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Weekly Update: Gujarat’s claim for retrospective revision in tariffs is fundamentally flawed

Weekly Update: Gujarat’s claim for retrospective revision in tariffs is fundamentally flawed

In a recent petition, Gujarat’s energy company Gujarat Urja Vikas Nigam Ltd. (GUVNL) claims that the levelized tariff of INR 12.54/kWh being paid to the state’s solar power developers is too high and should be reduced (refer to our last weekly update). The petition (refer) states that actual project costs incurred by developers in 2011 (INR 120-130m/MW) were significantly lower than initially assumed (INR 165m/MW). As a result, the developers ended up making ‘windfall gains’ while putting an unnecessary financial burden on the government and, by extension, on the public. Two years after signing of the PPAs, the GUVNL is asking for a retrospective reduction in the levelized tariff to INR 9/kWh.

  • Project cost considered before was rightly insisted on by developers as they were based on the costs of the few installations in India that had been set up till then
  • Non-adherence to the 70:30 debt equity ratio by the developers should not be help against them
  • A decrease in solar tariff will not have much impact on the total energy bill however, may discourage investors to further invest

We believe that GUVNL’s claim is fundamentally flawed.

As per the tariff order dated 29 th January 2010, the Government of Gujarat (GoG) decided on the levelized tariff for solar power of INR 12.54/kWh. This tariff was finalized considering that the capital cost for setting up the projects was INR 165m per MW. GUVNL claims that the developers insisted on the existence of high capital costs while submitting their comments during the allocation process while they ended up setting up projects at INR 120-130m per MW. We agree that projects were later commissioned at lower costs, however, the project cost considered at that time was rightly insisted on by developers as there were very few installations in India then and these costs were based on the cost of projects that had been set up till date. This is reinforced by the fact that in February 2010, one month after the Gujarat tariff order, the Central Electricity Regulatory Commission (CERC) proposed a tariff of INR 17.91/kWh for projects under the NSM in the FY 2010-2011, based on an assumed capital cost of 169m/MW.

The tariff of INR 12.54/kWh is also not ‘too high’ even when assuming project costs of INR 120-130m. The tariff was also in line with the levelized tariff of INR 12.16/kWh determined by the competitive bidding process under the NSM which took place much later in November 2010, almost 10 months after the Gujarat tariff order. Even under the NSM bids, at the time it was assumed that developers probably speculated the reduction in solar costs that were going to follow. This means that the tariff computed by the GoG coincidentally turned out to be fair. If the prices for solar PV hadn’t fallen, it would have given a fairly low return and probably would not have attracted the kind of investment that it did.

Further, GUVNL’s claim of non-adherence to the 70:30 debt equity ratio by developers may be true for some but should not be held against the developers. A debt equity ratio of 70:30 is a general thumb rule for financing projects as per most banks. However, in case a developer is not able to get financing and he puts his own balance sheet on the line to obtain recourse loans. Most of the debt funding in Gujarat based on recourse finance and benefits of such a move should rightly accrue to the developer.

The reluctance of banks to lend to some of the projects also shows that projects were not making windfall gains. We also believe that even if developers managed to leverage the financing structure to their own advantage by employing more debt, then the benefits of that too should accrue to them.

Further, the GUVNL states that the revision would be an act in the interest of the public as otherwise a cost differential of INR 3.54/kWh (between 12.54 and 9) would be passed on to the end consumer in the form of increased cost of power. Solar accounts for around 1.4% of the total electricity consumption in Gujarat. The cost of solar power has a minute share in the total energy bill of the consumer. This 3.54 excess cost will lead to an increase in the price of electricity by around INR 0.035/unit. However, with a loss in investor sentiment, the decrease in tariff may lead to losses in terms of investments forgone with the cancellation of new prospective infrastructure projects in the state.

Moreover, as per the Gujarat Energy Development Agency (GEDA), the GoG had accounted for an expense of INR 21 bn/year for solar tariff payments (refer). This means that the payment liability should have been adjusted in the budgets for the 25 years to fulfill the government’s obligations as per the PPAs.

BRIDGE TO INDIA believes that the GERC should not accept the petition. The petition itself has shaken investor confidence in solar power projects in India. With an investment of INR 80bn at stake, any revision of a closed contract will not only adversely affect India’s solar story, but will also have a negative impact on investments in other infrastructure projects in India in general.

This post is an excerpt from this week’s INDIA SOLAR WEEKLY MARKET UPDATE. Sign up to our mailing list to receive these updates every week.

You can view our archive of INDIA SOLAR WEEKLY MARKET UPDATES here.

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