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India’s solar developers are voicing concern that foreign investors are promising to supply clean power at rates that are unrealistically low, threatening to destabilize the industry.
Companies such as SkyPower Global of Toronto have undercut Indian companies in recent auctions for contracts to build solar power plants. Local rivals including Azure Power and CLP India Pvt. say their competitors may never be able to build the capacity they promise.
The dispute is a test for Prime Minister Narendra Modi’s effort to draw in as much as $100 billion for solar power, reducing emissions from plants fired by fossil-fuels and the greenhouse gases they emit. Modi’s government is preparing to announce India’s pledge for reducing emissions, the last major developing economy to do so, before the next round of global warming talks culminate in December in Paris.
“The tariffs that are coming, we find them quite challenging now,” said Samir Ashta, director of finance and chief financial officer at Mumbai-based CLP India Pvt., a wholly owned subsidiary of CLP Holdings Ltd. “We will look to enter the market, but at these tariffs it’s a challenge.”
In July, SkyPower Global won half of the 300 megawatts of solar capacity auctioned off in the state of Madhya Pradesh by offering to supply electricity at Rs.5.05 a kilowatt-hour. It was the lowest rate ever quoted and more than 10% below the highest bid from Hero Future Energies Pvt. The next month, SkyPower won the contract to develop 200 megawatts of solar in Telangana with a bid of Rs.5.17 a kilowatt-hour, again the lowest offered in that auction.
“It’s not wildly out of whack” to see those prices, said Jenny Chase, lead solar analyst at Bloomberg New Energy Finance in Zurich. She noted a project in Dubai by Saudi Arabia’s ACWA Power International bid 5.85 cents a kilowatt-hour, a rate that “would be totally impossible in India.”
Other low bids globally have been in Jordan for 6 cents to 7 cents a kilowatt-hour and in Brazil where more than 800 megawatts of solar capacity was handed out at an average of 8.4 cents per kilowatt-hour.
SunEdison Inc., the world’s largest renewable-energy developer, pulled out of a 20-megawatt solar development in India in April 2014 because of local equipment shortages and prices that made it unviable. The project had been won in an Indian government auction several months earlier.
SkyPower didn’t respond to requests for comment. Pashupathy Gopalan, SunEdison Asia Pacific’s president, said his company isn’t bidding too low.
“We’ll not bid aggressively just for the sake of winning,” Gopalan said. “We need to make money.”
The government expects 10% of the capacity it awards will never be built because developers fail to secure financing or land in time. About 100 megawatts of projects have been delayed by more than three months for similar reasons, said Tarun Kapoor, joint secretary at the ministry.
“We’ll always over-tender projects because it is a given that 10% to 15% of capacity will never get built,” Kapoor said.
Azure Power is concerned that the bids coming in are falling faster than can be explained by the weakness of the rupee or declines in the cost of solar panels. Chief executive officer (CEO) Inderpreet S. Wadhwa said “any significant departure on capital (and capex) cost forecast assumptions is likely to limit the number of projects that get done.”
To achieve a target of 15 gigawatts by 2016 and 100 gigawatts by 2022, India has opted for a reverse-auction mechanism. Developers submit bids to buyers—typically utilities—stipulating the price they need to earn to build a renewable energy project.
In theory, that brings competition to the market. There are risks for developers, who may find it suddenly unprofitable to build the projects they’ve promised if the currency fluctuates or the cost of solar panels changes.
By using auctions, India’s policy makers are hoping to avoid the kind of boom and bust seen in Germany and Japan. Those nations used feed-in-tariffs—a guaranteed price for power for all qualifying plants—to stimulate wind and solar. They had to quickly contain uncontrolled booms by ratcheting back support when too many developers flocked in.
“Generally I am pro bidding, but only if we have the right risk allocation,” said Anish De, a partner for infrastructure and government services at consulting company KPMG. “This is not the case in India. Contracts are one-sided and have too many open risks for developers.”
Promises to invest in India have been mounting for months. In June, SoftBank Group Corp. linked with Bharti Enterprises Pvt. and Foxconn Technology Group on a $20 billion solar venture in India. The aim is to add 20 gigawatts of generating capacity. SoftBank didn’t reply to requests for comment.
It’s likely that some announcements will not get translated to reality, said Sumant Sinha, founder and CEO of Gurgaon-based ReNew Power Ventures Pvt., which has 230 megawatts of solar projects under construction in India.
“Or it may happen in a very watered down way,” Sinha said
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