Falling solar tariffs: Are we facing risk of tariff renegotiation for our existing contracts?

The recent SECI bid of Rs. 2/kWh, has posed a challange to the solar developers whether the existing solar contracts shall remain intact?. Typically the solar PPAs are signed for 25 years and tariff is based on a reverse bidding process. Thee developers bid the tariff based on its capital cost, interest rate, CUF, and mnay other factors which are the part of risks associated with the specific off takers. The offtakers risk is clearly visible in case of solar bids, as the state government bids and central government bids have typically a difference of about Rs. 0.5- 1/kWh. The offtaker risk of PPA renegotiation is obeserved in some of the state bids where the offtaker approached the solar developers to renegotiate the agreed tariff. Recently in case of Andhra pradesh the developers signed contracts at Rs. 5.5 /kWh with the state government and developed over 800 MW of solar capacity. Now with the change of political regime, the the State government wants to renegotiate the PPAs to the tune of Rs. 2,44/kWh. Similarly in 2012, the Gujarat government also filed a petition to renegotiate the solar tariffs with the developers. UPERC has also recently cancelled the PPA in light of higher realiseed tariff in their one of the auction. Similarly Madhya Pradesh has also cancelled the ACME and Azure power bids of solar projects due to the delay in the installation of the project.

PPA renegotiations reduce the global investor confidence, and would stall the investments in the renewable energy sector. If we compare the solar tairffs in India, with global tariff trends, there is still significant gap in the lowest tariff realised in Indian market and other global markets. In a recent bid in Abudhabi a consortium of JInko solar and EDF has quoted a tariff of $ 0.0135  for Al Dhafra 1.5 GW project. This is approximatly about Rs. 1/kWh in Indian terms, and about hald of the tariff realised in Indian market. The major factor which affect the LCOE of solar projects are the financing, solar radiation and the capital cost. Though the capital cost can be expected at par in large scale solar projects, but the interest rate in Indian projects are considered to the tune of 8.5%-9% as compared to the 2-3% interest rates in overseas projects, which makes significant difference in the tariff. As Indian projects carry higher policy and regulatory uncertainity, the return on equity expectation of the solar developers are of the order of over 12% as compared to the 8% in case of overseas projects. Though the solar radiation in gulf region is also higher as compared to Indian conditions, but the regulatory uncertainity and offtaker risks still dominate in case of Indian solar projects and it shows that there sitll a long way to be at par with the international tariffs.