Will the solar exuberance sustain?

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CRISIL Research believes bidding aggression will continue for a while, despite pressure on returns 

The solar sector is super-charged right now, going by the aggressive tariff bids seen of late. However, there is a big question mark on whether, or how long, the euphoria will sustain.

Tariffs hit a new low in May, with the winning bid for 500 MW capacity at the Bhadla Solar Park in Rajasthan quoting at Rs 2.44/unit – a price that makes it cheaper than even thermal power. This was way below the Rs 3.15/unit bid seen just the previous month,for a 250 MW capacity at Kadapa Solar Park in Andhra Pradesh.

CRISIL believes the sharp decline indicates the players are aggressively trying to build their solar portfolios at the cost of project returns.

A bevy of factors has resulted in declining tariffs.

First, solar module prices have declined sharply – with ~40% reduction since the beginning of 2016 – to around 33 cents/Watt today.

Second, the high annual global horizontal irradiance (GHI) in states like Rajasthan, Andhra Pradesh and Maharashtra ensures healthy power generation. Bhadla (Rajasthan), for instance,has a GHI of ~6 kwh/m2/day and over 300 sunny days in a year.

Third, the Solar Energy Corporation of India has ensured that payment delay/ default risk to the solar developer is minimum by setting up a corpus fund to cover 3 months of payment in the event of delay.

Fourth,competition for Indian independent power producers has intensified with large global companies looking to expand their portfolios in India even as recent entrants also seek a piece of the pie.

Fifth, the risk is lower in solar parks, which offer ready infrastructure and utilities, including ~2,000 hectares of land with clear titles and evacuation infrastructure i.e. 400/220/132/33 kv grid substation with associated 220 kv lines.

Sixth, CRISIL believes developers are factoring DC side overloading, which essentially means photovoltaic arrays of rated capacity higher than that of inverters could be connected (which in turn reduces cost/MW as seen in chart below) to generate more number of units from inverters.This view gains credence from the fact that in the Bhadla bids, for instance, there is no upper limit on the capacity utilisation factor that a solar plant should achieve.  

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Generation spurts with DC overloading without commensurate rise in capital costSource: CRISIL Research 

Seventh, in order to improve project economics, the players could negotiate for buyer’s credit linked to import of modules – which account for 55-60% of the total capital cost – from Chinese companies. This would lead to savings as there would be no principal repayment for three years, and developers could refinance the loan at the end of that.

Eighth, large developers had raised funds last year from private equity funds and other institutions anticipating significant auctioning activity in 2017. However, tendering activity in the past 6 months has been muted, mounting pressure on them to deploy funds and garner a larger piece of the pie.

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Fall in bid prices not in sync with decline in module pricesNote: We have considered only central level bids in the given period.Source: PV Insights;

CRISIL Research CRISIL Research believes the aggression in bidding is expected to continue over the next 12-18 months as players look to scale up their portfolios amid stiff competition and limited alternative investment options in the power sector. However, for growth to sustain,an improvement in the financial health of distribution companies, stricter enforcement of renewable purchase obligations and availability of low-cost finance would be critical.

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Author: Mr. Rahul Prithiani, Director, CRISIL Research

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