Mercom Exclusive: Solar Park Costs on the Rise in India

Solar parks are a vital piece to India’s solar future and were designed to reduce bottlenecks and bring down large-scale project development costs by allocating land and providing transmission infrastructure, big challenges for solar project development in India. The government recently doubled down and increased the proposed solar park capacity from 20 GW to 40 GW and is providing financial support to the tune of Rs.81 billion (~$1.23 billion) in Central Financial Assistance (CFA) and $100 million (~Rs.6.5 billion) from the World Bank.

While solar parks have played an important role in lowering tariffs in recently conducted reverse auctions, our research is finding that costs are actually increasing, squeezing the margins even more in a highly competitive auction market. Most of the developers have told Mercom that incomplete solar park infrastructure, exorbitant upfront fees, and not so transparent yearly charges are all adding to project costs with some developers calling for auctions outside of solar parks as they think it could be cheaper in some instances.

Even though all solar parks come under the same policy (solar parks are being developed in collaboration with state governments with Solar Energy Corporation of India (SECI) as the implementing agency), each solar park has a different fee structure which is leading to the varying in tariffs and project costs. In fact, two solar parks in the same state can have different fees. According to Mercom’s data, the solar park fee in India varies from Rs.3.73 million (~$58,039)/MW in Karnataka to Rs.10.58 million (~$164,335)/MW in Gujarat.

Land application fees (non-refundable one-time), upfront development charges (one-time), annual leases of land, and annual operation and maintenance (O&M) charges are the most common park fees or charges. However, developers are faced with differing stamp duties in each state and service taxes on all components. “Hidden charges end up inflating project costs,” commented one developer.

In each state or even in different areas in the same state, the topography and solar irradiation changes, and the distance from the substation also changes; all these lead to differences in park fees, stated a SECI official. If the park development agency or authority is spending more on construction of transmission infrastructure, land acquisition and levelling - it will obviously charge more, added the SECI official.

In response, developers said they understood that land lease charges and development charges can vary, but they were skeptical as to why operation and maintenance charges vary across states. That is an area they see where SECI or the implementing agency can make a change.

The Rewa Solar Park auction, which resulted in one of the lowest bids has become a model in terms of structuring a solar park fees and executing on infrastructure. There were no upfront park fees, the land lease and internal evacuation infrastructure was built with the World Bank loan. Overall the charges are comprehensive and straight forward according to a developer. These factors helped in the recent record low bids for the 750 MW auction.

All solar park capacities in the future will be looking at Rewa tariff rates. But if there is a mechanism in place to ensure similar rates, then developers are happy providing Rewa tariffs, commented one developer. In other parks, charges such as development and infrastructure fees are way too much, he added.

The Ghani Solar Park in Andhra Pradesh has a high development charge of Rs.4.2 million (~$65,316)/MW. On top of that, there are additional recurring charges for O&M, land leases, water supply charges, and a service charge of 15 percent on all these fees. There is a six percent annual escalation in Andhra Pradesh on recurring charges.

The 250 MW Kadapa Solar Park in Andhra Pradesh charges a one-time development cost of Rs.4.12 million (~$63,985)/MW. In addition, there are annual O&M charges calculated at the rate of Rs.0.32 million (~$4,970)/MW for the first year which escalates annually at the rate of six percent thereafter. Water used by the projects will be charged at a rate of Rs.10 (~$0.16)/kiloliter, which is fixed for the agreement period.

There is an annual land lease of Rs.1,000 (~$15.5)/acre for developing projects in the Kadapa Solar Park. Developers have to contribute an amount of Rs.0.5 million (~$7,765)/MW at a rate of Rs.0.1 million (~$1,553)/MW per year for five years. The first year installment is to be paid along with one-time solar park development expenses to Local Area Development Fund, which is separately maintained by Solar Park Power Developer.

Recently, the 250 MW Kadapa Solar Park auction resulted in a record low tariff of Rs.3.15 (~$0.049)/kWh under the National Solar Mission Phase-II, Batch-2, which had more to do with pent-up demand.

There are three phases of the Bhadla Solar Park in Rajasthan, and the rates differ in various phases as they are being developed by different park development agencies. Projects in the Bhadla Solar Park also have recurring O&M charges, land leases, and a 10 percent escalation per year.

“If park fees are the same or even in the same range across the country it will be beneficial for us [developers], and the tariffs we quote will also stabilize in the same range,” said a project developer.

The Pavagada Solar Park also has an upfront fee, recurring O&M charges and land leases with an annual escalation rate of five percent.

In some states the implementing agency purchases the land and in others they lease the land, stated an official at the Karnataka Solar Power Development Corporation (KSPDCL). The official said leasing the land is cheaper and in Karnataka “we have leased the land resulting in lower rates,” added the official.

In Gujarat, the Charanka Solar Park fees are increasing constantly, from Rs.4 million (~$62,124)/MW average to ~Rs.10 million (~$155,311)/MW, stated a project developer. An official at the Gujarat Energy Development Agency said that they have to provide water, access roads and that these cost the agency, so they want developers to pay them.

“The concept behind solar parks was to reduce bureaucracy, land acquisition issues, and to better facilitate transmission and evacuation. The goal of parks was always to reduce burden and costs, but now States are using parks as a way to generate additional revenue, which defeats the primary purpose,” commented Raj Prabhu, CEO and Co-founder of Mercom Capital Group. “Park fees need to have some consistency, should be transparent, and should be published online before auctions are conducted so there are no surprises and developers can model the upfront fees and annual charges into their bids,” added Prabhu. 

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