The Economic Survey, a precursor to the federal budget, has indicated that the central government may reconsider renewable energy subsidies since tariffs have fallen sharply

Tariffs for solar and wind energy in India has fallen precipitously in recent times (Photo by Erich Westendarp)

The central government may soon relook at the current subsidies and incentives it gives to promote renewable energy as part of its agenda of building energy access and clean sources of power in the country.

The Economic Survey 2017-18, released as a precursor of the upcoming Union Budget on February 1, has presented a case in support of the move to address concerns due to falling prices of the renewable energy. “Currently, the levelised tariff is approaching grid parity. There is a case for revisiting the subsidies and incentives being given to the renewable energy sector,” said the survey.

With the tariffs of both the solar and wind falling continuously and breaking all-time low records, there are concerns that the state governments and discoms may go back on power purchase agreements (PPA) that were signed on fixed tariffs, which are higher than the current bids. “The discovery of very low tariffs through the auctioning process, though a welcome news, possibly contributed to some demands for renegotiation of the already signed PPAs. Some discoms have hinted at the possibility of renegotiating the PPAs signed by them at tariffs higher than those in the recent bids,” the survey said.

PPAs are agreements signed between the power generator and power purchasers and in the case of renewable energy; they were signed on the basis of the pre-determined Feed-in tariffs as fixed by the state regulatory electricity commissions.

But as seen in the recent bids, the solar power tariff dropped to a historic low of INR 2.44 (USD 0.04) per unit in May last year. This freefall in the prices of green energy has continued in the wind energy sector as well. In the first auction held for the wind-based power in February 2017, the feed-in tariff dropped to INR 3.46 per unit, which later again in October last year touched a historic low of INR 2.64 per unit.

Renegotiating contracts

This crash in renewable tariffs is seen as a driving force behind states that are putting pressure on power developers to renegotiate contracts at lower tariffs throwing investments of developers at a risk. “Renegotiation of PPAs are likely to face tough resistance from the developers and may result in legal battles. This introduces uncertainty for the sector and banks which are already facing the issue of NPAs (non-performing assets), may become apprehensive of lending to the sector in the future. There are cases where the developers have already made huge investments into renewable energy projects based on the expected stream of revenue,” said the survey.

The survey mentioned that some discoms have hinted the possibility of renegotiating the exisiting PPAs signed by them at the higher tariffs than those in the recent bids and the renegotiation of the tariffs could result in the risk of worth Rs. 48,000 crore for investments.

In July last year, the Uttar Pradesh electricity board had put pressure on the clean energy developers to voluntarily lower solar tariffs that were already agreed upon. Karnataka and Andhra Pradesh as well cancelled just a year-old PPAs that were valid for at least next 10-15 years.

The Central government, which wants to fulfil its ambitious target of installing 175GW of renewable energy by 2022, has been discouraging states from revising the signed PPAs, which can derail the solar programme. As a deterrant, the government announced in August that it would levy a minimum penalty of 50% of the tariff if the solar agreements are scrapped unilaterally by the states.

Even as some states want to shorten the duration of PPAs, the economic survey has said, “Making the term of future PPAs shorter may not be desirable as it could only increase the cost of capital without much gains.” The survey has proposed risk-mitigating instruments such as payment guarantee fund or a foreign exchange fund available to developers to provide them with financial security.

The economic survey has devoted an entire chapter on sustainable development, energy and climate change and has focused on the International Solar Alliance as well and called it “a trillion dollar opportunity in solar”.

“It is not a valid logic to link subsidies with the renegotiations of PPAs by the discoms as subsidies are only applicable in the residential and non-profit sector. Commercial solar installations are not taking the government help,” said Vishal Jain, chief Financial Officer of 8minutes, a solar power producer. “However, for the residential sector we would have liked the subsidies to continue for at least another year so that the tariffs in residential sector achieve parity with grid.”