The historically low solar tariffs at Rewa

Solar energy has become the cheapest it has ever been in India, thanks to historically low tariffs achieved in the reverse auction bid for three units in the Rewa plant in Madhya Pradesh earlier this month. But what does this mean for the solar industry in India?

What exactly happened?

The two-day reverse auction bid for three 250 MW blocks in the Rewa solar plant in Madhya yielded a tariff of Rs 2.97 for each of the blocks and a levelised tariff of Rs 3.3 over the course of the 25-year power purchase agreement. The winners of each of the bids were Mahindra Renewables, ACME, and Solenberg Power. The Rewa plant is a joint venture of Solar Energy Corporation of India and Madhya Pradesh Urja Vikas Nigam (MPUVN).
A reverse auction in such a scenario is basically a situation where companies bid for a unit by offering the lowest tariffs at which they will sell the energy generated from the unit. The lowest tariff wins the bid.

How were such low rates achieved?

Companies bidding for the Rewa units were able to commit to such low tariffs because of various factors, some to do with the industry, and others to do with the specific bid.
The industry-related factors include the fact that solar energy producers in India have been able to greatly reduce their costs due to the import of cheap photovoltaic panels from China. In addition, in keeping with the government’s renewable energy push, especially its commitment to achieve 100 GW of solar energy by 2022, it has expedited the land acquisition process and has reduced excise duties on various components required to set up a solar plant.

Specific to the Rewa bid, the Madhya Pradesh government implemented a few favourable and unique structures in the project power purchase agreements. For example, it included a state government guarantee for the contracted capacity by the utility as well as a compensation for deemed generation in case of non-availability of grid. These factors allowed the bidders to commit to lower tariffs than they would otherwise have been able to.

What does this mean?

While this does mean that solar energy will be cheaper, several industry experts have warned that, at such low tariffs, margins are also very slim. This could mean that even a slight increase in input prices—such as pricier imports from China—could push many of these projects into unprofitability.