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Green | June 2012

Drop in solar tariffs in India

Steep falling module prices, rapid advancement in technology and falling demand in the German and European market have led to a massive reduction in the cost of solar power, say Sumanto Basu and Pallavi Bedi.

In order to reduce dependence on depleting fossil fuels and a means to tackle the rising fuel costs, countries across the world including India are increasingly focusing on the development of renewable energy as an alternative and viable source of energy. India being a tropical country has abundant sunlight (being available for longer hours per day and also in great intensity – the high temperatures can be a problem, but that is a separate issue). Overall, one of the prominent renewable energy resources in India is solar.

The Indian government under the Electricity Act 2003 (the principal statute covering major issues involving generation, transmission, distribution, and trading of power) has included provisions which accelerate the development of renewable sources of energy. Promoting solar power generation has recently been at the centre-stage of India’s plan to increase power generation from the renewable sector. One such initiative to promote solar power generation is the Jawaharlal Nehru National Solar Mission. The government through JNNSM wishes to promote ecologically sustainable growth while addressing India’s energy security challenge. The objective of JNNSM is to establish India as a global leader in solar energy by creating policy conditions for its diffusion across the country.

The JNNSM has set the ambitious target of deploying 20,000 MW of grid-connected solar power by 2022 in three phases. The first phase of JNNSM has been successfully completed, the second phase has been planned from 2013-2017 and the third phase from 2017-2022.

NTPC Vidyut Vyapar Nigam (NVVN), a wholly-owned subsidiary of NTPC has been designated as the nodal agency for (a) implementing the bidding process for selecting the solar power project developers under JNNSM and (b) procuring solar power by entering into Power Purchase Agreements (PPA) with solar power project developers.

Solar power developers are selected by way of a competitive bidding process wherein project developers meeting prescribed criteria are selected based on reverse bidding on tariff. For this purpose, NVVN issues a request for selection (RfS) document for development of solar photovoltaic (PV)/ solar thermal projects based on guidelines issued under the JNNSM. If short-listed proposals submitted are within the aggregate capacity to be allocated for the relevant batch, all short-listed projects are selected and a letter of intent is issued. In case, the short-listed proposals submitted are in excess of the aggregate capacity to be allocated for the relevant batch, a unique ‘price discovery mechanism’ or ‘reverse bidding’ process has been adopted, whereby the final selection of the projects from the list of short-listed projects is done on the basis of discounts to be offered by project developers on the applicable CERC approved tariff.

Price discovery under Phase I of JNSMM

Private solar developers have shown keen interest in developing solar power plants allocated under Phase I of JNNSM. Bids for Batch 1, Phase-I of the JNNSM saw solar developers offering an average discount of Rs 5.75 for solar PV projects and Rs 3.82 for solar thermal projects over the Central Electricity Regulatory Commission (CERC) approved tariff (as briefly discussed below). In Batch 1 the average bid for solar PV projects emerged to be Rs 12.16 kWh with the lowest bid at Rs 11.18 kWh and for solar thermal projects the average bid was Rs 11.48 kWh with the lowest bid at Rs 11.14 kWh. The main reason for such high tariffs was the substantial capital costs (including for the technology) that are required to develop a solar power project.

A drop in the solar tariff was indeed the market expectation for Batch 2. Nonetheless, discounts offered by solar developers surprised many in the industry. It appears that the steep falling module prices, rapid advancement in solar technology and falling demand in the German and European market led to a massive reduction in the cost of solar power. Solaire Direct, one of the largest solar power company in France, was the lowest bidder at Rs 7.49/kWh while Green Infra was the highest bidder at Rs 9.39/kWh.

Though it could be said that the price discovery mechanism has proved useful by making solar energy cheaper and closer to grid parity, it remains to be seen if these projects could prove to be viable at the proposed tariffs. Such issues, unfortunately, will only become clear with the passage of time. There is a concern that if such tariff bidding drops prices dramatically, then technological development (one of the objectives of the push for renewables) may suffer.

