The poor financial health of India’s power distribution companies (DISCOMs) is deemed to be the weakest link in the Indian power sector and a huge headache for project developers.  It is not just critical for the revival of the power sector but also for the health of public sector banks. Recent estimates by CRISIL suggest that poor progress on tariff reforms and high AT&C losses have cost led to accumulated DISCOM losses of INR 3.75 trillion (USD 56 billion). To put this in perspective: this is equivalent to around 2.7% of India’s GDP.

  • Central government wants states to issue bonds for raising funds at 8.5-9% to refinance power firms’ current high-cost loans (13-14%)
  • In return for reforms, central government will offer funds from schemes such as the Integrated Power Development System and Deen Dayal Upadhyaya Gram Jyoti Yojana
  • The long term growth prospects of the solar sector are contingent upon the financial health of the DISCOMs

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On Sunday, 5th June 2015, one of India’s leading economic journalists, Swaminathan Aiyar, in his weekly column “Swaminomics”, wrote that India should wait for five years before trying to implement big plans for solar (refer). He argues that solar is still a comparatively expensive energy generation technology and that because India is an evening peak country, increasing the share of solar would be a “double whammy”, by driving up indirect costs for thermal, peak power generating sources. As a result, he concludes, India should go all out on solar only after it is fully established that the cost breakthrough has been achieved and the technology is more mature. While there are interesting insights in the article, we disagree with his conclusions. Here is why.

  • Solar costs are not as high as Swami claims. In fact, upcoming NSM bids will show that it’s neck to neck with        new thermal projects.
  • India is an evening peak country right now but as the economy develops the peak will move into the daytime          (cooling).
  • Global investors already see the social and economic appeal of solar and are moving out from coal to the                sector.

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The Indian Parliament recently concluded a literally washed out monsoon session. The key Amendments for Electricity Act 2003, which the Parliamentary Standing Committee had already recommended was ready but not tabled (refer here to read why this matters for the solar sector). Another important proposal to amend the National Tariff Policy 2005 has been severely watered down (refer here to read about its proposed impact on the solar sector).

  • Amendments to the Electricity Act are ready but could not be introduced in the parliament.
  • Dropping of the compulsory adherence clause in the amendment to the National Tariff Policy will undermine the impact of the reform.
  • Written replies to questions raised by parliamentarians revealed several aspects of various government initiatives.

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India has been discussing dollar dominated bids for solar projects in the country for some time now. The rationale is to attract low cost international capital and reduce hedging costs by pooling currency risk with the ultimate objective of reducing the cost of solar power. An initial allocation for 1 GW of projects is believed to be in planning stages and guidelines on bidding process are expected within the next couple of months.

  • The government hopes to lower the cost of solar power by around 10%
  • BRIDGE TO INDIA analysis shows that cost reduction may be slightly less at about 5% but these projects may attract new capital to the sector
  • It is worth going through the added complexity of Dollar dominated bids only if the government is confident of using this mechanism for much larger capacity, say 10 GW or more

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Financial bids were opened today (3rd August 2015) for the 2,000 MW solar tender in Telangana. This is the single largest allocation in the country till date. According to unconfirmed sources, the lowest tariff for this bid has been quoted at INR 5.17/kWh by SkyPower. Sky Power had also quoted the lowest tariff in Madhya Pradesh at INR 5.05/kWh.

  • Despite the manifold increase in the number and capacity of allocations in India, competition remains intense
  • Appetite of developers has also increased manifold and several new players have entered the market
  • We expect NSM bids for 420 MW in Rajasthan to witness even more intense competition

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