New Delhi: Declining solar power tariffs have resulted in fewer clean energy deals because of concerns that electricity offtake commitments at higher tariffs may not be honoured.
Deal makers and experts say that the proposed transactions for the solar projects with high tariffs are increasingly being put on a back burner in the backdrop of record low tariffs of Rs2.44 per unit recorded last week at Bhadla in Rajasthan. This is due to concerns over whether the electricity distribution companies (discoms) will honour their commitments for projects earlier awarded at high tariffs and not waver on signing power purchase agreements (PPAs).
“Recent spate of sub Rs3/ unit price of solar energy has created significant uncertainty in the transaction space of Indian power industry. Leave aside assets that don’t have PPAs; investors are increasingly getting cagey about buying assets, solar or thermal, with firm offtake agreements specially those struck at higher tariffs. There are concerns on whether discoms will honour the PPA terms or force generators to reconsider the offered tariff. Even if the PPAs are honoured, in the present scenario of stagnant demand and low PLFs (plant load factors), these assets will find themselves placed lower on the dispatch merit order thereby reducing its overall attractiveness,” said Abhishek Poddar, a partner at consulting firm A.T. Kearney Ltd.
Solar power tariffs have declined sharply because of plunging prices of solar modules. Also, overseas developers with deep pockets have made a bet on the Indian solar space driven by its scale and their own outlook of a benign interest rate regime.
Driven by the government’s ambitions for a green economy, India’s solar power generation capacity has more than tripled to 10,000MW from 2,650MW as of 26 May 2014.
“From deals perspective, last few months’ outcome definitely has put investors in a cautious mode. There are many questions in their mind. So far in deals, pipeline was a big consideration around valuations / pricing of deals. With wind also moving towards auctions, and prices in auctions for both wind and solar the way they are headed, fist big question is – is there a pipeline concept anymore? Can this specific player be sure of winning projects in auctions? What pricing to take in valuing this pipeline?” said Manish Aggarwal, partner and head of corporate finance at consulting firm KPMG in India.
There are worrying signs. Some discoms are wavering on signing PPAs for projects awarded at higher tariffs, according to consulting firm Bridge to India.
Some believe that the activity in the deal space will return once more clarity emerges.
“The whole din around the low prices needs to settle down and finally needs to be seen whether the older contracts are honoured by the off-takers. As long as they are willing to do so, the deal activity will recommence. However, given the residual risks, the valuations could be altered. Any such disruption (low solar tariffs) automatically disrupts the status quo,” said Anish De, partner at the infrastructure and government practice at KPMG.
The solar space has already seen a significant decline in tariffs from Rs10.95-12.76 per kWh in 2010-11. The year 2017 brought the prices further down from Rs3.30 per kWh at Rewa solar park in February to Rs3.15 per kWh at Kadapa in Andhra Pradesh last month and to Rs2.62 per kWh discovered on Wednesday.
Acme Solar Holdings Pvt. Ltd and SBG Cleantech Ltd further dragged down the tariffs by placing winning bids of Rs2.44 per kWh and Rs2.45 per kWh respectively on Friday at an auction conducted by state-run Solar Energy Corporation of India for Bhadla solar park.
“Next big issue is Utility side – we have already been witnessing many issues around curtailment, non-signing of PPAs in many states, and with these bids, another concern to investors is how will utilities see this and respond to? There are already instances when utilities are refusing to sign new PPAs unless prices are revised downwards to bid prices. Further, there are noises around past PPAs too,” added Aggarwal.
Bridge to India had earlier termed the recent low winning bids for solar power projects in India “unsustainable” and warned that “inadequate risk pricing poses a severe viability challenge for the sector”, Mint reported.
It has been some time since a large deal has taken place in the Indian green energy space. Marque deals in the Indian renewable energy sector include Tata Power Co. Ltd buying the entire 1.1 gigawatt renewable energy portfolio of Welspun Energy Ltd for $1.4 billion and Hyderabad-based Greenko Energies Pvt. Ltd, backed by Singapore’s sovereign wealth fund GIC Holdings Pte. and Abu Dhabi Investment Authority, acquiring SunEdison’s Indian assets for $392 million last year.