Webinar Insights: “What led to historic low tariffs of Rs.1.99-2/unit in solar in India?”
India is advancing steadily towards cleaner and more economical form of energy procurement. In the recent years, this transition was driven primarily by the offtake of solar power. The installed solar capacity of India increased at a CAGR of 54% between FY2014 & FY2020 to reach 34.6 GW[1]. The declining price trend of solar power, brought on by solar technology evolution, PV manufacturing growth, enhanced financing options, etc., have spurred the dynamics of the market and lately, even more so as can be seen with the latest record-breaking solar tariffs of Rs. 1.99-2 per unit in the country.
With the underlying agenda of learning different factors that led to such low tariffs and the associated risks, impact analysis on earlier auctioned tenders and to understand developer’s perspective on future tariff trends, IEEFA and JMK Research jointly hosted a webinar titled “What led to historic low tariffs of Rs. 1.99-2/ unit in solar in India?” on 22nd December 2020. The panel for the discussion consisted of eminent speakers with diverse profiles who are as follows:
- Ms. Vibhuti Garg, Energy Economist, IEEFA
- Mr. Goutam Samanta, Head PV Technology, Juniper Green
- Mr. Sathish Velu, Manager, BD, L&T
- Mr. Mudit Jain, Head- Research, Tata Cleantech
- Mr. Lakshmi Narayanan, Senior Manager- BD, Ayana Renewable
- Ms. Jyoti Gulia, Founder, JMK Research (Moderator)
Ms. Vibhuti Garg began the discussion while pointing out the significant global shift of capital away from fossil fuel-based power generation. Since 2013, about 152 major global banks, insurers and asset owners have implemented substantial formal coal policies. Meanwhile, in 2020, so far there have been 68 new/ updated policy statements. Ms. Garg presented some of the lowest discovered solar tariffs across the world and which are below the cost of fossil fuel power generation. In the past 2-3 years, the lowest tariffs among various countries/ regions such as Portugal, Abu Dhabi, Brazil, Jordan, etc. have ranged between US cent 1.32-2.49 per kWh. Whereas, India’s lowest solar tariff is at US cent 2.7 per kWh (Rs. 1.99/kWh). The deflationary characteristic of solar tariff was portrayed using the Indian context wherein approx. 75% decline in the prices can be observed over the last 7 years. With the introduction of competitive bidding in 2016, there was a 35% drop (approx.) in the prices with respect to the last bid in 2015. In December 2020, the prices reduced further by 16% from the earlier lowest tariff of Rs. 2.36 per unit. From 2019 to Q1 2020, concerning the range of L1 tariff and the tariffs bid by all developers in the same tender, most of the solar tariffs lie in the range of Rs. 2.5-2.87/kWh. Post the removal of ceiling tariffs for new solar and wind tenders since February 2020, the solar tariffs from Q2 2020 onwards have been hovering between Rs. 1.99-2.97 per unit. Ms. Garg also gave brief details of SECI auction of 1070 MW Solar (Tranche-III) as well as GUVNL 500 MW (Phase-IX) Solar auction. She touched upon some of the key factors which drove the historic low tariffs in these auctions such as power purchase assurance, access to low cost financing, exemption of duties, prospect of installation of bifacial modules and single-axis trackers, expectation in fall of module prices.
Mr. Goutam Samanta shared a developer’s perspective of the PV market through SWOT analysis. Under strengths, he mentioned that along the past 10 years, developers have been able to gain immense learning and experience to be able to design solar plants with optimum generation. Secondly, there is a bright prospect of higher wattage modules (600 W+) being deployed in PV systems from 2021 onwards. As for weakness, it was noted that the tonnage per MW is higher for systems with 1-axis trackers compared to fixed-tilt PV systems as the solar panels in the former scenario must be installed at a greater height above the ground. Commenting on the opportunity, Mr. Samanta expects further decline in Chinese module prices to 17-18 US cents/Wp prior to and in high anticipation of implementation of Basic Customs Duty (BCD) from April 2022. This would lower the system capex and thereby, raise the IRR of the project.
