The Indian Electricity Market Transformation: Record low bids for solar – commercial, repeatable and sustainable

9 February 2017 – In the same week that the India crossed the 50GW threshold of cumulative installed renewable energy capacity (excluding large hydro), the initial bids for the first major solar auction of 2017 were announced at a record low Rs3.59-3.64/kWh, down 16% year on year against the then record low bid of Rs4.34/kWh accepted from Fortum of Finland.

India’s draft National Electricity Plan released in December 2016 called for a fivefold expansion to 258GW of renewable capacity by 2027, diluting thermal power capacity share to just 43% of India’s total, down from 66% today.

“This world-transforming target just got substantially easier and more cost effective to implement,” said Tim Buckley, Director of Energy Finance Studies at the Institute for Energy Economics and Financial Analysis (IEEFA).

“These costs per unit of power to purchase are tumbling. Critically it can now be demonstrated that these prices are commercially viable and likely to beaten again in 2018, and again in 2019 as total solar costs continue to decline globally at 10% annually.

“The implications for global renewable energy uptake, and the ongoing structural decline of seaborne thermal coal are clear.

Initial bids for the 750MW Rewa solar park in the Indian state of Madhya Pradesh were released overnight, coming in at a new record low Rs3.59-3.64/kWh (US$53/MWh),[i] down 16% year on year against the then record low bid of Rs4.34/kWh (US$64/MWh)[ii] accepted from Fortum of Finland for a 75MW project.

“At the time Fortum’s bid was 25% below the bids being lodged a year earlier, and there was consistent comment that the bid was neither commercial nor sustainable, and would not be replicated. Subsequent solar bids consolidated at Rs4.50-5.00/kWh.

A key fact supporting IEEFA’s solar forecast is that the Rewa solar tender was ten times oversubscribed with 7.5GW of total bids from firms as diverse as India’s leading power conglomerates (eg the Adani group, Aditya, Hero) to innovative global conglomerates (SoftBank of Japan in joint venture with Foxconn of Taiwan), leading global utilities (ENEL of Italy, GDF of France) and also specialist Indian renewable firms (ReNew Power) backed by global financiers (ADB, Goldman Sachs and JICA of Japan)[iii] and sovereign wealth funds (Abu Dhabi Investment Authority) leveraging the rapidly developing global Green Bond market.[iv]

“The record low bids are commercial, repeatable and sustainable.

“Key factors driving down the delivered cost of solar electricity in India are many. Firstly, solar module costs dropped 30% over 2016. Secondly, the Reserve Bank of India has delivered a succession of rate cuts since 2015 as inflation has near halved post Prime Minister Modi’s 2014 election. This has driven down the cost of finance.

“Thirdly, the Indian exchange rate has stabilised, allowing US$ module costs to translate directly into lower Rupee cost of solar. Fourthly, the access to global capital for renewable infrastructure projects in India is rapidly expanding. Fifth, Indian installers are learning by doing, and are now installing the largest solar projects in the world (Adani’s 648MW Tamil Nadu project, commissioned mid-2016) using the latest technologies,” said Buckley.

“A sixth factor is that the solar tender is backed by the Solar Energy Corporation of India (SECI), a central government entity providing an entirely bankable counterparty, circumventing the un-bankable state utilities (DISCOMs).[v] The seventh factor is that the tender allows for the initial tariff to have a partial inflation protection via indexation.

“Behind all of this is the clear vision of Energy Minister Piyush Goyal. India’s energy policy has delivered TLC – transparency, longevity and certainty to the solar sector.

“The investment needs of the Indian electricity sector over the next decade are approaching US$1 trillion – an investment opportunity large enough to draw attention from the global majors who have historically overlooked India’s 1.3 billion people and the ongoing 7% annual economic growth rate.

India’s Central Electricity Authority (CEA) released its Draft National Electricity Plan in December 2016,[vi] and the clear conclusion was that India did not need to build any new coal fired power capacity over the coming decade to 2027. This conclusion was reinforced with the CEA this week reporting the average thermal power plant utilisation rate in the nine months to December 2016 fell to a decade low of 59.6%.[vii]

Goyal’s target to cease thermal coal imports into India this decade looks a clear commercial certainty – imported coal fired power generation is the risky, high cost option. Renewable energy capacity is targeted to increase fivefold to 258GW, and investment in other zero emission technologies (nuclear and large hydro) would see a near doubling to 94GW.

Indian solar tariffs of US$54/MWh are likely to continue falling 5-10% annually for the next decade.

“With the Adani group announcing this week it targets USD$2bn of investment in solar in 2017 alone, one must clearly question if there is any remaining strategic or commercial merit in Adani Enterprises’ ongoing pursuit of the remote and now stranded low quality export thermal coal proposal at Carmichael in Queensland’s Galilee Basin.

“In IEEFA’s view the only way the Carmichael proposal could proceed is with a massive government subsidy to underwrite the $5-10bn project risk involved. The North Australia Infrastructure Fund (NAIF) has been prompted to provide a $1bn subsidy, but the balance remains unfunded, a key project risk,” Buckley concluded.

Tim Buckley is the Director of Energy Finance Studies, Australasia for IEEFA. He has 25 years of financial markets experience, including 17 years with Citigroup culminating in his role as Managing Director, Head of Australasian Equity Research.

ABOUT IEEFA: IEEFA conducts research and analyses on financial and economic issues related to energy and the environment. The Institute’s mission is to accelerate the transition to a diverse, sustainable and profitable energy economy and to reduce dependence on coal and other non-renewable energy resources.

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