2017 saw new record lows for solar tariffs in India. Most believe they fell too low, too fast. What does 2018 have in store for tariffs? My contrarian views on the topic in the year end issue of Solar Quarter magazine.

1. w w w . s o l a r q u a r t e r . c o m Solar Quarter • December 2017 20
When it comes to solar the most crucial variable is tariff.
In a business where capex cost is fairly standard for all
developers and debt too is available to most developers
at pricing that falls in a narrow band, it is the required
or targeted return on equity, translated into bid tariff,
which determines if a bidder secures capacity at all in
a reverse auction regime, and if an acceptable return is
made on the capacity thus secured.
The last reported historic low of Rs.2.44 (3.75cents) was
achieved in a tender floated by Solar Energy Corporation
of India (“SECI”) in May 2017. At the time of writing this
article SECI has reportedly managed to secure a tariff
of Rs. 2.47 in bidding carried out after a long hiatus
of about six months. This parity with the previous low
was achieved despite much speculation that tariffs were
due a major upward correction as they had fallen too
low, too fast, particularly in the backdrop of hardening
module prices. So what managed to offset upward
pressure on tariffs to result in new levels at par with the
previous lows?
Giving a downward push to tariffs, and thus acting as
counterweights to module price rise, are de-risked PPA’s
and an increasingly benign risk perception of solar, the
latter being a trend which is manifesting itself at a global
level. In August the Ministry of Power released its official
Guidelines for Tariff based Competitive Bidding for Solar
PV which seeks to close several of the loopholes in
earlier PPA’s which resulted in power not being offtaken,
either due to unavailability of transmission, or Discom’s
arbitrarily instructing developers to back down from
generation. The workarounds are not water tight (loss of
revenue due to transmission constraints can take three
years to recover while only 50% of generation lost from
back down is compensated) but PPA’s incorporating
key operative clauses of the Guidelines will be viewed
as being substantially de-risked in comparison to their
previous avatars. It is also worth pointing out that in the
case of tenders where intermediate offtakers (such as
SECI) in turn sell power to state Discoms, the Guidelines
mandate a two tier Payment Security mechanism covering
payments from the latter to the former. This mechanism
Industry Insights
comprises a combination of a Letter of Credit and a State
Government Guarantee – with the Tripartite Agreement
signed between the RBI, Central Governments and State
Governments specifically qualifying as the Guarantee.
This is noteworthy because a draft version of the
Guidelines circulated to stakeholders earlier in February
allowed for an element of optionality around the topic
of State Government Guarantee.
Global trends also support a further softening of tariffs
in India. The past six months may have seen a lull in
domestic activity, but the rest of the world has been
pretty busy tendering out capacity. And the implications
are clear, particularly because solar is as global a business
as it gets. A common pool of capital freely chases solar
development risk & returns across countries. This free
movement of capital, along with the standardized nature
and cost of the components, combined with an input
(sunlight) which is equally free of cost and predictably
available everywhere on the globe will result in a strong
tendency for tariff levels to move in unison. This is
not to say that tariffs should nominally equalize across
countries. Differences in currency & country risk,
offtake credit risk, cost of borrowing, irradiation and
individual nature of electricity markets will prevent such
parity, but adjusted for these differences global tariffs
should all gravitate towards a narrow band. This also
means that boundaries which are tested in one country
will set benchmarks for others. While tariff levels may
remain high in certain countries where they are policy
driven (feed in tariff), countries which have shifted to
market driven price discovery regimes such as India
have seen tariff levels fall steeply. For example Chile
(Rs.1.40/2.15cents), Mexico (Rs.1.28/1.97cents) and
Saudi Arabia (Rs.1.16/1.78cents) have achieved tariffs
almost half of Indian levels in the preceding four months
and this hints at just the kind of boundaries that may be
tested in the future.
This brings me to my final point. As developers get ever
more comfortable with the project specific contractual
protections offered to the solar top line in India, and take
their cues from events unfolding globally, the spread
w w w . s o l a r q u a r t e r . c o m Solar Quarter • December 2017 20
Gagan Sidhu
The author is a Senior Independent Adviser who
advises clients in the areas of renewable energy
finance, investment & strategy. He was previously
CFO at GMR Renewable Energy, and prior to that
an Investment Banker with ING Bank across several
global locations.
Where are Indian solar tariffs headed?
between cost of borrowing and the return they require
on their investment will increasingly tighten. Cost of
borrowing itself will also face continued downward
pressure both at the primary bank project finance level
as well as the refinance level, including via a selectively
receptive bond market which may even allow developers to
pierce domestic bank base rates at some point for the right
portfolios. Global tariff trends all point in this direction.
So what does all this mean for tariffs in 2018? Barring
future shocks to capex including as a result of adverse
impact of anti dumping duties or safeguard duties flowing
from the investigation initiated by the Ministry of Finance a
couple of days ago, I expect tariffs to fall further and maybe
even come close to testing the Rs. 2.00 (3.00cents) level for
central offtake projects. A waiver of inter-state transmission
charges for solar projects completed by December 31,
2019 will act as a further suppressive force over tariffs, at
least for those tenders which provide sufficient runway to
allow for completion before the deadline. Once achieved,
such tariff levels will have far reaching consequences
for the country and will mark an inflection point clearly
separating companies that were involved in the business of
development and energy generation in the past, and those
that will define this space in the future. I will be keenly
tracking the outcome of next year’s auctions to see if my
hunch proves to be correct, as I am sure you will too.
As a very interesting year for
renewable energy draws to a
close in India, it’s a good time to do
some crystal ball gazing to try and
predict what lies in store for us in
the new year. I am a firm believer
that the staggering financial (just
imagine a zero national oil import bill
for a moment) and societal benefits
to be had from decarbonization
will be centered around solar based
generation on the one hand, and
transmission & storage which will
evolve to keep pace on the other.
Other forms of renewable generation
will certainly make significant
contributions, but solar will
anchor it all.