Tariffs for other solar projects in India

The main regulatory authorities that regulate the tariffs of generating companies are the CERC and the State Electricity Regulatory Commissions (SERC). CERC is responsible for determining and regulating tariff for generating companies owned or controlled by the Central government and for generating companies other than those owned or controlled by the Central government, if such companies have entered into a composite scheme for generation and sale of electricity in more than one state. SERCs determine and regulate tariff for intra state generation, supply, transmission and wheeling of electricity in the relevant states.

The CERC came out with tariff regulations to determine tariffs for various renewable energy projects. These CERC regulations are also a guiding factor for SERCs while dealing with matters related to energy generation from renewable energy sources.

Pursuant to tariff regulations, CERC issued the generic levellised tariff of Rs 17.91/kWh (without claiming accelerated depreciation) and Rs 14.95/kWh (after claiming accelerated depreciation) for solar PV and Rs 15.31/kWh (without claiming accelerated depreciation) and Rs 12.85/kWh (after claiming accelerated depreciation) for solar thermal projects, where power purchase agreements (PPA) were signed on or before 31 March 2011. The solar projects for which PPAs are signed subsequently till 31 March 2012, the tariff was revised to Rs 15.39/kWh (without claiming accelerated depreciation) and Rs 12.94/kWh (after claiming accelerated depreciation) and Rs 15.04/kWh (without claiming accelerated depreciation) and Rs 12.69/kWh (after claiming accelerated depreciation) for solar PV and solar thermal projects, respectively.

Recently, the CERC notified the CERC (Terms and conditions for tariff determination from renewable energy sources) Regulations 2012 which inter alia sets out new norms for determination of tariff for solar projects and modifies the existing tariff regulations. These new regulations (which came into effect on 1 April 2012) stipulate a huge decline of 41 per cent in normative capital cost for setting up of solar PV power plants. This decrease reflects the decrease in price for thin-film and crystalline modules in India. In terms of new regulations, the normative capital cost for setting up of solar PV projects has been reduced to Rs 1,000 lakhs/MW (from Rs 1,700 lakhs/MW under the earlier regulations).

Pursuant to these 2012 tariff regulations, CERC has lowered the generic levellised tariff for solar projects to Rs 10.39/kWh (without claiming accelerated depreciation) and Rs 9.35/kWh (after claiming accelerated depreciation) for solar PV and Rs 12.46/kWh (without claiming accelerated depreciation) and Rs 11.22/kWh (after claiming accelerated depreciation) for solar thermal projects.

A trend of reduction of tariffs for solar projects can also be seen in the tariffs determined by the various SERCs. Gujarat Electricity Regulatory Commission, the electricity regulator for Gujarat (one of the leading states of India for solar projects), has recently revised the tariff for procurement of power from solar projects. The solar tariff in Gujarat for solar PV projects has moved down from Rs 15/kWh (for the first 12 years) for solar power projects commissioned up to 28 January 2012 to Rs 9.28/kWh (for the first 12 years) for solar power projects commissioned between 1 April 2012 to 31 March 2013.
Similarly, we understand that the Rajasthan Electricity Regulatory Commission has also recently revised downwards the tariff for procurement of solar power in Rajasthan. While the existing tariff for solar PV projects commissioned or that would be commissioned till 31 March 2012 is Rs 13.19/kWh (claiming accelerated depreciation), the proposed tariff for projects which are commissioned by 31 March 2014 is Rs 8.85/kWh (claiming accelerated depreciation).

Following suit, most likely other states such as Maharashtra, Karnataka and Tamil Nadu (prominent locations for setting-up of solar projects) will also move towards lowering their solar tariffs.

In addition to being an alternative source of energy, one of the significant benefits of generation of power from renewable energy sources (such as solar) is that it is safe and can make an important contribution to clean, sustainable and diversified future electric supplies. A drop in solar tariffs seems to be a favourable move – subject to it not affecting the technological innovation and longevity of the projects. Due to this downward trend in tariffs, hopefully, in due course solar power will start contributing in a significant manner in India’s total energy mix.
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