Exclusive India update: Solar projects without financing will be cancelled

Furthermore, a spokesperson at NTPC Vidyut Vyapar Nigam Ltd. (NVVN) told Mercom Capital Group that the capacity for the next batch of projects will be increased based on the size of the cancelled projects. For example, if 50 MW worth of projects get cancelled then the next batch capacity will be 300 MW plus 50 MW.

No consequence

According to NVVN, the project developers that could not get their projects financed will still be allowed to bid again and will not face any consequences. Inexperienced developers can continue to delay and hold up projects though, unless the policy is changed to include stringent qualification requirements.

MNRE recently held a meeting to review policy suggestions from the industry. Based on the results of this meeting, new policy guidelines will be announced in the last week of July and will incorporate some of these suggestions.

Indian solar market gambles on its reverse auction

The funding deadline for the first batch of solar projects under the Indian solar mission has now passed. While the final project numbers have not been released, it appears that roughly half failed to secure funds. Here, Mercom Capital Group discusses the mission’s progress to date.

By the end of the second quarter of 2011, the whole of India’s solar sector was anxiously awaiting the looming July 9 deadline – the point when developers should have secured their funding for the Jawaharlal Nehru National Solar Mission’s (JNNSMs) Phase 1, Batch 1 solar projects.

This date gained even more significance after the Secretary of Ministry of New and Renewable Energy (MNRE) publicly stated that projects which did not receive funding by July 9, would not receive an extension, and that project cancellations would follow.

However, while companies had to have secured funding by the start of the month, they were given until July 24 to provide documentation. Overall, they were given six months from the date they signed their power purchase agreements (PPA) to obtain financing.

See a detailed timeline for solar projects for Batch 1, Phase 1 under JNNSM.

According to the MNRE, approximately half the projects failed to achieve financial closure by the given deadline. One senior MNRE official said that just 17 photovoltaic projects and two concentrated solar power (CSP) projects provided financial closure details. This is out of 30 photovoltaic projects, worth 150 megawatts, and seven CSP projects, worth 470 megawatts that were approved in the batch.

Reverse bidding

India scrapped its feed-in-tariff policy last August due to an overwhelming number of applications and replaced it with a reverse bidding mechanism where solar projects were awarded to the lowest bidder regardless of their previous experience in developing such projects.

This resulted in some aggressive bidding on the part of project developers. The Union Minister for New and Renewable Energy, Farooq Abdullah, was quoted as saying he was "really shaken" when he saw the tariff go down from 18 rupees (0.40 U.S. cents) to 12 rupees (0.27 0.40 U.S. cents) in the bidding process. ?

The situation has been quite disconcerting since the chosen policy basically states: "Aggressive bidding welcome. No experience required."

In Mercom’s initial analysis of the JNNSM program (see pv magazine 9/2010), the group clearly outlined these risks: now these contentious issues are turning out to be the main culprits contributing to the difficulties in achieving financing.

Furthermore, due to the uncertainty in the outcomes of Phase 1, Batch 1 projects, MNRE has now postponed the announcement of bidding for the balance of Phase 1, Batch 2 projects until the end of 2011.

Acceleration

The MNRE has also recently invited suggestions for the selection process for the balance of capacity – 300 megawatts – of photovoltaic projects. But even before suggestions were made, the Director of MNRE was quoted in the media as saying that suggesting that they want to raise the size of projects from the current five megawatts to a maximum of between 20 and 25 megawatts per developer, which suggests that those at MNRE have already made up their minds to increase projects sizes. ?

In a move to expedite solar projects and avoid delays, the Ministry of Environment and Forests recently announced that both photovoltaic and CSP projects are not required to obtain environmental clearance. This is helpful for developers in the short term. However, it would be prudent for them to voluntarily conduct environmental studies to avoid future problems. ?

In a positive development for the industry, the government has approved gross budgeting support of Rs. 456 crore (102 million U.S. dollars), which will act as a backstop in the event of payment defaults by the state utilities. Most state utilities in India operate under a loss and depend on central government subsidies to survive.?

In other developments, the Central Electricity Regulatory Commission has proposed a reduction in solar renewable energy credit (REC) prices for the year 2012 to 2013, proposing a floor price of Rs. 9,880 (222 U.S. dollars) per megawatt hour and a forbearance price of Rs. 13,960 (308 U.S. dollars), which represents a reduction of approximately 18 percent from the 2010 to 2011 prices.?

Confusion

JNNSM’s decision to use reverse bidding instead of the feed-in tariff has created confusion among state solar programs. Since most state policies and tariffs expired on March 31, 2011, many states are in the process of developing new policies.

Some will be adopting the same reverse bidding program as JNNSM. Notable states with feed-in tariffs are Gujarat, Karnataka, Madhya Pradesh and possibly Maharashtra. ?

In conclusion, it now comes down to how many projects are funded in this batch. If a large number of projects do not receive funding, it will be a clear indication from the markets that the policy in its current form is not "bankable" and an immediate course correction will be required to renew confidence in the financial community.

Raj Prabhu is managing partner at Mercom Capital Group.

Mercom Capital Group is a clean energy communications and consulting firm with offices in the U.S. and India. Mercom consults its clients on market entry, strategy, policy, due-diligence and joint-ventures. For more information, visit: www.mercomcapital.com. To get a copy of Mercom’s market intelligence reports, visit: mercomcapital.com/market_intelligence.php