In an important and positive announcement for the domestic renewable industry, the Ministry for New and Renewable Energy (MNRE) said that upper ceiling tariffs or tariff caps will no longer be prescribed in future bids.

It has directed Solar Energy Corporation of India (SECI), National Thermal Power Corporation (NTPC), state distribution companies (DISCOMs), and other implementing agencies that they will procure renewable energy (RE) power either through single renewable source or various combinations of renewable sources with or without storage as per their procurement policies.

The decision was taken after a meeting which was held recently between the Ministry of Power, MNRE, and representatives of SECI, and NTPC.

Earlier, in a meeting with the developers of solar and wind projects, the Ministry of New and Renewable Energy had proposed the removal of tariff caps.

Raj Prabhu, CEO of Mercom Capital Group had said earlier that “Removing tariff caps could be the single most important action at this time to revive the solar sector and send a message to the investment community that the government is serious about its solar targets,”

Tariff caps are slowing down auction activity in the sector. Developers have denied bidding at the tariff levels specified by state agencies instead of a market-based auction, where the lowest bid wins. This has been the reason for most tender deadlines being extended or retendered after raising the upper tariff ceiling. This trend of tender extensions and retenders has also led to a delay in auction activity.

In June 2019, Mercom reported that reverse auctions drove down tariffs, and developers are fighting for every penny to make a decent return on their investment. In this ultra-competitive environment, tariff caps have added a new challenge for them. A tariff cap is set by the auctioning agency and acts as an upper limit when bidding for a project. So, a developer can only bid lower than the set tariff, which becomes a challenge if the tariff cap is deemed too high for a project developer to make a healthy return on investment.

Looking at the trend, tariff caps were increased anywhere from 3% to 14% to attract participation from the developers who were reluctant to participate because of low tariff caps.

For instance, Maharashtra State Electricity Distribution Company Limited (MSEDCL) reissued a tender for 1,350 MW of solar projects to be developed across 30 districts. The tender was initially floated in September 2019 and the ceiling tariff was raised to ₹3.30 (~$0.04)/kWh, up from ₹3.15 ($0.044) /kWh.

Similarly, Solar Energy Corporation of India (SECI) increased the tariff ceiling for its 500 MW (Phase-1) solar tender that was floated in April 2019. The amended tariff cap was ₹2.93 (~$0.04)/kWh compared to the previous tariff of ₹2.85 (~$0.041)/ kWh. Further, the bid submission date was also extended. The initial submission date was May 27, 2019, which was extended to June 27, 2019.

Tenders from SECI and GUVNL, which are typically considered bankable because of their creditworthiness, were undersubscribed because the tariff caps were considered too low by developers.

It is clear from multiple tariff cap changes and under-subscribed tenders that tariff caps were priced aggressively and too low to be attractive to investors.

Image credit: NwComp Solar