 "Solar projects delayed due to financing issues: Tobias Engelmeier")
Gujarat Urja Vikas Nigam Ltd (GUVNL), the off-taker for 852 Mw that make up 80 solar energy projects in the state, has petitioned the Gujarat Electricity Regulatory Commission (GERC), stating developers overstated capital costs and the rate of supply should be now revised from Rs 12.54 a unit to Rs 9. Business Standard speaks with Tobias Engelmeier, managing director of New Delhi-based solar consultancy Bridge to India, on the matter. Edited excerpts:
Is GUVNL on a sound footing by asking to renegotiate contracts before January 29?
The key premise being offered is that initially, the rate was fixed at Rs 13 per kwh for the first 12 years and Rs 3 per kWh for the next 13 years. During the consultative process, the developers insisted that the capital costs being considered are low and need to be raised to Rs 17 crore per Mw. In view of this, GUVNL decided to consider the capital cost to be Rs 16.5 crore per Mw. At that point of time, the data for the capital cost of projects in India was not available. In retrospect, GUVNL has found that most projects have been installed with a capital cost of Rs 10-12 crore per Mw. Hence, the demand for renegotiation. However, solar costs were dropping rapidly then and developers were not sure of the prices. The amount of Rs 17 crore per Mw was suggested to be on the safer side, as the few demonstration projects set up before that had even higher capital costs. The point is that, costs could have gone either way after signing the PPA (public-private partnership) and there was no wrong done on the point of developers. The fact that the costs continued to fall also benefitted the projects under the National Solar Mission. However, under it, a large part of the falling costs was speculated by the developers in competitive bidding. We do not believe the petition is based on a sound footing. The developers took a risk and this can be proved by the fact that lenders were not so sure about the windfall gains that the developers would be making. Many projects were delayed or did not come up because they could not arrange debt financing.
What is the legality of GUVNL's demand for a renegotiation?
What impact will this have on the solar industry?
We do not know what the outcome will be. However, the petition itself is a very negative development for investor confidence, especially for international investors and lenders. It's in line with Andhra Pradesh's recent change on tariff. The effect will be that investors will put a higher risk premium on government PPAs in India.
Is GUVNL on a sound footing by asking to renegotiate contracts before January 29?
The key premise being offered is that initially, the rate was fixed at Rs 13 per kwh for the first 12 years and Rs 3 per kWh for the next 13 years. During the consultative process, the developers insisted that the capital costs being considered are low and need to be raised to Rs 17 crore per Mw. In view of this, GUVNL decided to consider the capital cost to be Rs 16.5 crore per Mw. At that point of time, the data for the capital cost of projects in India was not available. In retrospect, GUVNL has found that most projects have been installed with a capital cost of Rs 10-12 crore per Mw. Hence, the demand for renegotiation. However, solar costs were dropping rapidly then and developers were not sure of the prices. The amount of Rs 17 crore per Mw was suggested to be on the safer side, as the few demonstration projects set up before that had even higher capital costs. The point is that, costs could have gone either way after signing the PPA (public-private partnership) and there was no wrong done on the point of developers. The fact that the costs continued to fall also benefitted the projects under the National Solar Mission. However, under it, a large part of the falling costs was speculated by the developers in competitive bidding. We do not believe the petition is based on a sound footing. The developers took a risk and this can be proved by the fact that lenders were not so sure about the windfall gains that the developers would be making. Many projects were delayed or did not come up because they could not arrange debt financing.
What is the legality of GUVNL's demand for a renegotiation?
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You would have to ask a lawyer. In the petition document, GUVNL has cited some examples of such negotiations. However, earning more money is not a crime. Unless it can be shown that the developers have colluded to purposely deceive the authorities, I see no case for a renegotiation. The developers have taken a risk and it turned out well for them. Think of the opposite case. Would the government step in if the developers had faced higher costs than expected to guarantee their returns? I actually have a fundamental objection to the underlying idea that the government should in some way determine returns of businesses.
What impact will this have on the solar industry?
We do not know what the outcome will be. However, the petition itself is a very negative development for investor confidence, especially for international investors and lenders. It's in line with Andhra Pradesh's recent change on tariff. The effect will be that investors will put a higher risk premium on government PPAs in India.