India poised to introduce dollar bidding for solar contracts in July

The Indian government is set to introduce next month its first U.S. dollar bidding process for solar tenders in an effort to attract greater overseas investment and cut development costs in the country.

Although the long-rumored plan is yet to be made public, Bloomberg has learned from Tarun Kapoor, joint secretary in India’s Renewable Energy Ministry, that bids for India’s first dollar-linked solar power contracts will soon be invited, with the country’s largest power generator – the state-backed NTPC – awarding between 500 MW to 1 GW of tenders in July.

NTPC will set up a private fund designed to manage the currency risk and shield retail customers from any fluctuations, with those awarded the contracts paid the rupee equivalent of the dollar tariff set to be determined by the bidding process.

According to Kapoor, dollar-linked tariffs could potentially lower borrowing costs by a third, which will likely tempt more international companies to India’s solar market. The Indian government has targeted the deployment of 100 GW of solar PV capacity by 2022. Currently, India’s solar PV footprint stands at 4.1 GW.

To achieve these lofty aims, the Prime Minister Narendra Modi needs to generate from somewhere around $94 billion in funding, and believes that by dollar-linking solar contracts, dollar-based financing will be easier to access. Debt based on U.S. dollars is typically charged at between 2-5% interest rates, whereas domestic rupee debt runs at 12-14% interest rates. Current solar installation costs in India are around Rs. 6 crore per MW, but dollar-denominated development could be as low as Rs. 4.5 crore per MW.

In shouldering the currency risk, India’s state-backed NTPC will shield many would-be investors, but could struggle to grow in a sufficiently sustainable fashion, insiders warn. "State-owned utilities could take a big hit on their balance sheet as the dollar hedging would be on their accounts," mused Vikram Solar CEO Gyanesh Chaudhary to Bloomberg.

Retailers in India would pay a fixed rupee tariff to NTPC for the solar power they consume – a necessary buffer for the estimated 740 million Indians that survive on less than $2 per day. Dollar-based tariffs would not work due to currency uncertainty and the fact that many distributors of electricity in India already sell their energy at below-cost in order to keep prices low. It is estimated that as much as 700 billion rupees ($11 billion) is lost annually by state electricity companies forced to provide below-cost energy.

This is a sizeable chunk of money each year and, in using the dollar, First Solar’s Sujoy Ghosh told Bloomberg, "there’s a risk of default of payment by distribution companies." The head of First Solar’s India operations added: "If the government is going to hedge it, is this sustainable?"

The Modi government hopes that foreign investors will be drawn to this scheme, however, with India’s minister for power and renewable energy Piyush Goyal stating earlier this month that "dollar tariffs will encourage foreign investors to come in."

"We will be creating a self-hedging mechanism to ensure that it does not cause any distress to the purchasing distribution companies," Goyal told the Financial Times. Distribution companies that purchase this solar power would also contribute to a "hedging reserve", which would be used to soften any costs incurred should the rupee depreciate.

According to the FT, SunEdison’s Asia-Pacific president Pashupathy Gopalan welcomes the proposal. "If the rupee depreciates by 15%, you’re dead," he said. Earlier this month, SunEdison announced that it is to invest more than $15 billion in India by 2022, and has already revealed plans to build a $4 billion solar panel factory in the Indian state of Gujarat. Over the next seven years, the U.S.-headquartered solar company hopes to develop 10 GW of solar PV capacity in India.

Last week, China’s Trina Solar revealed to pv magazine that it had signed a framework agreement to develop a 2 GW solar cell and module manufacturing facility in the country.