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Solar power tariffs: A race to the bottom?

LiveMint logoLiveMint 13-04-2017 R. Sree Ram

Solar power tariff hit a new low of Rs3.15 per unit in an auction on Wednesday. The previous low was Rs3.30 per unit discovered in February, while in an auction a year ago, the discovered tariff was about 40% higher at Rs4.34 per unit.

Plunging solar tariffs may well have a disruptive impact on the power sector in the short term. The steep fall in tariffs is triggering a rethink among states, leading to a slowing down of fresh tenders and auctioning activity. According to Mercom Capital Group, a clean energy communications firm, states want new power purchase agreements (PPAs) to match the newly discovered solar tariffs and this is slowing tendering activity.

Jharkhand which auctioned about 1,000 megawatts of solar capacity more than a year back is yet to sign PPAs, points out Mercom. “In this case the discom (power distribution company) was unwilling to sign the PPAs for tariffs above Rs5 per kWh claiming it is not viable for the discom,” adds Mercom. A derived unit of energy, kWh stands for kilowatt hour.

Subdued demand is a major reason for the reluctance from states to sign PPAs. But the weak financial condition of discoms is also forcing them to lean towards cheaper tariffs. This can spell trouble for PPAs signed at higher tariffs some time back, as discoms will now find them unpalatable.

“Due to aggressive renewable energy targets in some states such as Rajasthan and Tamil Nadu, solar grew even at high tariff levels, only to leave these states struggling with finances a few years later and finding it difficult to take on new solar generation,” adds Mercom.

According to an industry expert, every PPA has legal sanctity. But the weak financial condition of discoms and availability of cheaper energy options (electricity is cheaper in the spot energy market) means projects locked in at higher prices can face indirect risks such as payment delays or power offtake curtailments, the expert points out.

The risks are not confined to the green energy sector. JM Financial Institutional Securities Ltd in a report last month warned that weak demand and the poor financial condition of state electricity boards can hit conventional energy contracts as well. “With depressed power demand, even projects with PPAs can suffer from delayed payments/PPA cancellations, wherein the rates are high (>Rs4.5/kWh). This is because cheaper power is available in long-term bids at around Rs4/kWh, while solar/wind bids have plunged to Rs3.4-3.5/kWh levels. Power is available on exchanges at Rs2.5/kWh,” pointed out JM Financial.

Of course, renewable energy and the spot electricity market are still relatively small in scale (compared to the whole power market). So they may not have a large impact yet. But the growing prevalence of renewable energy, plunging tariffs and easing congestion in the transmission sector, which makes it easier for states to buy electricity in the spot market, mean these segments are emerging as reliable options and they can have a disruptive impact on the power sector.

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