Cap on solar tariffs a threat to capacity addition plans, project viability: Ind-Ra

Any cap on solar power tariffs in future auctions could dampen free market sentiment and prove to be an Achilles heel for the plans of the Ministry of New and Renewable Energy (MNRE) to achieve the solar power capacity target of 100 GW by 2022, India Ratings and Research (Ind-Ra) said today.

"Confusion over applicable safeguard duty, increased project cost due to the depreciating Indian rupee against the US dollar and a lower margin of safety (due to highly competitive tariffs) remain the key challenges to the solar power industry's growth," Ind-Ra said in a statement.

Auctions for at least 3.9 GW capacity were scrapped during 5MFY19 (five months this fiscal) compared with about 11.86 GW of fresh capacity auctioned during the period. The major reason behind the scrapping of these bids may be higher quoted tariffs compared with minimum tariffs quoted in past auctions, it said.

It is pertinent to note that the weighted average tariff (as per capacity allocated) quoted by winning bidders during 5MFY19 stood at Rs 2.74/kWh. As observed by Ind-Ra, perceiving a high counter party-related risk, parties had bid higher tariffs in auctions held by states, it said.

Also, in case of the applicability of 25 per cent safeguard duty, tariffs could further increase by Rs 0.30 to 0.35/kWh.

According to market sources, the MNRE is contemplating on capping the tariff on solar power generated using imported cells and modules at Rs 2.68/kWh, which includes the safeguard duty amount of Rs 0.30 to 0.35/kWh.

This tariff is lower than what bidders have quoted in the recent past. If the MNRE decides to go ahead with this capping, it may lead to non-participation by a significant number of potential bidders in future auctions. This may negatively affect the MNRE's yearly 30GW capacity addition plan until FYE20, it added.

The progress on auctions is already lagging due to frequent changes in the policy on the levy of safeguard duty on solar panel and module imports. Any such move by the MNRE will only worsen the progress of future auctions. Also, some solar plants are delaying the import of solar modules until there is clarity on safeguard duty, as it may pose risks to them, such as the levy of liquidated damages and the reduction in project tariff due to delayed project execution, it said.

In Ind-Ra's opinion, the whole purpose of doing reverse e-auction for renewables is to create market competition and let competition decide the tariff. Any attempt to tamper the tariff could lead to the non-achievement of the capacity addition target and a negative impact on project viability.

Given the solar power industry is still grappling with the significant reduction in solar tariffs post the feed-in tariff regime, any further reduction may be too soon to deal with for participants. Also, lower auction volumes (in case bidders decide against bidding below their threshold level) could lead to sub-optimal volumes available to domestic panel and module manufacturers. This would affect their ability to significantly ramp up their production capacity to achieve economies of scale, it added.