Madhya Pradesh bid results: record low tariffs, tight margins

Last week, 300 MW of solar capacity was auctioned in the Indian state of Madhya Pradesh (MP). The record low tariffs surprised most observers. Canadian developer Sky Power offered to sell solar power at INR 5.05/kWh (50 MW capacity). The bids closed at INR 5.64/kWh with the median tariff at INR 5.34/kWh. The auction received a lot of interest and over 2,200 MW of projects were offered at tariffs below INR 6/kWh.

  • Solar tariffs in India are falling dramatically
  • At these tariffs, effectively, there should be no need for incentives anymore
  • Are return expectations sufficient for scaling up?

At these tariffs, our estimate of equity IRRs is between 11-15% assuming market standard technical and financial parameters. These returns are too low in the Indian context but before we get into the implication of these bids on the project development landscape, let us first look at the bigger picture and the results for the solar and power sector in India.

Recently concluded bids for new coal-fired power capacity in Andhra Pradesh saw winning tariffs of INR 4.27-4.98/kWh. In 2013, in Rajasthan and Tamil Nadu, coal power was bid at INR 5.41-5.66/kWh (refer). With the new MP tariffs, solar power seems to have graduated to become a mainstream option for power generation in the country. Effectively, there should be no need for incentives anymore – at least up until the point when grid limits are reached and balancing becomes necessary.

This begs the question about the future of the upcoming viability gap funding (VGF) scheme to be implemented by SECI where the proposed levelized tariff is at INR 5.79/kWh (set at INR 5.43/kWh for first year with an escalation of INR 0.05/kWh for next 20 years). This, along with the results from the upcoming NTPC tender will require recalibration of benchmarks for these bids. In another proposed project of 750 MW in Madhya Pradesh with 50% funding from World Bank, the proposed tariffs should be reconsidered. All this suggests that solar is moving faster than expected.

Though the availability (supply) of projects is set to grow by a factor of 10 this year (from 1 to 10 GW), margin pressure does not seem to ease off. Existing and new players are aggressively building ever larger portfolios. This Madhya Pradesh allocation of 300 MW was oversubscribed by over 1,200%. The ongoing allocation for India’s largest tender till date for 2,000 MW in Telangana was also oversubscribed by 250%.

If these indications are anything to go by, India has already come to a stage where the country can shift focus from direct fiscal support to solar power to strengthening the transmission infrastructure, building balancing capacity for the grid and normalizing power prices. Even the implementation of Renewable Purchase Obligations (RPOs) looks within reach.

However, many industry stakeholders argue that return on their investment is not sustainable for scaling up. There is obviously merit in that argument but the government is not too concerned about it as it sees investments and commitments continuing to pile up.

The way things are going, it seems that competition amongst the solar developers will soon be replaced by solar competing with other sources of power in the country. In that process, margins might recover.

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