Providing the lender’s perspective, Mr. Mudit Jain remarked that in a certain auction where the tariff had dropped significantly with respect to the previous solar auction, there was no proportionate reduction in the EPC costs, signifying the increasing risk appetite of the developers. He opined that there are two major reasons for the falling tariffs: module price and interest cost reduction. The module price decline as a factor has been in play for quite a long time. But the interest cost reduction has caused a greater impact on the solar prices. Speaking about other risk parameters, Mr. Jain firstly said that achieving 19% CUF with clipping losses with regard to Indian context is apparently difficult. Secondly, the INR depreciation as against USD considered by some of the developers has been on the conservative side. Thirdly, Mr. Jain highlighted the rising insurance cost on solar projects on account of increasing climate-related risks. He also asserted that interest rate is the riskiest factor affecting the solar tariffs. Due to rising inflation in India, the current lower interest rate may not remain consistent in the near future. If the interest rate were to rise back to 9.5-10%, the equity IRR would fall to a %age below the interest rate. It would be harder for private developers to capture lower interest rates for a long period of time as the floating rate regime would take over.
Mr. Sathish Velu described how the EPC forms a part of the entire solar tariff picture. Initially, he noted the 6 major components of the tariff. Out of the total tariff value, 45% is contributed by the debt and equity together, 30% by modules, 15% by BoS (Balance of System), 5% by O&M and the remaining share by land & evacuation. The components of debt, equity and modules come under the purview of the developers. With the entry of higher wattage modules between June and December 2020, the logistic cost began to drop as the number of modules transported in a container decreased. Deploying higher wattage (upto 540 Wp) modules have also enabled significant reduction in BoS costs viz-a-viz 400 Wp modules. But, a similar level of BoS cost reduction is not observed when moving from 540 Wp to 600 Wp modules as the dimensions of both differ from each other. The O&M sphere has been transitioning from wet cleaning process to dry cleaning process in the past 2 years. The robotic cleaning system brought down the soiling loss even more which improved the solar generation. Simultaneously, with the reduction in labour and water costs, the overall O&M cost is lowered as well. Mr. Velu also commented that currently, the tariff for project with bifacial-tracker system is at par with that for project with monofacial, fixed-tilt system. Although, now, the industry is promoting optimization of trackers to make bifacial-tracker systems more attractive. He added that the developers have brought down their investment return expectation or equity IRR for the recently awarded solar projects because of power purchase assurance and the opportunity for immediate deployment of funds.
Mr. Lakshmi Narayanan brought in several insights to the forum across various aspects of the solar PV market. He reaffirmed that in the global investor landscape, the solar industry receives stronger traction due to the uncertainty (volatility) in cash flows, simpler technology, etc when compared to thermal, wind industry. He agreed with the other panelists that due to the certainty in power offtake, there has been rise in the subscription rates for recent solar auctions. With respect to the PV supply chain, Mr. Narayan mentioned that there has been increase in wafer prices due to supply constraints posed by China on account of environmental issues such as flooding. Glass prices across the globe have also increased due to supply shortage. Thus, currently, module price volatility seems very high. Although, due to lesser requirement of glass for bifacial modules, the impact of glass prices on the modules may not last long. This is also supported by the strong prospect of high global capacity addition for glass production in the next few quarters. The relatively high market volatility now has rendered the recent solar project awardees to delay the procurement of modules for an extended period of time as opposed to purchasing them with the current prices. Concerning domestic financing, Mr. Narayan added that it won’t be possible to predict long-term interest rates. Additionally, due to shortage of liquidity related to domestic financing, External Commercial Borrowings (ECB) is gaining precedence over the domestic financing. The non-fund based financial products would also become more prominent as the market competition intensifies in the future. Despite the higher interest rates in India viz-a-viz the interest rates in the developed countries, India would continue to witness declining trend in the solar prices.
Click here for webinar recording.
[1] MNRE