Rewa becomes case study for solar bids

E-auction for 500 Mw at Kadapa solar park in Andhra put off due to a rethink on project conditions

While the Rewa Ultra Mega Solar (RUMS) park's seemingly unrealistic rate of award hinges on the availability of cheap finance for a longer tenure, it has had an unlikely impact in Andhra Pradesh. 

The e-auction for 500 Mw at the Kadapa solar park in that state was cancelled earlier this week because of a rethink on project conditions.

The three units of RUMS last week attracted a first-year bid rate of Rs 2.97 for its three 250-Mw units. After a fixed escalation of Rs 0.05 per year till 15 years of operation, it works out to a levelised Rs 3.3 a kilowatt/hour, lowest so far for any photo-voltaic (PV) solar project, though there is no viability gap funding. According to an ICRA calculation, the internal rate of return (IRR) will be below 10 per cent at this rate. Even at the lowest 8.5 per cent interest rate and a plant load factor of 23 per cent, the IRR is only 8.6 per cent.

“The ability of project developers to tie up debt funding at a cost-competitive rate, with a long tenure of up to 18-20 years, and in a timely manner, remains crucial,” said the report.

The central government's Solar Energy Corporation of India (SECI), equal promoter of the Rewa project with the Madhya Pradesh government's agency, has meanwhile cancelled auctions for the Andhra project. “They want to now assess the Rewa tariffs (rates) and project structuring before going ahead,” said a person close to the development. SECI managing director Ashvini Kumar was unavailable despite repeated phone calls.

A senior executive at one of the companies that exited the Rewa auction after the bids started going too low said there would be negligible margins for the project developers, unless the cost of finance is as low as one to two per cent. “The theory behind this belief is that foreign players with deep pockets, having access to cheaper (unhedged) funds, will be able to dominate this reverse auction regime. But, at the prevailing financing costs in India, there is not much significant difference between the fully hedged foreign funding and rupee term loans,” said Basant Jain, director, Mahindra Renewables. The company is an arm of Mahindra Susten, green energy wing of the Mahindra & Mahindra group. Mahindra Renewables, the Gurgaon-based ACME and Mauritius-based Solenergi are the three developers to bag the Rewa project that is expected to attract Rs 4,000-crore investment.

“We entered this price range because it was a very well designed tender framework. Construction risk is greatly reduced with land being acquired and substations being built. You can start construction from tomorrow, as unnecessary delays, cost escalation, are almost nil. Apart from that, there is no upfront fee for the land and infrastructure for the solar park, which is Rs 50-60 lakh per Mw in other solar park's case; in this case, it is amortised over 25 years,” said Harish Kapoor, group president, corporate affairs, ACME. The company bid the lowest Rs 2.97 a kwh among the three winners, with Mahindra putting a bid of Rs 2.979 and Solenergi Rs 2.974 for the first year. 

The ICRA report says although the rates vary from state to state, depending on expected solar irradiation levels, the counter-credit profile and certain other factors, the overall trajectory has been downward over the past three years, largely due to a reduction in the capital cost for solar PV-based power plants. The weighted average solar PV bid declined from Rs 6.5/kwh in 2014 to Rs 5 in 2016 and to Rs 3.3 for bidding of project capacity at Rewa.

“Against this, the average feed-in tariff for wind energy and competitively bid thermal tariff (last 24-month period) remains at Rs 4.8 and Rs 4-5, respectively. In addition to improved cost competitiveness, solar 

PV projects also remain favourably placed against conventional thermal-based projects, given the shorter construction period and lower execution risks, since thermal-based projects face delays in land acquisition and statutory clearances,” the report said.

Since the commissioning timeline is 18 months, Jain said there was ample opportunity to reap the benefits of forward looking assumptions. 

He said with better structuring of project documents, bankability of the power purchase agreement had improved significantly. This will assist in bringing down the cost of debt, as well as getting better financing terms from the lenders. The manner of documentation had smartly distributed the risk factors among all parties and significantly reduced the burden for developers, instead of carrying the entire risk on their shoulders. 

Kapoor said the credit rating and offtake risk is also minimised with this – "it is for the first time that we are having a proper letter of comfort mechanism, a sovereign guarantee and payment security". “We don't have any PPA (power purchase agreement) in this country with such security. It gives comfort to lenders and investors to come down to the bare minimum interest rate and IRR expectation.  The top 10-12 bidders were between a 297 and 311 paise range. All of us could reach to the lowest tariff band because of these comforts. Going further below would have been difficult.” 

He added that a full template was ready for the project. If that were not the case and there was no payment security, the rate would have been Rs 4-4.25 a kwh.