India lowers solar tariffs to favour local production

The federal government has reduced solar tariffs for central public sector companies to boost domestic production of photovoltaic cells and modules

In the second week of April 2020, the Ministry of New and Renewable Energy (MNRE) announced a reduction in tariff by 70 paisa to INR 2.8 (USD 4 cents) per unit under the second phase of the Central Public Sector Undertaking (CPSU) programme, for the development 12 GW of solar projects. The ministry also increased the timeframe for implementation of these projects from 18 to 24 months.

An order from the MNRE’s office amending the scheme stated, “The usage charge would not be more than Rs 2.8 per unit, which shall be exclusive to any other third party charges like wheeling and transmission charges and losses, point of connections charges and losses, cross-subsidy surcharge, state load dispatch centre/regional load dispatch centre charges, etc as may be applicable.”

Henceforth, all bidders will now have to bid below Rs 2.8 per unit under the auction for solar projects in the scheme. It may be recalled that earlier, the usage charge was fixed at Rs 3.8 per unit.

Reasoning why the tariff was reduced, an official source in the MNRE told India Climate Dialogue, “Many of the CPSUs were not in a position to go in for a larger amount of production. This move is aimed at increasing the scope and coverage. Construction during the lockdown period should not be counted and this should be treated as a forced measure, wherein no penalty will be imposed. It is equally applicable to the CPSU scheme as it is for other renewable energy projects.”

On what this development entails for the solar sector in India, the MNRE official explained, “The aim of CPSU is two-fold. One is that it will create a kind of RE (renewable energy) movement among the public sector undertakings. Secondly, it concerns only those solar cells that are manufactured domestically. Therefore, domestic content is a requirement in the CPSU scheme. This will help in creating a market for solar energy systems and devices which are made in the country.”

This is a unique scheme structured specifically to promote domestically manufactured modules without contravention of World Trade Organisation (WTO) rules, said Vinay Rustagi, Managing Director, Bridge to India, a cleantech consultancy. So far, the response has been poor with tenders being undersubscribed heavily.

“The main problem was high tariff as end users have had to bear various open access charges in addition to solar power cost, which raised the total cost of power to levels of around INR 5-6. The government is hoping to improve uptake with a reduction in tariff.”

While the move is positive, public sector undertakings would still find it more attractive to procure solar power on their own without any tendering and module procurement restrictions, Rustagi said.

Opinions in the industry are a mixed bag. Vinay Kumar, founder and CEO, VARP Power, said that as far the raising of ceiling tariff for CPSU tenders is concerned, MNRE has already taken a decision to remove ceiling tariffs for both solar and wind tenders.

“So it is a moot point whether the raising of ceiling tariffs is a good measure. Tariffs in tenders where SECI (Solar Energy Corporation of India) and NTPC (earlier known as National Thermal Power Corporation) are the off-takers are now at the level of INR 2.5 to 2.6 per kwh. CPSUs that will be the off takers in these tenders may not have as good a credit rating as do SECI and NTPC,” Kumar said. “Therefore, purely from an off-taker credit quality perspective, we expect the tariffs to be INR 2.5 per KWH. Moreover, a ceiling of INR 2.8 per kwh is fair, considering the current tariff trends in recent bids and the off-taker quality in upcoming CPSU tenders.”

IREDA to take charge

The nodal agency for conducting auctions of these projects has been changed as well. The Indian Renewable Energy Development Agency (IREDA) will now complete the task instead of SECI.

The order adds that IREDA would be entrusted with the task of conducting bidding amongst the government producers for allocation of solar power project capacity under the scheme with viability gap funding (VGF) as bid parameter to select the project proponent.

An additional clause to the scheme provides that IREDA can also allot solar projects of up to 50 MW to interested entity at the L-1 rate (lowest tariff bid) discovered in most recent auction, within four months of that auction. Rustagi believes this is a marginal move and is unlikely to have a major impact.

Extended timeline

In terms of the timeline to implement the project, the letter says that projects with up to 500 MW capacity would be implemented within 24 months from date of letter of award. In projects of more than 500 MW capacity, the project capacity up to 500 MW would be commissioned within 24 months from the date of letter of award and balance capacity to be commissioned in next six months. Earlier, the scheme provided the timeframe of 18 months for commissioning the projects from the date of letter of award.

Welcoming the move, Vinay Kumar said this is a policy level change effected by the MNRE and is not unique to any single tender. “It is designed to give the developers ample time, especially on the land acquisition and financial closure, both of which tend to take time. Increasing the project timelines for larger projects from 18 months to 24 months is a welcome move, given the dual challenges of land acquisition and achieving financial closure in these turbulent times.”

Strengthening the domestic sector

The MNRE official said that making the domestic sector independent is an aim that is being pursued by policymakers for a while now. “This is a larger aim that we have been pursuing since many years,” he said. “If there is a gap in the domestic manufacture, somewhere it needs to be compensated. The larger goal and challenge lie in whether we can increase the share of domestic manufacturing in the solar energy sector.”

There are efforts to address these issues. The CPSU scheme is linked to domestic manufacture. Rationalisation of the duty is being made as well. There was a safeguard duty that was introduced and aimed at domestic manufacturers, so that they are not in a disadvantageous position, in case there is dumping from China or any other country, the official said.

However, production cost in some countries, including China, is cheaper than in India. “So, there are two conflicting objectives. One is that do we go on buying solar cells and the other is buying electricity at a lesser cost,” he said “Should we go in for that on a large scale or do we opt only for domestically made cells or modules? The aim has always been to create a self-reliant domestic industry, as is the case with wind energy. In solar, irrespective of whether it is a company of Indian origin or a multinational company, if they have a production facility within the country, it has a different kind of economic spill over. So, the government is sending signals in that direction and the aim is indigenisation of solar energy technologies, which are not available in India.”