Shadow on states' solar energy strategy

Just a short drive away from the Kadapa solar park in Andhra Pradesh, where tariffs dipped to a record low of Rs 3.15 this week, is the unfinished coal-based Rayalaseema thermal power project. In the works since 2011, its sixth and largest unit of 600 Mw is yet to be commissioned.

As the price of solar power takes a deep dive, other fossil fuel power projects could follow the example of the Rayalaseema plant. There was 46,000 Mw of thermal and gas power capacity stranded across states as on March 31. The older projects are stranded, says Pankaj Batra, member (planning) of Central Electricity Authority, because states have not built sufficient infrastructure to deliver this idle power to the consumer. The lack of interest by the states is because power from these projects is suddenly looking costly compared to renewables. Given the huge capital investments required, the states baulk at building the connections. Many solar and other renewable projects plan to access the capital markets. Yet, their counter-party risks could jeopardise their ratings. This is because the solutions the states are looking for are themselves built on offering fresh guarantees to make them bankable. These are projects whose tariffs have been chopped, based on those guarantees, essentially the long-term power purchase agreements (PPA) offered to solar power developers and subsidies for rooftop solar projects.

“Power projects, in general, are hostage to the behaviour of state utilities. Notwithstanding the Centre’s emphasis on renewable power, the discoms often veer off the established payment pattern,” says Siva Subramanian, associate director, infrastructure, at India Ratings. Maharashtra last year cut its PPA with a clutch of wind power projects as prices dipped and resorted to buying power from the cheaper spot market. It was mayhem for the developers and the banks that had lent them money.  

The discoms have a problem; as state government-funded entities, they are reluctant to add debt. A Deutsche Bank research report by its senior economist Kaushik Das notes, “Our analysis of state fiscal balances indicates that Rajasthan and Uttar Pradesh will face the highest stress in coping with the fiscal implication of the UDAY scheme, followed by Haryana, Andhra Pradesh and Madhya Pradesh, given their relatively weak fiscal positions.” Subramanian also estimates that except for Uttar Pradesh, Haryana and Karnataka, all major states have excess power of 10 billion units each for the next few years. So, offers of PPAs, either for fossil fuel or for solar energy, will be at a premium.

Despite those numbers, the Kadapa solar park, with its neighbour in Anantapur, plans to become the poster boy of renewable energy in India. Both are in the Rayalaseema region, which fancies itself as best placed to tap solar energy in the country. In Anantapur, the ultra mega solar park has a planned capacity of 1,500 Mw. Once up and running, it will dwarf Gujarat’s current 900 Mw capacity and will possibly be the largest such integrated facility in the world. But this is predicated on committed offtake by the state through long-term PPAs.

Essentially, these are the same issues developers of coal-based power plants faced in the last decade. To lower tariffs from those plants, the states offered them bundled coal supply as feedstock. In return, they had to offer low tariffs for an agreed number of years. The coal scam was the result of this “accounting game”, as Rahul Tongia, Fellow at Brookings, describes it.

At its heart, the PPA is a payment security mechanism. A state plans to set up a solar power plant and bids it out to a developer. The developer sells the power generated to the state at the bid rate, typically lower than the price of electricity flowing through the grid. The state profits because of this difference and the developer receives a committed cash flow, as well as any tax incentive or subsidy the government provides. It can be applied to both mega projects and smaller ones like the rooftop ones Delhi is promoting. But, there are distinct signs of a “bubble” developing, says Kaushik Bandyopadhyay, senior adviser with the International Institute of Sustainable Development. “The attractiveness of the PPA is justifying the cost of the solar project, but it should be the other way round.” Also, he says, the low prices are built on a glut of solar cells in the European and Chinese markets. This drives down the cost of building a solar utility, which makes the discoms happy as their power purchase bill comes down. But it militates against plans to make India the host for manufacturing renewable energy equipment, thereby creating a “deadly dilemma” for Indian policy makers.

In fact, recognising the need to keep electricity tariffs down, the PPAs of most state governments so far have allowed for “open” sourcing of components, or freedom to buy from within India or abroad.  

Tongia says there is a more fundamental problem. While there may be some justification for a utility-level solar project to receive some subsidy, a rooftop solar project should not be promoted by any state at all with subsidies. It will appeal to industrial units and those who can offer a large roof. “They will move into solar and out of the conventional grid at the expense of the poor who cannot afford to build these units,” he explains. This will create more pressure on the conventional grid for price recovery. Given the need to balance the funding for large-scale solar projects and the expected profusion of rooftop solar units, we are looking at a disbalanced grid and weakened finance for power.