Is VGF the way forward in financing the solar project

Guest Post:

The solar energy is a capital intensive and has lower operation maintenance cost however the risks involved are high and the viability of a project depends upon factors such as regulatory support and technology trends.
In order to make the sector more attractive, the Phase 2 (2012-2017) draft suggests financing the majority of the proposed 2600 MW of solar energy, which is the domain of the Central government, through VGF (Viability Gap Funding), which in turn is funded by the NCEF.
VGF scheme was envisaged in infrastructure sector by govt of India, to attract private sector resources and techno managerial efficiencies, under PPP model. Primarily, this facility is meant to reduce capital cost of the projects by credit enhancement
Public-private partnerships using VGF have been severely criticized in other sectors like water supply, airports, roads etc. as it has led to companies setting up the infrastructure but not being able to properly operate and maintain it. Re-negotiation of terms is very common, leading to unforeseen public expenses
As per the phase 2 draft version the bidders will bid for VGF in RS/MW for the solar projects and the bidder quoting the low amount of VGF would be selected. The funding would happen in 3 stages:
• 25% at the time of delivery of at least 50% of the major equipment at the site. This would be based on the cost of total procurement.
• 50% on successful commissioning of the full capacity of the plant
• Balance 25% after one year of operation meeting requirements of generation as per guidelines.
In case of solar VGF, a capital subsidy, does not incentivize developers to build an efficient power plant possible .It provides incentivize to setup plant with low capital ,using sub standard raw material and engineering costs making subsidy a large part of Capex .
Better system design and construction which were the major drawbacks of Phase 1 would still haunt, with VGF in place, as the performance is hardly ameliorated by paying out 25 per cent of the VGF after one year.
No major renewable policy world wide support capital subsidy for the growth of the sector as it proved inefficient moreover in the beginning of wind sector in India, capital subsidies were provided which low quality turbines being set up hence low capacity utilization of Indian wind sector.
The NCEF and Finance ministry should discuss the innovative methods for financing a solar project such as GBI (as in case of wind) .GBI mechanism used in an efficient manner could give an ideal solution and beneficial one.
A developer could pay average pooled price to the utility and the gap for the power produced through could be filled by the GBI received from centre moreover in longer run as average pooled price increases GBI in turn reduces at same amount hence providing a cash flow to the developer and return of loan to the government .
Assume the 1520 MW of PV solar now set for VGF would draw about Rs. 3000 crore rupees from the NCEF with no returns. A reversible GBI could on the contrary end up making a compounded total of Rs. 2300 crore rupees (assuming a 5.86 per cent increase in average power purchase cost per year as calculated by the Planning Commission)
The management of a reversible GBI would arguably be more complicated than a VGF but the large potential gains of thousands of crore along with potentially higher output from plants warrants a more complex management apparatus
The VGF scheme could attract more fly by operators and suppress more serious contenders and would introduce and add up to the various malpractices prevalent in the industry.

 

References:  http://www.re-solve.in/perspectives-and-insights/jnnsm-draft-policy-guidelines-for-phase-2-released/

 

About author: Ankush Vashisht (1st year Energy management Student ,GLIEMR, Solar enthusiast )

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1 Response

  1. kumar says:

    Nice article. I slightly differ from this view. Not all schemes should be validated in terms of returns (as stated as Rs.2,300Crores return if reversible GBI would have been adapted). To attract private money into a common purpose, like this solar project for the development of the nation, the investor should see attractive returns. The equity returns of usual projects are calculated at a rate of 15.5% which is much higher than the Govt bonds and interest rates of banks. When the country is still facing power deficit and the scenario likely to prevail in the near future, and with the non-availability of adequate funds and resources with the Govt. its becoming high time to involve private players,who are eagerly looking for investment opportunities. The point is that Govt. is trying to impose certain checks on maximizing the use of Indian made modules, thereby promoting local manufacturers, banks, logistics, service, employment opportunities, reducing the current fiscal deficit and encourage more RD&D to have improved efficiency of the panels equivalent to those found in U.S and European countries, is one of the high positive side. History should not be forgotten, the failure of solar panels imported from European country, especially Germany, because of the change in operating temperatures of the panel. The social returns of the scheme comes into picture at this moment. Providing 25% of subsidy after 1 year as such is a check on the developer to provide quality work. To improve the quality of installations and project in the longer run, the Govt can impose and enforce strict norms on the quality of the modules to be installed. To tap more solar energy and to capitalize the advantage of being located in the equatorial and tropical region with nearly 300 clear sun days, the Govt. should spend some money, VGF, subsidy, tax incentive or give it any name, by calculating the EIRR and not the actual IRR.

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