Solar bidding: A boon or a bane?

The question of solar bid viability has been doing the rounds for a while now. The point of concern is whether solar power projects are feasible for companies when bids are being benchmarked as low as Rs.4.43 per unit by the government. While some experts consider this trend to be a paradigm shift, there are many who have expressed caution over aggressive bidding. However, regardless of the stand one might take, the fact remains that the winning bids in state auctions have fallen by approximately 60% in the last five years – from an average of Rs. 12.16 per unit in 2010 to Rs. 4.63 per unit in 2015.

"The current financial year is extremely important for the solar market in India as we are targeting an addition of 6 GW of solar installations, thus doubling the present installed capacity. Is the current solar bidding process, in this scenario, a boon or a bane?"

So is this really viable?

In light of the current scenario, aggressive bidding may be unsustainable in the long term. This is because most bidders do not have much experience in executing such projects from the ground. As a result, financial investors are bound to face difficulties as uncertainty and cost overrun can affect their targeted IRR. I strongly recommend that the financial investors consider proper risk due diligence before opting for an aggressive bidding strategy.

The sector is also witnessing reluctance from banks towards financing projects that are priced at under Rs. 5 per unit, and for good reason. There are numerous risks in the market that need to be understood. It is largely perceived that utilities may start delaying payments. Additionally, grid instability continues to remain a problem, and changes in weather conditions may result in varying and unpredictable generation. These risks are currently being discounted which should not be the case. And when you consider these risks, it is obvious that anything under Rs. 5 per unit may become uncompetitive and unviable; however, only time will tell.

On the other hand, there is substantial discourse that supports the government’s recommendation for reverse bidding. Industry experts believe that deciding what value is the right benchmark is difficult with project development cost coming down so quickly. A bid that looks low today can become attractive tomorrow in the face of another, lower bid. There is also the thought that, with market growth surpassing expectation, the reverse bidding approach may actually be the best strategy; it is aggressive, but also consumer oriented.

"Some consider the aggressive solar bidding trend to be a paradigm shift, while others express caution. However, regardless of the stand one might take, the fact remains that the winning bids in state auctions have fallen by approximately 60% in the last five years – from an average of Rs. 12.16 per unit in 2010 to Rs. 4.63 per unit in 2015. Is this really viable?"

The primary question, however, is whether the bids and quotations are being successfully converted into on-ground projects, within the targeted timelines. What are the business models that are allowing players to make such low bids? Are these bidders playing the role of market disruptors or are such bids being made with the sole aim of capturing market share? Whatever the answer, the point remains that project delivery within a particular time-frame is a concern.

Unfortunately, it is possible that there will be delays in project deliveries as bidders attempt to take advantage of the reduced costs brought on by such delays. But this tactic can deter international investors who prefer transparency – the deliberate delaying of projects to take advantage of falling equipment prices does not bode well for the industry.

So what can be done to bring about regulation and make bids that can be viable?

Most solutions are reactive, such as introducing a cap on tariffs if allocated capacities aren’t commissioned or blacklisting players who win bids but fail to deliver. These measures discourage unfair bidding practices and give other companies a fair playing ground. There are some proactive measures too, such as restricting the capacity allocation to a single bidder until some percentage of the project is executed. This can lead to more participation availability in the market space. However, the need of the hour is to enforce strict quality and performance standards for the projects that are being implemented, verified by an independent accredited agency. This will ensure output for which the bids were placed. Currently, manufacturing is not viable in the solar energy sector due to the low pricing and lack of visibility of market access in light of reverse bidding, which is currently based on lower prices prevalent in neighbouring countries. The government may also examine creating a financial instrument/VGF to push deployment of solar projects of domestic origin. Many countries adopt such practices (viz. FINAME scheme in Brasil). Why should India shy away from framing similar policy? Boosting manufacturing will contribute to the Prime Minister’s vision for ‘Make in India’ as well as create opportunities for exports.

"What are the business models that are allowing players to make such low bids for solar projects? And are these bids and quotations being successfully converted into on-ground projects, within the targeted timelines?"

The solar market is facing a tough time - marred by what some may even call erroneous practices, difficulty in financing and delayed implementation. Appropriate market correction will renew investor interest in the sector as well as momentum as India moves towards achieving the target of 100 GW by 2022. However, if we continue to move further in the direction in which we are going, tariffs are bound to increase and project developers are going to face losses. The current financial year is extremely important for the solar market in India as we are targeting an addition of 6 GW of solar installations, thus doubling the present installed capacity. The next few months to a year are crucial; and most players, Suzlon included, are expecting to see them result in a positive change.