• Bidding behavior in the Indian solar sector not sustainable: Bridge to India

    Solar power tariff may not have dwindled due to auctions and increased competition as being claimed by the government but because of falling equipment costs.

    According to research firm Bridge to India, changes in equipment costs and other factors are responsible for most of the decline and adjusted for these changes, tariffs haven’t trended down in the last 18 months.

    “As an example, in July 2015, weighted average successful tariff for the Madhya Pradesh 300 Megawatt state tender was Rs 5.35 (US ¢ 8.2)/kWh. But if that bidding were to happen in September 2016 in another state of Andhra Pradesh, the same tender would yield a weighted average tariff of Rs 4.29/kWh because of changes in capital expenditure, cost of debt, irradiation and land and transmission infrastructure costs,” Bridge to India said in a report.

    It said harmonised tariffs have stayed reasonably stable around the average level and projects tendered by NTPC and located inside the solar park were highly oversubscribed and subsequently had the lowest tariffs.

    “For other tenders, we see no material relationship between offtake risk and bid results except in some extreme cases – Gujarat (credit rating of A+ by ICRA; tariff discount of Rs 0.32/ kWh) or Uttar Pradesh (credit rating of C by CARE; tariff premium Rs 2.68/ kWh),” it said.

    Auction based tender process has forced developers to be very aggressive. The industry is trying to bridge the returns gap by improving technical execution and finding innovative, cost effective means of financing. But it is also becoming increasingly common place to build forward-looking, favorable assumptions for solar module prices, debt refinancing and many other parameters.

    “But the most relevant insight, in our view, is that the average harmonized tariff from our study gives an equity IRR (internal rate of return) of only 14.20 per cent, significantly below the benchmark expectation of 18-20 per cent and that too without any material risk contingencies,” Bridge to India said.

    The report, however, said steep module price declines pose critical threat to the financial health of module suppliers and a risk for winning project bidders. In general, risk pricing, particularly for capital cost, interest rate, offtake and transmission risks, appears inadequate. T.J. Lang Jersey

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