Original Post: BRIDGE TO INDIA
India has been discussing dollar dominated bids for solar projects in the country for some time now. The rationale is to attract low cost international capital and reduce hedging costs by pooling currency risk with the ultimate objective of reducing the cost of solar power. An initial allocation for 1 GW of projects is believed to be in planning stages and guidelines on bidding process are expected within the next couple of months.
India has been discussing dollar dominated bids for solar projects in the country for some time now. The rationale is to attract low cost international capital and reduce hedging costs by pooling currency risk with the ultimate objective of reducing the cost of solar power. An initial allocation for 1 GW of projects is believed to be in planning stages and guidelines on bidding process are expected within the next couple of months.
- The
government hopes to lower the cost of solar power by around 10%
- BRIDGE
TO INDIA analysis shows that cost reduction may be slightly less at about
5% but these projects may attract new capital to the sector
- It
is worth going through the added complexity of Dollar dominated bids only
if the government is confident of using this mechanism for much larger
capacity, say 10 GW or more
Under this structure,
National Thermal Power Corporation (NTPC) hopes to buy solar power at a fixed
tariff of about USD 5.6 cents/kWh (INR 3.6/kWh) using auction process and sell
to distribution companies (DISCOMs) at around INR 5/kWh, about 10% lower than
current cost. This leaves INR 1.40/kWh to cover hedging risk.
BRIDGE TO INDIA analysis
shows that this is a sensible move as there is already very strong demand from
international investors for Indian solar projects. But the actual tariffs
realized under Dollar denominated bids will likely be less than 10% because
procuring currency hedging for 25 years is not possible and it is not clear who
will maintain this hedging corpus and bear the residual risk. This
unhedged risk, which increases with time, is very difficult to quantify and
will result in higher hedging cost.
It is important to
highlight that the Dollar tariffs will remove exchange rate risk for developers
and investors, but they will still bear all other India project development
risk including offtake, dispatch, policy and other operational risks. Hence,
developers expecting 10-11% return on projects in the USA, for example, will
still expect a return premium for Indian projects to compensate for extra
risks. And will the international lenders who anyway do not take any
currency risk see these projects differently? The government should finesse the
structure after thorough consultation with developers and lenders, distribution
companies and NTPC, which is expected to be the project procurement agency. It
might take another 6-8 months before all the kinks are ironed out and India
actually moves forward with the first round of dollar dominated bids.
It is worth going
through the added complexity of Dollar dominated bids only if the government
feels confident of using this mechanism for much larger capacity, say 10 GW or
more. The clear objective should be to attract large international developers
for larger projects and reduce project procurement time and costs in addition
to hedging costs.
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