required to supply power through competitive bidding. Initially the competitive bidding was introduced in case of procurement from the new thermal power plants, and this led to significant reduction in the electricity procurement prices as low as 1.19 Rs/kWh in case of Reliance Sasan Project.

Taking the experience of bidding framework in the coal base power projects, Government of India initiated the bidding in Solar projects and under the JNNSM phase batch I the price discovery was achieved to Rs. 12.16 against the benchmark tariff of Rs. 17.91 Rs/kWh which was an average discount of 32% to the CERC determined benchmark tariff for solar projects. In subsequent bids of JNNSM batch II an average tariff of Rs. 8.77 was discovered with a discount of 43% in the benchmark tariff of CERs of 15.39 Rs/kWh. These price reductions were predominantly due to the falling cost of solar PV modules and global oversupply of PV modules. As the tariffs were very low than the benchmark tariff of CERC the lenders were apprehensive on the viability of these projects and non recourse finance were not available. Still the JNNSM phase I could achieve its targets and it can be considered as a successful bid. Taking the experience of JNNSM phase I bidding some of the state governments also initiated the competitive bidding for fulfilling their RPO targets, however, these bids stuck in some of the disputes due to lack of clarity among the regulators as well as the developers and the projects in the states such as Andhra Pradesh, Rajasthan, and Tamilnadu are yet to take off for implementation.

The excessive focus on the tariff has led to cost reduction strategies among the solar project developers and in tern this is affecting the quality installation and some of the projects are reflecting the poor CUFs. These cost reduction strategies are leading to the danger of early failure of the solar projects and could shake the confidence of investors in the PV technology and the Government of India’s targets of achieving 20 GW by 2017. This is also affecting in deployment of new technologies in the solar PV sector and the focus on the cost reduction is leading the second grade technology selection. There is nothing wrong in the basic framework of competitive bidding.

JNNSM Batch 1JNNSM B2

 

Government of India recently introduced the Viability Gap Funding (VGF) as yet another measure for competitive bidding rather than tariff based bidding, and the bid has been subscribed over three times the allotted capacity. It is still to evaluate the outcome of this bid and attractiveness of VGF based scheme in terms of bankability of solar projects.

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