Falling solar prices: Boon or Pain

Solar has been making headlines as PPA rates are reaching parity with conventional fuels. The industry raised eyebrows in 2015, when a tender by NTPC for solar fetched a bid of Rs.4.63 kWh, the lowest bid in the history of the sector. However, it couldn’t retain the position of being the most lucrative tariff, 2016 opened with a tariff of Rs.4.34/unit. The bid was by Fortum India for 70 MW project in Rajasthan.

The industry started off from Rs.18/kWh and has now reached the above levels. Dumping of low cost solar panels, which constitutes a major chunk of the solar project cost, is the major reason attributed to this downturn of prices, is the

Government coming up with tenders, bidders bidding the lowest price and the government over achieving its annual targets. Glossy right?

But, is the country’s utility grid ready for renewables? Will these projects be able to run for every year in the 25-year period?

There are certain questions that need to be addressed:

1. Has the fall in PPA rate (the selling price) been in proportion with the fall in the project cost?

2. Are these projects feasible at such low rates?

3. Is 25 years a long lock in for a regulation driven sector?

4. In the wake of procuring more projects are the developers taking a hit on the IRR?

A recent note by ICRA estimates that at Rs.5/kWh, it is difficult for the IRR to reach double digits. This is assuming project cost at Rs.5.5 crore/MW, cost of debt funding at 11.5% over a tenure of 12 years, and PLF at 19%. So how do we have bids lower than that? The two lowest rates, have been quoted by foreign companies, enjoying a lower cost of borrowing and the scale of projects enabling them to achieve economies. However, there’s currency risk involved too. Being credit worthy, these developers would be getting good rates for the debt. Although, as per a recent report these projects are yet to achieve financial closure.

The move towards a complete renewable powered country would require the grid being ready, the base load being ready to deal with fluctuations in the solar generation and availability of efficient storage capacities. If the government has a no for these questions, probably the honoring of these agreement in future would become difficult and the thin margins of the current bidders won’t take much time to erode. This can ultimately make the entire investment unviable.