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This week PV Tech revealed the results of India’s latest solar auction in the state of Punjab and once again the winning bids came in very low. In a similar fashion to the summer’s two other state solar auctions in Madhya Pradesh and Telangana, the winning prices for Punjab came in at well under INR6/kWh (US$0.09). This is despite a recent analysis from Mercom Capital Group citing several bankers saying that only prices of INR6-6.5 per unit would be workable given India’s current market conditions.

PV developer SkyPower Southeast Asia Holdings' winning of a 50MW solar plant at a record low price of INR5.05/kWh in Madhya Pradesh prompted a stream of industry figures to express concern about the viability and quality of projects with such low tariffs. This was followed by news of winning projects having trouble signing power purchase agreements (PPAs) in Madhya Pradesh and peculiar project allocations in Telangana due to a substation-based bidding process. Concern was then heightened after PV developer Photon won a 50MW project in Punjab at INR5.09/kWh this week.

Tobias Engelmeier, the founder and managing director of consultancy firm Bridge to India, spoke to PV Tech about what lies behind these low bids and whether they really are as reckless as some would have us believe.

Tobias Engelmeier, founder and managing director of consultancy firm Bridge to India Image: Bridge to India

Engelmeier 'There are other players who want to be pioneers in this market and are ready to make almost any bet'. Image: MNRE

How will projects with such low prices come to fruition and who will finance them?

We predicted that developers would bid aggressively, but the lowest bids were lower than expected. There are always outliers. The projects will get built, but some owners will not get strong returns, because the margins are so low.

Low tariffs can still be bankable. There are various types of recourse finance available. Also, there are different types of contractual details in loan agreements, so just because a project is below a certain price does not mean that banks will not finance it.

What is really behind these low bids?

There are more and more players willing to come into the market at increasingly competitive tariffs. It means that they are making various aggressive assumptions about their business. 

Some players in the market are focusing on building a solar asset base, even if individual projects don’t yield returns. They then aim to give that asset base a value, which is more than the current value of returns from the individual projects within that asset base. There is scope for refinancing, of course. Yet, value expectations seem to go beyond that. It is unclear what that extra value could be.

The market is currently split into two. There are players who say there is no additional value and the returns of projects are not attractive, and therefore they don’t enter the market. They are standing on the side lines and watching in wonder at what is happening. Then there are other players who want to be pioneers in this market and are ready to make almost any bet.

Why does Madhya Pradesh appear reluctant to sign PPAs with some winning companies from its auction such as Hero Future Energies and Renew Power?

If you are a developer and take part in a tariff action, then your best result is to be at the high end of winning projects. That is the game. Now, the Madhya Pradesh government has said some players are giving power at ~INR5/kWh and therefore it should not have to pay the other winning players a rupee more. It has not yet issued Letters of Interest to Hero Future Energies and ReNew Power. This is not acceptable. Other than undermining confidence in the government’s processes, it would hold everyone in the market hostage to the lowest bidder. And the lowest bidder, as discussed before, might have other ideas than maximising project returns. I don’t think Madhya Pradesh will go down that path, I think it will sign the PPAs.

Why have some developers with less competitive bids been allocated capacity in Telangana?

The Telangana bidding is held around specific substations, which means that a developer must own land near that substation to be able to evacuate power through it. It splits the market from a state level to a substation level. While this makes sense from a point of view of maximising the use of existing infrastructure, it could create a market around certain substations that is no longer competitive. It is possible to have just two players owning suitable land near a certain substation. They then could win at tariffs that give them more profit than they would need. The state is at risk of overpaying. It just shows how difficult good market design is. By and large, however, the Telangana bid was very well handled. 

Is there concern about Punjab’s suitability for solar given the low winning bids? 

Punjab is the food basket of India. It has plenty of fertile land and agriculture. As a result, land prices are high. It is not the place to build large amounts of solar, whereas if you look at Madhya Pradesh, Rajasthan, Gujarat, even places in Tamil Nadu, there is unused land and baking heat, which makes these states suitable for solar. Punjab having tariffs at a similar rate to Madhya Pradesh makes little sense.

More solar auctions are coming up in Maharashtra, Karnataka, Gujarat and Uttar Pradesh. Do you expect to see similarly low prices? 

I think so. Unless something dramatically changes on the cost side, which I don't foresee, then we can expect prices of between INR5-5.50/kWh. Market tariffs are “sticky” once expectations have been set.