With ultra-low tariffs, Rewa paved path for scale-up of green energy without viability gap funding For about 12 years till 2002, some 1,200 hectares in Badwar, Madhya Pradesh, were used as a firing range by the Army. Fifteen years after the guns fell silent, there has been a dramatic change in the way this remote village in the Rewa district will be known: a solar park with three projects of 250 MW each is slated to come up here. On February 10, the three projects were bid out by the Madhya Pradesh government to Mahindra Renewables, ACME Solar Holdings and Solengeri Power’s Spring Energy at historic low tariffs: Rs 2.97-2.98 a unit in the first year and Rs 3.32 over 25 years of contract. The rates were received through 33 hours of reverse bidding. The last few years have seen a sharp drop in solar tariffs. With the price of photovoltaic cells in a southward spiral, the weighted average solar power tariff has declined from Rs 6.79 a unit in 2014 to Rs 5.01 in 2016. Rewa’s tariff of Rs 3.32 will be bettered by Kadapa Solar Park in Andhra Pradesh, which is slated to come up next month, with tariff of Rs 3.15. The tariff for average coal-based power at which NTPC, the country's largest coal-based power producer, sold during the quarter ending December 2016 is Rs 3.20. “We were expecting bids in the range of Rs 4.5 a unit. For us it was a challenge to get bids below it,” says Manu Srivastava, chairperson, Rewa Ultra Mega Solar Ltd (RUMSL), and principal secretary in the Madhya Pradesh government. The excitement was palpable. It took Srivastava’s team and the transaction advisor, International Finance Corporation (IFC), some 293 queries to fine tune the project structure and offer an attractive document to bidders. chart Four days after the Rewa tariff was announced, Rajeev Kapoor, secretary in the Union ministry of new and renewable energy, shot off a letter to all chief secretaries in the states and union territories: “Such low tariff, without any viability gap funding and capital expenditure support, has been obtained on account of very careful structuring of the project risk sharing mechanism…you may like to review these arrangements and incorporate them in solar power projects being developed by your state.” After the news broke, final bids for some projects and power purchase agreement by states where the bids threw up a higher tariff were put on hold. Jharkhand, which had bid out power purchase agreements for 1,200 Mw in March 2016, has now been approached by bidders to release their bank guarantees since the state is not signing the PPAs. The tariff discovered was Rs 5.5 but the state never went ahead and signed the contracts. chart Bhanu Mehrotra, global solar practice PPP lead, IFC, points out the three-tier payment security available for Rewa. The two power buyers, state-owned distribution companies (discoms) and Delhi Metro Rail Corporation (DMRC), are giving a letter of credit equal to a month’s payment. A payment security fund will be put in place by RUMSL. It will be equivalent to three months of payment by Madhya Pradesh Power Management Company (MPPMCL), the holding company of the discoms. Discussions are going on with the ministry of new and renewable energy and commercial banks for an overdraft facility. The third security ring comes from the state government guarantee. Nonetheless, on April 12, 250-Mw solar project in Kadapa Solar Park beat the Rewa tariff. French company Solairedirect, which is building the project, quoted Rs 3.15 a unit. For Kadapa, the advantage comes from assured offtake and bundling with NTPC power. The sheer strength of the NTPC balance sheet makes the project attractive. Though solar tariffs are on a downward spiral, assurance of purchase by MP Power Management Company and DMRC for Rewa and by NTPC for Kadapa lowers the risk of the two projects. DMRC is looking to run its third phase on power from the project. Anoop Kumar Gupta, DMRC director (electrical), says it currently buys 700 million units annually at an average cost of Rs 6.70. While its consumption will go up to 1,000 million units, the cost of power from Rewa will be Rs 3.3. Power constitutes 35-32 per cent of DMRC’s total annual operating cost of Rs 500 crore. Sabyasachi Majumdar, senior vice-president and group head, ICRA Ratings, says, “The viability of such tariff for project developer from its credit perspective will be critically dependent upon the availability of long tenure debt (up to 18-20 year post project completion) at cost competitive rate. Also equally important will be the ability to keep the cost of PV modules within the budgeted levels and execute projects in a time-bound manner.” According to Srivastava, a 1 per cent reduction in interest cost leads to a 10-paisa reduction in tariff. If the capital cost is Rs 4.5 crore per Mw and plant load factor is 21 per cent, ICRA estimates cumulative average debt service coverage ratio over a tenure of 18 year at 1.20 times and project internal rate of return at below 10 per cent for a project with a levellised bid tariff of Rs 3.15 that emerged for Kadapa. An improving tariff competitiveness of solar energy thus remains favourable for the distribution utilities, in ICRA’s view. In the case of Madhya Pradesh, for instance, a state government official points out to the surplus power being available with the state. It has so far been buying renewable energy for Rs 5 a unit. To this is added Rs 2, equivalent to the fixed cost, the distribution companies have to pay to conventional power producers under the power purchase agreements since the state is not buying their power and going for renewable. If the transmission and distribution losses are added to these two, the green energy costs the state about Rs 9. In many ways, Rewa has set the pace for solar tariffs for future projects. In the first round of bids submitted for Solar Energy Corporation of India’s 750 Mw tender in Bhadla Solar Park in Rajasthan last week, signs are that competition would be fierce as the supply of new projects has slowed in the last 12 months, says Bridge to India in a report released on Monday. With tariffs now coming down, the load on distribution companies will be lowered. Besides, as Srivastava points out, Rewa opens up an entirely new chapter in utilisation of renewable energy in the country, where large institutional open access consumers can start procuring inexpensive renewable energy. Mehrotra says till now bidding has been at the level of national level utilities like NTPC and SECI. “They were buying the power at the front end and at the back end they would sell it to the state utilities. But now the initiative has moved on to the states.” Earlier, the pre-occupation has been with tariffs which made viability gap funding important. Now, this sort of low tariff allows the space to move to other things like grid stability and storage. Besides, it has ensured that viability gap funding and bundling of green power with conventional power become less relevant policy tools for the promotion of renewable energy.