Solar Power bids below Rs. 9 per unit risky says Crisil Research

KOLKATA: CRISIL Research, believes that the pace of reduction in capital costs in solar power is expected to moderate in 2012. This will exert pressure on the margins of players, who have bid below Rs 9 per unit under batch 2 of Jawaharlal Nehru National Solar Mission (JNNSM), unless they can access low-cost foreign debt.

In 2011-12, India’s solar power capacities increased manifold to nearly 940 mw from a meagre 20 mw in 2010-11. Besides favourable government policies, particularly Gujarat’s solar policy, a sharp decline in capital costs over 2011 drove this rapid expansion.

In 2011, the capital costs of Solar Photovoltaic (PV) projects fell by 3%, following a 50 % decline in the prices of solar PV modules that make up for half of the total capital costs in PV projects. Prices of these modules have been sliding due to weak demand from key European markets including Germany, Italy and Spain following the withdrawal of incentives after a period of explosive growth in capacity additions.

Moreover, significant capacity additions, led by Chinese module suppliers, resulted in module overcapacity of almost 50% in 2011, leading to pressure on module prices.

CRISIL Research expects the pace of decline in module prices to slow down in 2012 due to the sharp erosion in the margins of module suppliers and increasing consolidation among global players. As a result, capital costs are expected to decline only by 10-13 % to Rs 8.7-9 crore/mw in 2012.

However, some players under batch 2 of JNNSM have bid aggressively anticipating a steeper decline in capital costs, which may not materialise. For healthy equity internal rate of returns (IRRs) of around 1%, a levelised tariff of Rs 9 per unit is necessary, assuming a plant load factor of 19 per cent and typical debt equity of 70:30, with borrowing costs of nearly 13 per cent. “Almost half the bids under JNNSM batch 2 have been below Rs 9 per unit and about a fourth of the bids below Rs 8.5 per unit, making these investments highly risky”, says Rahul Prithiani, Director, Industry Research, CRISIL Research.

These projects can become viable if solar power producers can tap cheaper foreign funds. Often foreign developmental finance institutions provide low cost debt to fund purchase of solar equipment from suppliers in their country. Hence, the domestic procurement clause imposed by JNNSM for crystalline PV cells and modules – the widely used technology – could limit access to such funds.

“In contrast, the fixed levelised tariff of Rs 10.37 per unit and the absence of any domestic procurement clause make Gujarat state’s solar power policy more attractive, thus enabling healthy equity IRRs of 18-22 per cent”, said Prasad Koparkar, Senior Director, Industry and Customised Research, CRISIL Research.

Source: Economic Times

About Ritesh Pothan

Ritesh Pothan, is an accomplished speaker and visionary in the Solar Energy space in India. Ritesh is from an Engineering Background with a Master’s Degree in Technology and had spent more than a decade as the Infrastructure Head for a public limited company with the last 9 years dedicated to Solar and Renewable Energy. He also runs the 2 largest India focused renewable energy groups on LinkedIn - Solar - India and Renewables - India
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