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Weekly Update:Project developers in Gujarat may face a retrospective reduction in tariffs

Weekly Update:Project developers in Gujarat may face a retrospective reduction in tariffs

Gujarat Urja Vikas Nigam Limited (GUVNL), the off-taker for 852 MW of installed solar capacity in the state, has submitted a petition to Gujarat Electricity Regulatory Commission (GERC) to intervene and facilitate the re-negotiation of tariffs for the already installed projects.

  • GUVNL claims that a capital cost of INR 165 m/MW was assumed to determine the tariff , however, most developers have been able to set up projects within 120 m/MW
  • GUVNL explains that the assumption was made because of comments submitted by the developers who claimed existence of high capital costs
  • According to BRIDGE TO INDIA, even a windfall gain for developers does not justify a retrospective action unless the developers agree on it

Projects that were commissioned (or ‘deemed to be commissioned’) before January 29th 2012, have been awarded a tariff of INR 15/kWh for the first 12 years and INR 5/kWh for the remaining 13 years. This works out to an effective average tariff of INR 12.54/kWh. GUVNL claims that a capital cost of INR 165 m/MW was assumed to determine the tariff offered. However, most developers have been able to set up their projects at a capital cost of INR 90 m to INR 120 m. This has resulted in a windfall gain for the developers.

Ideally, GUVNL should not have signed the Power Purchase Agreements (PPAs) at the given tariff if it thought that the capital costs assumed did not reflect the actual price point in the market. However, GUVNL claims that the developers insisted on the existence of high capital costs while submitting their comments during the allocation process. This, according to GUVNL, amounts to a fault on the developer’s part. Therefore, as an off-taker, GUVNL has the right to ask for a retrospective change in tariffs.

GUVNL is of the opinion that a ‘reasonable and prudent tariff’ should be around INR 9/kWh (refer). For now, the petition has been listed for admittance and the hearing has been scheduled for July 23rd 2013.

BRIDGE TO INDIA believes that this step is detrimental to investor confidence. The state entities should honor the conditions of the signed agreement. Solar prices have been falling and most tariff determination orders at the central and state level become outdated by the time they are released. This is the primary reason why allocation processes in India usually follow a bidding based mechanism to determine the tariffs. Even a windfall gain for the developers, if any, does not justify a retrospective action unless the developers are willing to voluntarily agree to any such change.

According to us, projects in Gujarat are receiving a reasonable Internal Rate of Return (IRR) of 15% to 18%, and are not making a windfall gain to begin with. If Gujarat wants to continue to promote itself as an investor friendly state that offers policy stability, the state government should intervene and ensure that a retrospective action is not taken. If GUVNL is of the opinion that it should not be paying the existing tariffs, it should blame the policy formation process and ask the state for compensation. More details of the petition are awaited.

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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