India’s Gamble on a
Market Update – 2nd Quarter
By: Raj Prabhu, Managing Partner at Mercom Capital Group
By the end of the second quarter 2011, the whole of India’s
solar sector was waiting anxiously for the looming deadline of July 9th
- the date that project developers were to have secured funding for JNNSM Phase
1 (Batch 1) projects. This date has
gained even more significance after the Secretary of Ministry of New and
Renewable Energy (MNRE) publicly stated that projects that did not receive
funding by this date would not get an extension, with outright project
cancellations to follow. Companies were
given six months from the PPA signing date to secure their financing.
Here is a detailed
timeline for solar projects for Batch 1, Phase 1 under JNNSM.
According to the MNRE, approximately half the projects are
yet to achieve financial closure by the July 9th deadline. According to a senior MNRE official, 17 PV
projects and two CSP projects are said to have provided financial closure
details; this is out of 30 PV projects (150MW) and seven CSP projects (470MW)
that were approved in this batch.
India scrapped the feed-in-tariff (FIT) policy they
announced originally and replaced it with a reverse bidding mechanism where the
projects were awarded to the lowest bidder regardless of their previous
experience in developing solar projects. This has caused some aggressive bidding on the
part of project developers. The Union
Minister for New and Renewable Energy, Farooq Abdullah, was quoted as saying he
was “really shaken” when he saw the tariff go down from 18 rupees (US $0.40) to
12 rupees (US $0.27) in the bidding process.
The situation has been quite disconcerting since the chosen policy
basically states: “Aggressive bidding
welcome. No experience required.” In
Mercom’s initial analysis of the JNNSM program (PV
Magazine September 2010), we clearly outlined these risks and now these
contentious issues are turning out to be the main culprits contributing to the
difficulties in achieving financing.
Due to the uncertainty in the outcomes of Phase 1, Batch 1
projects, MNRE has now postponed the announcement of bidding for the balance of
Phase 1, Batch 2 until the end of 2011.
JNNSM - Phase I Status
Migration - Power Purchase Agreements (PPAs) for Migration projects
were signed on October 15, 2010 for 84MW (54MW-PV, 30MW-CSP).
Batch 1 – PPAs for Batch 1 projects were signed on January 10, 2011
for 620MW (150MW-PV, 470MW-CSP).
Batch 2 – Batch 2 projects are expected to be announced at the end
of 2011 for 300MW (PV). NTPC Vidyut Vyapar Nigam Ltd., the sole off-taker of
grid-connected solar power under JNNSM, (NVVN) originally confirmed that, like
Batch 1, there would be another auction process with a starting bid.
MNRE has also recently invited suggestions for the selection
process for the balance of capacity (300MW) of PV projects. But even before suggestions were made, the Director
of MNRE was quoted in the media suggesting that they want to raise the size of projects
from the current 5MW to a maximum of 20-25MW per developer, which implies that
MNRE may have already made up their minds to increase projects sizes.
In a move to expedite solar projects and avoid delays, the
Ministry of Environment and Forests recently announced that PV and CSP projects
are not required to obtain environmental clearance. This is positive for developers in the short
term, however it would be prudent for developers to voluntarily conduct
environmental studies to avoid future problems similar to those experienced by
project developers in numerous instances in the United States.
In a positive development for the industry, the government
approved gross budgeting support of Rs. 456 crore (US $102 million) which will
act as a backstop in the event of defaults in payments by the state
utilities. Most state utilities in India
operate under a loss and depend on central government subsidies to survive.
JNNSM’s decision to use reverse bidding instead of the FIT
has created confusion among state solar programs. Since most state policies and tariffs expired
on March 31, 2011, many states are in the process of developing new policies. Some will be adopting the same reverse bidding
program as JNNSM. Notable states with FITs
are Gujarat, Karnataka, Madhya Pradesh and possibly Maharashtra.
In other developments, the Central Electricity Regulatory Commission
has proposed a reduction in solar REC prices for the year 2012-2013, proposing
a floor price of Rs. 9880 (US $222) per MWh and a forbearance price of Rs.
13,960 (US $308), which represents a reduction of approximately 18 percent from
the 2010-2011 prices.
It now comes down to how many projects get funded in this
batch. If a large number of projects do
not get funded, it will be a clear indication from the markets that the policy
in its current form is not “bankable” and an immediate course correction will
be required to renew confidence in the financial community.