Revised benchmark CAPEX will help the VGF bidding process under the NSM Phase 2
The Central Electricity Regulatory Commission (CERC) recently announced the revised benchmark capital cost for solar projects. In the order, dated October 25th 2012, the benchmark capital expenditure (CAPEX) for solar photovoltaic (PV) projects in India has been reduced to INR 8cr/MW. This is largely driven by the falling costs of PV modules. This has resulted in a 20% reduction from the earlier benchmark of INR 10cr/MW. As per our analysis, this revision of the benchmark CAPEX by the CERC ahead of the announcement of guidelines for phase two of the National Solar Mission (NSM), will pave the way for setting up of more reasonable allocation and execution procedures for projects under the policy.
- New allocation of projects under phase 2 of the NSM will be based on bidding for Viability Gap Funding (VGF)
- The maximum VGF that can be provided is based on a percentage of the benchmark CAPEX
- A more realistic estimate of the benchmark CAPEX benefits the bidders by correctly estimating the required guarantee to be paid
- As per our analysis, the revised benchmark CAPEX is a more realistic estimate of actual market costs
It is proposed that new allocations under the phase two of the NSM will use bidding based on Viability Gap Funding (VGF) as a mechanism to allocate new projects (to read more, download the October 2012 edition of the India Solar Compass). Under the VGF mechanism, the project developer that requires the minimum fund from the government to make their project viable will be allocated the project.
The maximum VGF that can be provided to any developer will be based on a fixed percentage of the benchmark capital cost. This percentage will be fixed by the Solar Energy Corporation of India (SECI). To draw out the guidelines for this mechanism, the SECI needs to set the limit of the funding it can provide to the projects in order to budget for the fund requirements for the upcoming bidding process. For example, if the VGF can be provided for up to 25% of the benchmark cost of INR 8cr/MW, SECI may need to provide a maximum VGF of INR 2cr/MW.
The mechanism will be designed in such a way that the developer asking for the minimum fund will be required to submit the maximum bank guarantees. This is done to ensure project completion. If the benchmark costs, as determined by CERC, do not reflect the actual costs, developers can be expected to pay unrealistic performance and other guarantees. A benchmark capital cost that reflects the actual market costs will only help in making the guarantees more reasonable. As per our analysis, this revision of the benchmark CAPEX by the CERC ahead of the announcement of guidelines for phase two of the NSM, will pave the way for setting up of more reasonable allocation and execution procedures for projects under the NSM.