Tamil Nadu Solar Policy – Back on track with a new tender?

After receiving a lukewarm response from the bidders(who bid for only for 50% of the capacity) and some not-so gentle criticism from the stakeholders, the Tangedco seems in no mood to throw in the towel out of helplessness. It is planning to do the most practical thing, which is to come out with a new tender for allocation of the remaining capacity. We at RESolve have been of the view that releasing a new tender was the most pragmatic solution. Madhavan Nampoothiri, Director of RESolve, told Down to Earth magazine a couple of weeks back that “TNEB(Tangedco) will have to accept what it can from this tender and launch a new one to fill the remainder”. Thankfully, Tangedco seems to agree.(Read the full Down to Earth article here).
In a similar vein, Madhavan also told New York Times that ” “They (TANGEDCO) weren’t able to allow an extension, and now they’re going to have to.” (The complete New York Times articles is available here.)The implication of the new tender is that the entire capacity of 1000 MW will be commissioned at least 2 months later than planned. That again is subject to the condition that there is an overwhelming response to the new tender and that it is fully subscribed.
Now, instead of finding faults with TANGEDCO, I would like to examine how the new tender can be improved by incorporating some of the lessons from the previous tender. Some of the solutions that could smoothen some of the rough edges in the solar policy are:
A Change in L1 Approach
Many project developers have claimed that a L1 based approach across the state puts bid at lower capacity at a disadvantage. Without an upper limit on the capacity to be allocated, developers who opt to go for higher capacities would be able to quote lower rates because of economies of scale advantage. Secondly, considering the fact that the allocations are to be made pan state, the solar irradiation patterns, grid availability etc. could vary across the various geographies which suggests that every bid is essentially not normalized. Thus, going for a district based L1  could be the best way to resolve this issue. District based L1 also has the added benefit of resolving the issue of who gets the allocation first in a particular district, considering the limited evacuation infrastructure present in each district.
Capacity Based Allocations
As was witnessed in the initial drafts of the Rajasthan policy, there could be a possibility to go for capacity based allocations wherein a percentage of the total capacity (say 20%-30%) could be earmarked for small scale projects, say for 1 MW, or for upto 5 MW. This would greatly benefit small scale developers who have significant interest in setting up projects but dont have the deep pockets to warrant large scale installations. Furthermore, this would also help combat the economy of scale advantages which traditionally makes solar project allocation a privilage for large developers. In addition to this, an upper limit on project size could go a long way in increasing the number of parties interested in taking part in the bidding process so that Tangedco has backup options whereby it would not force itself into a corner  where the market would be a seller’s market as opposed to a buyer’s market.
Payment Security
While a irrevocable/revolving LC  is a good option in ensuring payment security, the invoice/bill clearance is still under the purview of Tangedco which could affect cash flows of a developer due to delayed payments (payments are only due once the invoice is cleared by Tangedco). Moreover, a developer would not want to always encash the LC as it might strain relations with Tangedco, especially considering the fact that this is a long term PPA where relations have to be maintained for a 20 year PPA(Power Purchase Agreement).  If the PPA is structured in such a way that payments are guaranteed within a specific time frame, say 10-15 days after the end of each month, then the developer would have greater predictability over his cash flows. This would go a long way in increasing bankability of the projects and hence, developer interest.
Lenient Timelines
One of the oft criticized point in the TN solar policy is the stringent timeline. For instance, the time period to achieve financial closure is about 3 months from the acceptance of the LOI(Letter of Intent) issued by Tangedco, with one month of it taken for a load flow study essentially limiting the investor to 2 months to achieve financial closure. This again restricts the possibility that smaller developers would be able to compete with large scale investors as it is not realistically possible to achieve financial closure in that short a time frame. An approach similar to AP or JNNSM where the developer would have 6 to 7 months to achieve financial closure would be beneficial.
TNERC Approval
This is a problem that is probably at the heart of all the controversy surrounding the bidding process. The Solar Energy Society of India (SESI) had petitioned the Madras High Court stating that the bidding process, in its current state is contrary to the guidelines specified under the Electricity Act, 2003. In addition to this, the Solar Independent Power Producers Association (an association which constitutes some of the high profile developers in the country including leaders such as Welspun) has questioned the validity of the tender. The reason, they claim, is that the Power Purchase Agreement (PPA) does not have the approval of TNERC. The draft PPA had a clause which read “subject to the approval of TNERC”. The Electricity Act 2003 states that PPAs would have to be approved by the regulator i.e. the State Electricity Regulatory Commission (SERC). An approval, on paper from TNERC rather than verbal guarantees would serve to quell this issue.
Infrastructural Issues
The PPA as it stands, would not compensate developers for any loss incurred due to grid unavailability. Although this is not a very major issue, there is some significant loss in revenue to the developer through not fault of their own. In addition to this, much like the wind energy sector, the solar developers too would be faced with UI(Unscheduled Interchange) charges and might be asked to back down their power generation should it be deemed that it might affect grid balance. If history is any indicator, it is likely that the renewable power developers would be asked to back down first before any other sources of generation. This again causes revenue losses to the developer. A better solution would have to be formulated to handle this issue. However it is unlikely that any major decision can be made on this issue without significant overhauling of the grid infrastructure to begin with. Perhaps a guaranteed generation clause could serve as a band aid solution, but it is unlikely that we will see such a clause.
If  Tangedco has already finalized the guidelines for the new tender, we are quite hopeful that at least some of these suggestions are already incorporated.
Waiting eagerly for the next tender!!
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You are invited to join the Tamil Nadu solar group in LinkedIn and share your views there. The link to the group is http://www.linkedin.com/groups/Tamil-Nadu-Solar-4681107