First-Time Solar Producers May Imperil India's Clean Energy Push

India’s first solar auction, designed to boost clean energy in the world’s fourth-biggest polluter, may risk failure after winners were selected without experience or proof that they can keep projects afloat earning low margins.

A woolen yarn maker, an animation company and an industrial pipes supplier with no experience building power plants were among 37 winners of the government auction announced Dec. 13. The lowest bidders quoted prices that mean they may struggle to earn an attractive profit, said Bloomberg New Energy Finance analyst Bharat Bhushan.

“These projects aren’t going to get built,” Anmol Singh Jaggi, director of Gensol Consultants Pvt., which funds renewable energy projects, said in an interview. “I don’t see how they’ll get financed or get returns.”

India, which averages 300 sunny days a year, aims to generate 20 gigawatts of solar power by 2022, equivalent to 12 percent of its total electricity production today. A setback may delay solar’s development in Asia’s second-fastest growing major economy at a time when equipment makers, including Arizona-based First Solar Inc., face a potential supply glut and seek new markets as European countries slash solar subsidies.

The three largest projects went to companies experienced in building power plants: Lanco Infratech Ltd., KVK Energy Ventures Pvt. and Rajasthan Sun Technique, a unit of billionaire Anil Ambani’s Reliance Power Ltd. Abengoa SA, which has built plants in Spain and the U.S., and Acme Group, which is building a 10- megawatt solar thermal plant in India, were passed over.

‘Returns Not Important’

“The returns aren’t very important at this stage,” said Alok Nigam, Lanco’s vice president of business development. “What we wanted to ensure was we got a berth in the National Solar Mission.”

“Are these tariffs really sustainable on a long-term basis?” Nigam said. “I have my doubts.”

Under auction rules, project developers offering to sell their electricity at the cheapest rates were selected. The lowest solar photovoltaic bid price came in at 10.95 rupees (24 cents) per kilowatt-hour and the lowest solar thermal bid was 10.49 rupees per kilowatt-hour, offering discounts of more than 30 percent to government-proposed rates.

The auction awarded 470 megawatts of solar thermal capacity and 150 megawatts of photovoltaic capacity. New Energy Finance’s Bhushan said the seven solar thermal winners, including Lanco, KVK Energy and Rajasthan Sun, quoted bids that may be below the levelized cost of generation in India. The lowest photovoltaic rates may be at cost, he said.

Knitwear Maker, Animation

Levelized analysis compares the costs of energies produced from different sources after accounting for expenses such as financing and installation.

Bid winners included Oswal Woollen Mills Ltd., Kolkata- based Amrit Animation Pvt. and Megha Engineering & Infrastructures Ltd., which makes water-pumping equipment.

Oswal Woollen, based in Ludhiana, Punjab state, said in an e-mailed statement that it has run a 15-megawatt bio-gas plant and that concerns about its ability to build a solar facility were unfounded. “We will be more aggressive in the successful implementation of our solar energy plant,” it said. “You have to wait for only nine months.”

Megha Engineering has no experience in solar or building conventional power projects though it has “good financial strength,” R. Balaji, an engineer at the company’s power division, said by telephone. No website or contact details could be found immediately for Amrit Animation.

Skills Untested

Companies weren’t evaluated on their technical skills, Deepak Gupta, secretary at the New and Renewable Energy ministry, said Nov. 29. To prevent irresponsible bidding, companies had to pay bid bonds on projects and will be charged fines for delays or failure to build.

“I don’t think there’s a problem,” Gupta said after the auction. “There’s no reason why we shouldn’t reach our target.” The bids were probably accounting for declining equipment costs and cheaper financing, he said.

“I personally don’t believe it can happen” at these rates, said Petra Leue-Bahns, chief financial officer of Ecolutions Gmbh, a Frankfurt-based renewable energy investment company. Borrowing costs, banks’ reluctance to lend and a shortage of mandatory domestic equipment may also prevent projects from getting off the ground, she said.

“From the perspective of a risk-averse institutional investor, the whole story seems like a work-in-progress still,” Leue-Bahns said.

Costs, Complexities

Developers may be underestimating the cost and complexity of setting up solar plants, according to Mumbai-based Tata Power Co., India’s largest non-state electricity developer, which shunned the auction. “We do hope that the people who are bidding those numbers understand what it means to set up a solar project,” Executive Director Banmali Agrawala said in an interview. “It’s not a piece of cake.”

The auction drew bids for more than eight times the 620 megawatts of capacity offered as companies sought to benefit from government subsidies and power needs in India where peak electricity demand outstripped supply by more than 10 percent this year, according to the Central Electricity Authority.

The Asian Development Bank announced it plans to partially guarantee commercial bank loans to $425 million worth of solar investments in India to help the sector take off. “But the projects have to be credible,” said Sujata Gupta, head of the bank’s private sector group in India.

“What’s going to determine this market is projects that get done, that get financed, that get finished,” said Rana Mookherjee, senior director of project finance at Fremont, California-based Solaria Corp., which is making modules in India. “Success is what’s going to help this market take off.”