MP and Ultra Mega Solar Projects

Three units of 250MW each in the Ultra Mega Solar Project will go for bidding in the reverse auction starting with a tariff of Rs 3.59, Rs 3.62 and Rs 3.64 a unit respectively in the reverse auction starting with a tariff of Rs 3.59, Rs 3.62 and Rs 3.64 a unit respectively. The bidders are a Who’s who list of the top developers in the world including Italy’s Enel Green Power SpA, SoftBank promoted SBG Cleantech Ltd, Canadian Solar Energy Holding, Singapore 3PTE Ltd and SembCorp’s Green Infra Wind Power Project Ltd. Indian Bidders are Hero Future Energies, Mahindra Renewables, Shapoorji Pallonji Infrastructure, Torrent Power and Aditya Birla Renewables. The project in Rewa District would supply almost the entire power required by Delhi Metro. DMRC (Delhi Metro Rail Corporation) is likely to buy 12 Crore units from each of the three units while MPPMCL (Madhya Pradesh Power Management Corporation Ltd) will book 80% of the generation capacity. This of course means of the 112.5 Crore units that will be generated, 36 Crore units will be supplied to DMRC and 76.5 Crore units to MPPMCL.

Let us look at the financials of the project. If we assume that Rs 2.97 is the winning bid as reported in the press, then let us try to back calculate as to what should be the cost of the project. The bid of Rs2.97 plus a 33 paise to bring a levelized tariff implies an average EBITDA of Rs 371 Crores. This of course means for a 16% IRR, the cost of the Project ought to be Rs 2300 Crores or a construction cost of Rs 31 per unit of electricity. The scope of the project does not include the Evacuation facilities like 33/220KV Substation and transmission lines. The winners of the auction are Mahindra Renewables, Acme Solar Holdings and Solengeri Power. There is of course a 5 paise escalation per year for the next 15 years. And a performance guarantee of Rs 76 Crores coupled with a project completion by December 2017 implies low penalties in case of performance default but a lower time in setting up the financing for this mammoth project.

The moot point in these bids are is the bid price low? In August 2016, Energy firm Solarpack contracted to sell electricity in Chile at $29.1/MW for the Granja Solar Project. This in Indian Rupees translates to Rs 2/unit. However Solarpack only won for 120MW and the average price for rest of the Chilean Tender held in August 2016 was $47.6/MW which translates to Rs 3.33/unit. What makes this Tender different from the Indian MP Tender is that SolarPack has time until the second half of 2018 to begin construction.

Similarily Jinko Solar and Marubeni offered $24.2/MW or Rs 1.7/unit for the auction held in Dubai in September, 2016. This was for the 350MW auction for the Government owned Abu Dhabi Water and Electricity Authority. These bids have not been awarded and authorities plan to award the bids after

examining it in the first quarter of 2017. The plant is supposed to commence operations in first quarter of 2019. It is interesting to note that the bidder Consortium Jinko Solar/Marubeni has shown an IRR of 7% (https://www.greentechmedia.com/articles/read/jinko-solar-and-marubeni-bid-2.4-cents-for-solar-power-plant-in-abu-dhabi) and the bid is predicated on lower financing cost (Japanese finance) and a further reduction in panel cost by end 2017 (27 cents). The energy watchdog International Energy Agency (IEA) says “ Auction prices also reflects companies bidding strategies, they may accept unusually low returns on an investment in order to gain a competitive advantage in the market” in it’s World Energy Outlook released in November 2016.

So what does this tell us of the MP Auction? Are the prices feasible? This author does think so. Remember this cost doesnot include land nor setting up the Evacuation facilities. The tarrif rate is low and by front ending the tarrif at a low rate and then increasing it later makes this project so attractive to the investor. The penalty being low means that the Developer can always walk out. Unlike the examples quoted above in Dubai and Chile, the MP project needs to commence construction by June 2017. This makes the time needed to tie up financing shorter than Jinko Solar or SolarPack. Will the panel price reach 27 cents ? Will financing take care of the fluctuation of the Rupee against the Dollar? These are questions that really should not bother the developers. What needs to be factored in is the execution risk and the capacity of MP Discom to pay that probably Time and Hindsight can answer. This factor as we have seen with Hydel Projects guaranteed by various states in the North East notably Sikkim may prove to be a millstone to the Exchequer. This is as this author feels that Energy Prices as Generation capacity increases in India and Demand picks up would be fairly lumpy over a 25 year horizon. The price as we see in this particular example would be Rs 3.98 in the fifteenth year.