Brazil’s first solar auction at the end of last week raised eyebrows with incredibly low project prices averaging out at less than US$87/MWh. Tobias Engelmeier, managing director of the consultancy Bridge to India discusses what lessons Brazil could take from India’s experiences with solar auctions.
How low did prices get in India’s earlier PV auctions?
The 2010/2011 reverse bidding auctions reduced the solar tariffs by as much as 30% from the benchmark tariff set by the regulator. Since then, solar tariffs have fallen by another 40% to the current 6-7 INR/kWh.
What was the fate of these lowest-priced projects?
In the initial stages, there were lots of 'cowboys' bidding at tariffs that were not viable and making risky bets on future cost reductions of solar equipment. About 60-70% of initial National Solar Mission projects were won by such cowboys. Of their projects, around half were never built. At least half of those that were built have compromised significantly on quality, leading to sub-par generation and loss-making projects.
What was the wider consequence of this on the Indian solar sector as a whole?
Lenders were put off and only agreed to provide recourse lending – thus severely restricting the available capital. Quality EPCs were priced out of the market. Professional investors with a solid financial model did not get projects. These bad projects have dented the initial enthusiasm.
How has this issue been addressed in India?
In part, there was a process of learning and professionalisation from all parties involved: policies became better – better off-takes, larger projects, more technical requirements – lenders became better at understanding and evaluating risks. The bad project developers exited and Indian EPCs became better. The last auctions yielded much more stable prices and were mostly won by credible – largely Indian – players.
How can governments ensure good value from projects without incentivising unrealistic offers?
By moving away from short-term incentives such as capital subsidies or tax benefits to longer term incentives such as cheaper debt. Another option is to penalise low performance of projects. Long lock-in periods for asset sale (one to three years). Separating short-term investors from strategic ones is difficult – an excessive reliance on technical know-how and track record will discourage professional new entrants.
Which countries do you think have the most robust auction processes and what is it about them that has worked so well?
I cannot comment. I would think that overall, given the learning curve, the auction process in India served the country well.
What advice would you give those designing the auctions in Brazil on domestic content rules?
No domestic content rules. First focus on building a thriving market by bringing down the cost of solar. Later, when the market is very large, it will be easy to convince companies to manufacture there. There is no “early mover advantage” in manufacturing.