India’s SBI Warns Solar Tariff Cut Will Curtail Funding

State Bank of India, the nation’s biggest lender, is drafting a letter to a state regulator warning that a move to backtrack on contracts by reducing the price of solar power will curb investment.

The state buyer of solar power in Gujarat state is seeking approval to cut the rate paid to plants by 28 percent. The Gujarat Electricity Regulatory Commission is evaluating whether to accept the case. A decision is due next month.

The petition alone will have “an adverse impact on investors’ outlook,” Rajat Misra, senior vice president of the infrastructure group at SBI Capital Markets Ltd., which is the lender’s investment banking arm, said in an interview in Mumbai. “It only takes a couple of projects to go back for the entire sector to fall through.”

SBI Capital has arranged funding for 95 megawatts of solar capacity. Those are mostly for projects in Gujarat owned by developers such as Tata Power Co. (TPWR), France’s Solairedirect SA, billionaire Vinod Khosla-backed SunBorne Energy Holdings LLC, and Kiran Energy Solar Power Pvt. whose investors include Bessemer Venture Partners, according to Misra.

Debt Repayments

The projects were based on assumptions, including tariffs that wouldn’t be revised during the 25-year power purchase agreements, Misra said.

“If that changes, the entire financials of the companies would change,” he said. “They’ll barely be able to service their debt. That’s not a happy situation for both financers and the developers.”

The Indian state joins jurisdictions like Spain, Greece, Romania and the Czech Republic also working on retrospective cuts for solar power. Spain, after installing the most capacity worldwide in 2008, stalled growth in the industry by capping the number of hours solar plants could earn preferential rates and holding up new installations.

Reopening contracts is always damaging, especially in a new industry that’s struggling to gain investor confidence, Misra said. Project finance, where the lender is repaid from the plant’s revenue and has no claim on other assets, has been more difficult to raise, he said.

“It’s especially negative for something like the solar industry, where non-recourse lending only just started two years back,” Misra said. “We had to work very hard to convince lenders about the technology since it was new for the Indian market.”


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