<div><strong>Shravan Sampath</strong></div><div> </div><div>Last week, the big news in the energy business was the solar bids in Andhra Pradesh. Eyebrows were raised when a 500 MW solar park bid attracted a lowest bid of Rs 4.63 per kilowatt-hour. Such aggressive bids have usually been the hallmark of Indian promoter groups who are hoping to change the goalpost at a later date. However, this aggressive bid was by Sun Edison, an internationally reputed and NYSE listed project developer, whose stock unfortunately appears to be in a perilously downward spiral.<br> </div><div>While most market experts feel that such aggressive bids will never be commercially viable, Sun Edison appears to be confident. Apart from redefining the price point for solar in the country, Sun Edison has also established new benchmarks in sycophancy by attributing their success to Minister of Power and Renewable Energy Piyush Goyal.<br><br>Taking a cue from Indian promoters' ability to profusely thank the government at every small opportunity, Pasupati Gopalan, the president & managing director of Sun Edison Asia Pacific is reported to have said "These low bids are the result of the tireless efforts of the minister (Piyush Goyal) and the ministry. They took a lot of feedback from the industry, assured the investors about the transmission and evacuation of power and land availability for the project. Then, an entity like NTPC is also involved. As the risks were significantly reduced, all this was factored in the low bids that were quoted." One can only hope that when his wonderful solar plant starts generating power, Gopalan would not attribute the bright shining sun also to the minister's tireless efforts.</div><div><br>However, for industry watchers, it is quite depressing to note that while bids become more and more aggressive, the commercial framework around solar seems to be stagnating. The innovation shown by the conventional power sector even way back in 2006-07 in formulating of standard bidding documents seems to be missing in formulating a bidding framework for solar. It appears that there are so many more areas where it is possible to optimize the bidding framework. </div><div> </div><div>For instance, a distinct improvement on the bidding framework that is waiting to happen is different tariffs for different blocks of years. For instance, bidders can be asked to enter different tariffs for the first 12-15 years and a different tariff for the remainder of the PPA tenure. This could enable bidders to financially structure the bid tariff such that the project cash flows match with the debt servicing tenure. This structure was employed by the first generation of standard bidding documents issued by the Ministry of Power way back in 2006-07 itself, but has not yet been discovered by solar.</div><div><br>Another suggested optimization, which, it is understood, is already in the works due to the "tireless efforts of the minister" is bidding in US dollars. Most of the financing today is obtained internationally and it would greatly help for the projects to have a dollarized revenue stream as well. Once again, imported coal based power bidding was introduced in 2006-07 itself with these parameters, and there is nothing new about this. Large projects like Tata Mundra and Adani Mundra have been set up with the imported coal price being denominated in US Dollars, and this has not hurt the procurers one bit.</div><div><br>Another interesting innovation can be to utilize the international drop in module prices to provide the best tariff to the power procurer. The bidders in the market today are betting on the fact that the module prices are likely to fall next year and the developers can make a neat margin by building the plant on a reduced capital cost. To enable this benefit to pass on to the power procurer, a part of the tariff can be benchmarked to an international module indicator, and this can be increased or decreased based on the drop or increase in the index. Again, this innovation has been employed in fixed costs for thermal power that have been indexed to Wholesale Price Index (WPI) and Consumer Price Index (CPI).</div><div><br>Another interesting possibility is to move from generation based Power Purchase Agreements (PPAs) to capacity based PPAs like conventional power. At the moment, solar power is purchased for each unit of power generated (or kWh), as against conventional power, which is based on the power capacity set up (or MW). At the moment, the developer has to take a call on solar radiation levels, and estimate how much solar power can be generated per Megawatt of capacity set up. He (or she, as the case may be) then bids based on the actual energy likely to generated in kWh. Thus, the solar radiation risk is taken by the developer. An option to be explored is whether solar power can be procured with the procurer providing an assumption of Plant Load Factor (PLF), and asking the developer to bid based on the assumed PLF. This could be employed in states where solar radiation data is unknown or limited, such as the north eastern states for instance.</div><div><br>With such innovative structuring possible in the bids, it is difficult to understand why our state utilities and the Ministry of New and Renewable Energy have not yet incorporated any such structures in solar bids. There is clearly a long way to go in improving the bidding documents and commercial frameworks around which solar power is being procured.</div><div><br>(<em><strong>The author, Shravan Sampath, is CEO, Oakridge Energy</strong></em>)</div>
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