India's Solar Auction at Risk as Tata Power Says Projects `Not Bankable'

India’s first auction of solar power permits may get derailed as plant builders say borrowing costs are too high to finance the projects, a key part of government efforts to reduce oil imports.

Tata Power Co., India’s biggest non-state power developer, said it isn’t participating in the auction because it would have trouble raising loans. Azure Power said it has found another way to fund its project because of unattractive rupee lending terms. Developers offering to sell their electricity at the cheapest rate will be picked and will gain preferential tariffs and a designated buyer of their power, according to the government.

India needs alternative energy sources as the cost of oil surges to a two-year high, threatening Prime Minister Manmohan Singh’s efforts to curb the budget deficit and rein in inflation. The government is estimating a cost of funding for the industry at 13.3 percent, compared with 10-year bond yields of 8.84 percent for Rural Electrification Corp., India’s state- controlled lender to power projects.

“We’re not comfortable,” Banmali Agrawala, Tata Power’s executive director of strategy and business development, said in an interview in Mumbai on Nov. 26. “We would not want to go and win a project with a power purchase agreement that’s not bankable.”

Sunny Days

India, which has about 300 sunny days a year on average, has collected bids under a government program to generate 20 gigawatts of power from the sun by 2022, equivalent to 12 percent of the nation’s current generation capacity. Winners may be announced as soon as the end of the year.

As the world’s fourth-largest consumer of oil, India imported 70 percent of its crude last year, according to the U.S. Energy Department. Imports of the commodity surged 41 percent in the first 10 months of this year to $82.1 billion, according to data compiled by Bloomberg. Oil touched $90.76 a barrel yesterday on the New York Mercantile Exchange, the highest since Oct. 8, 2008.

Elsewhere in Indian credit markets, Indian 10-year government bonds rose today and the rupee fell after six days of gains. GAIL India Ltd., the nation’s largest natural-gas distributor, is raising 7.5 billion rupees selling 10-year bonds.

Yields Fall

The yield on the 7.80 percent note due May 2020 fell one basis point to 8.09 percent, according to the central bank’s trading system. India’s three-year bond yield was 7.5 percent, while rates on similar-maturity notes in Brazil were at 12.34 percent. Comparable Chinese yields were 3.09 percent and 6.96 percent in Russia.

The difference in yields between India’s debt due in a decade and similar-maturity U.S. Treasuries was 489 basis points, the slimmest margin since the first week of August. The measure averaged 317 basis points during the past decade.

The cost of protecting against a debt default by government-owned State Bank of India, which some investors perceive as a proxy for the nation, has increased 55 basis points this year to 173, according to data provider CMA. Such swaps usually pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt, and they rise as perceptions of credit quality deteriorate.

India’s rupee declined 0.9 percent to 45.03 per dollar, the most since Nov. 15. The currency has advanced 2 percent this month, the best performance among Asia’s 10-most traded currencies.

GAIL Bonds

GAIL’s bond offering will close today, two people familiar with the matter said yesterday. The bonds have a call option at the end of the seventh year, said the people, who declined to be identified as the information is private.

Singh’s government subsidizes diesel, kerosene and cooking gas to cap inflation, adding to the budget deficit that he is aiming to lower to 5.5 percent of gross domestic product in the year ending March 31, from an estimate 6.9 percent last year.

The solar auction aims to avoid the problems of European governments, including Spain, Germany and France, which are struggling to curb mounting subsidies to solar electricity suppliers. Spain owes about 14.6 billion euros ($19.3 billion) to power companies for the shortfall between the cost of supplying power and what the government promised to pay.

Europe’s debt crisis forced Spain to freeze the start of a plan last month to sell power revenue bonds intended to reduce that deficit.

Government Guarantee

India will guarantee that solar projects get paid for the power they produce to encourage banks to lend, said Deepak Gupta, secretary of the Ministry of New and Renewable Energy. The government also asked a group of lenders headed by the State Bank of India to look for ways to cut funding costs, he said.

“The developer must be paid, that we will ensure,” he said in an interview in New Delhi on Nov. 30. “The government of India is guaranteeing this. The banker can reduce his interest rate if he knows that if there’s a problem, there’s a guarantee.”

India’s solar power producers may need as much as $62 billion of investment to 2020 based on capital spending costs of 140 million rupees per megawatt, according to Bharat Bhushan, an analyst with Bloomberg New Energy Finance in New Delhi. About $3.1 billion may be needed for the first phase. The estimates may change depending on variations in equipment costs and technologies, Bhushan said yesterday.

The Central Electricity Regulatory Commission, which sets benchmark power tariffs, assumes a 13.3 percent cost of debt for renewable energy projects built in the fiscal year ending March 2012. Average Indian dollar debt yields are about 5.07 percent, according to HSBC Holdings Plc indexes.

Higher Costs

“The cost of financing in India is higher than the international cost of financing,” Inderpreet Wadhwa, chief executive officer of New Delhi-based Azure Power said in an interview yesterday. “We’re not looking at Indian banks.” Azure Power has bid to build a 5-megawatt project.

India’s sunny days provide 5,000 trillion kilowatt-hours per year of solar energy equivalent, according to the Ministry of New and Renewable Energy. In comparison, India’s projected total energy consumption this year is a fraction of that at 848 billion kilowatt-hours, a ministry report showed.

That makes India one of the most promising markets for solar that banks would tap if they could eliminate some of the risks of an unfamiliar technology, said Michael Barrow, director of the Asian Development Bank’s private sector infrastructure finance division.

“The bankers are saying they’d like to see if the ADB can help alleviate some of the risks,” such as panels failing to deliver as much power as expected, Barrow said by telephone from New Delhi last month.

The Manila-based lender may try to help extend the loans from the eight years that banks might offer to the 15 years that project developers will need, he said.

“Interest rates are what they are, we can’t impact underlying borrowing costs,” he said. “But we can make the sector attractive. If you’re having to pay back over 15 years versus eight years, that fundamentally affects the economics of a transaction.”

To contact the reporter on this story: Natalie Obiko Pearson in Mumbai at npearson7@bloomberg.net.

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net

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