Viability Gap Funding in JNNSM

Viability Gap Funding

Details on JNSM Phase II Batch 1 Financial Bid announcement carried by SECI under Viability Gap Funding (VGF) Scheme

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(Author is an expert solar industry veteran)

The MNRE authorised Solar Energy Corporation of India (SEI) to implement NSM Phase II program. SECI had auctioned 750MW of solar energy projects and announced the financial bid results on 21st February, 2014. A total of 68 bids were received from 58 developers, covering 122 projects with a cumulative capacity of 2,170 MW. Of this, 36 projects with a capacity of 700 MW opted to bid under the Domestic Content Requirement (DCR) part A of the bidding process and the remaining 86 projects with a capacity of 1,470 MW opted for the open category Part B. Each part eventually got allocated an equal 375 MW capacity projects. Bids by PMP Auto Components, Zandu Realty, Golden Crystal and Green Energy Wind were cancelled as they did not meet the techno-commercial criteria. The bid by Moser Baer was cancelled as they could not provide bank guarantee

[blockquote align=”center”]Achieving status of financial closure by all winning bidders would be a world class result ever seen elsewhere in emerging markets.[/blockquote]

The financial bids followed a technical qualification round. Developers competed in the reverse-bid auction in two parts. Half the 750MW available had a mandatory domestic content requirement (DCR), and the other 375MW was left open with no domestic requirement.

The US filed a complaint to the World Trade Organisation earlier this month claiming that it should have equal access to the procurement round. First Solar dominated the thin film market in Phase I batch 1 and 2 via a loop hole in previous JNNSM bids, now closed, which excluded thin film modules under DCR. The company has worked with the US Export-Import Bank on a number of projects will miss out its share in this bidding cycle. On the subject of the impact of the trade dispute First Solar had missed out “only based on the bid submitted by them. There are no political considerations. India can not be blamed to be investment unfriendly.

The reverse bid mechanism and option followed included bids for viability gap funding (VGF), a government capital subsidy to provide up to 30% of JNNSM project costs subject to maximum Rs. 250 lac / MW. There is a cap of up to 50MW per developer for funding applications.

The lowest bid under the DCR was for INR13.5 million (US$0.2 million) by Swelect for 10MW and highest bid has been INR24.9 million (US$0.4 million) by IL&FS Renewables also for 10MW. Under the DCR, another 15 PPAs are to be signed for 21 projects, totalling 375MW.The lowest and highest viability gap funding sought for projects outside the DCR were INR 1.7 million by Gujarat Power Corporation Limited (10 MW) and INR 24.9 million by Madhav Infra (10 MW) respectively. The highest bid under the non-DCR category is INR 24.5m (USD 0.4m) by Tata Power Solar. Under the non-DCR category, 15 project developers will be invited to sign power purchase agreements (PPAs) for 24 projects totalling 375 MW. Part A with the DCR oversubscribed twice whereas the non-DCR (open) part B four times over. The entire capacity of 750 MW will be converted into Letters of Intent (LOI) likely to be confirmed to respective winning bidders by end February. The average project size per developer would be around 25 MW and top solar potential states i.e. Gujarat and Rajasthan are the most preferred locations opted by most developers for implementation.

JNNSM Phase 2 Winners India
JNNSM Phase 2 VGF Scheme project locations

Viability Gap Funding (VGF) payments are estimated for non-DCR projects to cost INR97 billion (US$1.5 billion), whereas the DCR bids are estimated to cost much more at INR160 billion (US$2.5 billion).

The difference in government funding of INR 63 billion (US$1 billion), has sparked questions from solar industry analysts earlier advocated that this funding should have been extended  as direct funding to encourage domestic manufacturing instead.

It is speculated that some of the winning  firms who made aggressive bid would not sign the PPA and therefore the figures will not be final until PPAs are signed, which is predicted to happen  by March end  / April 2014

21 February 2014 has been a momentous day for solar in India as financial bids were opened at SECI.  The room was abuzz with anticipation and apprehension as the developers had their fingers crossed.

It may also be noted that the tariff for the NSM Phase II batch I projects were fixed at Rs. 5.45/kWh while the bids were called for Viability Gap Funding (VGF) required by the developer.

I have strong opinion that the bidders had similar enthusiasm and aggression in bidding perfectly matched with NSM Phase I program Batch 1 and 2 success story. This may be due to declining cost trends in EPC cost, more reliable players in the market, lenders confidence in funding on higher efficiencies / output, improved performance, improvised  O&M evidently observed in Phase I projects and bankable PPA with SECI apart from the fact that SECI followed a transparent competitive bidding process and discovered market determined cost for solar energy deployment in India.  The lowest bid for VGF has been made by GPCL (Gujarat Power Corporation Ltd), a Gujarat State company, the promoters of Gujarat Charanka Solar Park. This was the first solar park in the country already has more than 500MW installed capacity. The VGF bid by GPCL is a jaw-dropping Rs. 17.5 lakhs/MW in the non-DCR category. The next bid in the non-DCR category is Rs. 73.29 lac /MW by Sun-Edison, a US based developer.

The details of Minimum, Maximum and Average Viability Gap Funding quoted in PART A & B can be evidently seen in the attached table with companies participated in bidding.

The variance in VGF bidding amount from various bidders  in Part A and Part B where one can evidently see that  some of the bids in part A category matched the part B i.e. imported costs in an indication that if VGF could now be capped at Rs. 135 lac / MW and entire capacity be allowed under DCR category in next bidding cycles since it creates more jobs and economic development, which India needs. This will allow large scale solar energy deployment and boost local solar industry for sustainable development.   The success of this bidding has reconfirmed the interest of investors in solar projects and is a big booster from crawling solar market.

The heavy Viability Gap Funding discounting seen in Part A and Part B  is almost unbelievable but  Solar Power is clearly has been a winner in India as witnessed  in Phase I success and Phase II batch I bidding.

Achieving status of financial closure by all winning bidders would be a world class result ever seen elsewhere in emerging markets.

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Gopal Lal Somani

Guest Author, Mr. Somani is an expert in the field of solar policies and has had extensive experience in the solar industry.

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