Download Solar Power bids below Rs. 9 per unit risky

June 07, 2012
Mumbai
Solar Power bids below Rs. 9 per unit risky
Access to low cost foreign debt critical for half the JNNSM projects
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. CRISIL Research, India’s largest
independent integrated research house, believes that the pace of reduction in capital costs 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, the capital costs of Solar Photovoltaic (PV) projects fell by 30 per cent, following a 50 per
cent 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 per cent 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 per cent to Rs 87-90 million/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
15 per cent, 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 a domestic
procurement clause make Gujarat state’s solar power policy more attractive, thus enabling
healthy equity IRRs of 18-22 per cent”, adds Prasad Koparkar, Senior Director, Industry and
Customised Research, CRISIL Research.
Contd…
June 07, 2012
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Prasad Koparkar
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