Tariff Markdown on Manufacturing Tender. Unfair For Developers?

Even as SECI continues to provide positive tidings in terms of finally finding buyers for the power from the manufacturing linked solar tender that has been pending since last year, the news of markdowns can’t be good for relevant stakeholders. Readers will recall that these tenders had a tough time finding takers for a long time, and finally discovered the two winners at Rs 2.92/kWh, after a ceiling of Rs 2.93/kWh was used. This tariff has now apparently been reduced to Rs 2.54/unit, or Rs 2.61, after factoring in SECI’s own trading margin, which stays unaffected. The massive tenders grew to 12 GW side after the exercising of the greenshoe option by both the winners. Under this AGEL (Adani Green Energy Limited) accepted an additional capacity of 1,500 MW solar cell and module manufacturing and 6 GW generation. Azure Power added on another 500 MW manufacturing and 2 GW generation. Taking the 4 GW tender size to 12 GW.

Which is where the celebrations ended for both the developers. Even as AGEL went to town over its now swollen pipeline ‘confirmed’ projects in hand, making it the largest solar developer in the world by the calculations of one industry research site, the power purchase agreements which were to be signed by March 2020, never happened.  Simply because SECI realised there were no buyers for the power at Rs 2.92 per kWh.

Now, SECI has finally started announcing signing of PSA’s that would in turn help it to sign the PPA for the first 4 GW. While one PSA for 500 MW was signed with Grid Corporation of Odisha (GRIDCO), further PSA ‘s for 300 MW with the Chhattisgarh discom is expected to be signed anyday now. TANGEDCO, the Tamil Nadu discom has also signed up for 1 GW at Rs 2.61/unit. Officials at one of the bid winners informed us that a further 1200 MW or more of PSA’s will be signed up ‘very soon’ enabling work to finally start on the first phase of the project/s.

While obviously not happy about the drop in rates by 13% after getting an LOA, industry observers point out that the alternative, a further delay while waiting for buyers, was becoming increasingly difficult. It does appear that the developers agreed to the haircut to ensure progress even as they rebalance their calculations to work out profitability at a cost 13 percent lower than projected till recently. It must be noted here that Azure power, in one of its analyst calls in June this year, did flag the risk of a markdown on the projects, without specifying any range of course. At that time, our understanding was that the firm was primed for a 5-7% drop. A 13% drop, at a time when costs are much higher than when it first flagged the risk, is surely a cause for worry for the firm. Ironically, by September the firm actually hoped it could get by without any markdown.

It should be very interesting to watch the next steps on these contracts, as and when SECI sews up the remaining PSA’s. Will the developers accept it without demurring? With both firms being publicly listed, we are not sure the last move has been made on this issue yet. Watch this apace!