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India may shelve dollar-denominated solar electricity tariff plan

02 February, 2016

India may shelve its plan to introduce dollar-denominated tariff for grid-connected solar power, according to several government officials aware of the development. The proposed move, aimed to attract foreign investment by reducing foreign exchange risk, has been put on hold at a time when the tariff for electricity generated from the sun has touched a record low of Rs4.34 per unit. Also, the rupee has weakened against the dollar.

“The dollar-linked tariff plan for solar power has been put on the back burner given the volatility in the rupee-dollar exchange rate, and the downward trend in solar power tariffs,” said a senior government official requesting anonymity.

The National Democratic Alliance (NDA) government had come up with the dollar-linked tariff plan in order to bring solar tariff down at grid parity to increase its usage in the country. The plan’s formulation started last year when solar power was available at Rs6.70 per unit wherein the price of electricity available on the grid through other fuel sources was in the range of Rs3.60-5.79. Grid parity refers to the price of electricity being at par or comparable with the prices prevalent on the grid.

The proposed dollar-denominated tariff model suggested state-owned utilities, such as NTPC Ltd, invite bids to procure power from solar project developers in dollar terms, sell it to distribution companies in rupee terms and create an escrow fund to manage foreign exchange depreciation. Also, apart from the dollar, the government was exploring the idea of other prominent currencies, such as the euro and the yen, to target investments in solar.

A senior NTPC executive requesting anonymity said, “The dollar-denominated mechanism is not being explored now.”

The Narendra Modi-led government’s 100 gigawatt solar generation target by 2022 is five times the previous goal. The increase of around 20 times from the current capacity of 5,129 megawatt (MW) is part of efforts to provide electricity to almost 280 million people who don’t have access to electricity. NTPC has been tasked to meet a quarter of this solar power generation target.

“The dollar-denominated tariff has been kept in abeyance for the time being. As the tariff has plummeted, there is no point taking dollar-linked tariff plan forward,” said another NTPC executive who also didn’t want to be identified.

Taking into consideration the trend of annual rupee depreciation of around 3.0-3.5 per cent since the liberalisation of the economy in 1991, the hedging reserve was expected to remain positive for 25 years. Even considering a higher rate of depreciation of 5 per cent, the hedging reserve was expected to last for 17 years. The government was of the view that dollar-linked tariff would reduce the then-prevailing rate of solar power at Rs6.70 a unit to Rs4.37 and make green power affordable and accessible by all. This figure was breached during the last bid.

Spokespersons for India’s ministry for new and renewable energy and NTPC didn’t respond to queries emailed on 27 January.

Experts concur with the government’s strategy.

“Since the grid-connected solar power tariff has hit a record low of Rs4.34 per unit, it has significantly reduced the pressure on the government. I believe this is the reason why the government is going to shelve the dollar-denominated tariff for solar power,” said Kuljit Singh, partner and industry leader for infrastructure at EY, a consultancy firm.

The solar power tariffs have been declining in India. In November 2015, the US-based renewable energy firm SunEdison Inc. emerged as the lowest bidder by quoting an all-time low tariff of Rs4.63 per unit at an auction called by NTPC. It has further gone down in January 2016 when Fortum Finnsurya Energy Pvt. Ltd, a Finland-headquartered utility, quoted a record low of Rs4.34 per unit to get the mandate for developing a 70MW solar plant under NTPC’s Bhadla Solar Park tender in Rajasthan.

Also, the rupee has depreciated by around 51per cent since the start of calendar year 2011.

“We have dropped the dollar-denominated tariff plan for solar power as the rupee is hovering around 68 against the dollar,” said another senior government official who also did not want to be named.

The solar strategy is at the heart of the Modi government’s ambitious target to halve the country’s energy imports by 2030. India imported 192 million tonne of crude oil in 2014-15 at a cost of Rs6.92 trillion.


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1 Comment
Partha Bhattacharyya former Chairman Coal India Ltd . 2 years ago

Makes sense, since on adjusted $ terms the decline in solar tariff over the last 18 months is over 50%. Committing to a fixed $ tariff in these conditions is unwarranted.

India may shelve dollar-denominated solar electricity tariff plan

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