Solar Tariffs Plummeting In India — What Next?

Fortum, a company from Finland, is providing services in nuclear, thermal and hydro power worldwide and also in the renewable energy space. This company in January 2016 quoted an incredibly low cost of generation as reported from the bidding results for 420 MW installed capacity solar park in Rajasthan at Rs 4.34 per Kwhr (kilowatt per hour).

Surprisingly, a few other companies such as Solairedirect, Rising Sun and Yarrow Infrastructure also quoted Rs 4.35 and 4.36 per Kwhr, respectively. What is interesting is that the usual suspects like Softbank, Sky Power and SunEdison had quoted way above Fortum tariff in the Rajasthan solar project opportunity.

While, on earlier bidding occasions during the second and third quarter of 2015, these companies had won several bids in Madhya Pradesh and Tamil Nadu by quoting about Rs 5 per Kwhr. In July 2015, SkyPower won bid to install 150 MW in Madhya Pradesh by quoting Rs 5.05 per Kwhr solar tariff. Later in November 2015, SunEdison quoted Rs 4.63 per Kwhr and won the entire 500 MW bidding opportunity as single developer in Andhra Pradesh and Tamil Nadu. But the important question is why would companies like SunEdison, Softbank and SkyPower suddenly change their bid(s) from below Rs 5 per Kwhr to over Rs 5.66 per Kwhr in three months? The reasons for such commercial flip-flops are best known only to the management of these companies, and I wonder if the public will ever get to know?

Irrespective of the level of tariff offered by the photovoltaic (PV) panel-based solar projects in states like Rajasthan, Madhya Pradesh, Tamil Nadu, etc. (ranging between Rs 4.34 and Rs 5.67 per Kwhr) their sustainability in the longer term in the context of central-and state-owned transmission network management difficulties is truly suspect. Challenge for grid connected solar power generation projects’ survival for 20-25 years after signing the power purchase agreement (PPA) with state government-owned distribution companies, or discoms, lies elsewhere. Grid strengthening measures such as installation of green transmission corridors, integrating large size battery banks with the solar parks and installation of smart grids that would mitigate grid frequency fluctuations will enable their smooth and stable operation.

However, these grand schemes (green corridors, battery banks and smart grids) could be about a decade away. Billions of dollars needed for such remedial measures to stabilise grid connected solar power projects will be mostly paid for by Indian tax payers! This additional investment will have to be recovered eventually from the end user who buy electricity from grid as “Solar Surcharge Tariff”.

Thus, strictly speaking, PV panel-based power plants’ cost of generation for the customer should be calculated as the sum of tariff per Kwhr quoted in the bids in Rajasthan, Madhya Pradesh and Tamil Nadu, and the investment required for installing hardware like battery banks and smart grid in order to stabilise the state grids, again in Rs per Kwhr.

The challenge of integrating large capacity solar plants and preserving smooth electricity grid operation is not unique to India. Canada, US, UK and countries in European grids too are recognising the need to preserve grid stability as large capacity solar plants connect to their grids. Solar plants supply electricity that varies every minute and cannot be scheduled in advance like from coal, gas and nuclear power plants. Therefore, suitable MW size batteries banks must be integrated with each solar plant to smoothen power supply and also become predictable for dispatch of electricity at their delivery points into the grid, if they were to operate on a long-term basis in the grid.

In case these substantial compensatory hardware and software measures are not put in place quickly (the solar projects gestation period is under one-two years and the sudden appearance of more than 500 MW of solar power in the morning hours and its definitive disappearance by late afternoon), the Load Dispatch Centres of states and centre (SLDC/RLDC) that are responsible for managing the grid operation will often be compelled to disconnect solar units from their grids to preserve their stability.

The state or regional load dispatch centres are neither under the control of state governments nor Electricity Regulatory Commissions. They are not obliged to ensure power offtake from wind and solar plants. We have several examples in the past wherein various SLDCs/RLDCs forced the wind farms to shut down; no offtake was permitted in order to save the grid from imminent collapse. Wind farms had solid power purchase agreements but could not supply to the grid. Similarly, mere existence of power purchase agreement (PPA) between discoms and solar developers does not guarantee offtake by the grid operator.

One may refer to one of the standard articles in the PPA of any solar/ renewable power project in India: “The power project shall be required to maintain compliance to the applicable Grid Code requirements and directions, if any, as specified by the concerned SLDC/RLDC from time to time.”

According to this provision, disconnection from grid by the SLDC/RLDC and consequent loss of revenue for the solar power plant is a problem of the developer. It is high time we discuss the grid challenges openly in the Indian ecosystem with the various stakeholders before installation and commissioning of mega-size solar power projects, for equitable risk sharing.