Cheering a lap-win in an unfinished race

Earlier this week, in a new round of SECI auctions, bids for supplying power from new solar PV plants purportedly hit historic new lows at Rs 2/kWh. This tumble was driven by aggressive bids from Saudi firm Aljomaih Energy, a subsidiary of the Singapore’s Sembcorp, and NTPC, closely on their heels, amongst a field of 14 bidders.

As we see the solar tariffs in SECI auctions tumble repeatedly in the last few years, one cannot help but think of the L1 seeking ruinous competition that has characterised many infrastructure bidding processes over the last few decades (consider Acme’s recent cancellation of its Rs 2.44/kWh project). Without some serious financial creativity, there are a few realistic project finance models under the sun that can produce a positive NPV at these prices, assuming realistic generation tariff-based income is the only source of income for the project. Not surprisingly, domestic banks are baulking at lending to any RE PPA under Rs 3/kWh on the grounds of financial viability.

So then why are companies bidding so low? Such low prices cannot be justified simply through declines in panel prices (under threat due to growing disputes between India and China), advances in technology (which mostly bring marginal, not huge discontinuous changes in pricing), or any other traditional input into project finance models.