Bhadla Phase-III Solar Park: Key solar cost reducing factors responsible for lowest bid of Rs 2.44 per unit Levelised Cost (LCOE)




The key drivers of lower LCOE (Levelized Cost of Electricity) of solar power is the result of combination of factors and the most important being:-

Cost Driver / Factor # 1 - Favorable Policy of GOI –

Decision by GOI to cover solar power by SECI under the ambit of Tripartite Agreement for payment security against defaults by State distribution companies. This has helped to eliminate the so called inherent risk associated with liquidity generated from power sale by the developers during the entire tenure of 25 Years mentioned in Financial Model

Cost Driver / Factor # 2 - Energy Yield –

Superior energy yield (eg: better solar resource at the site, and operational efficiencies) owing to approximately 7-10% higher yield in Rajasthan due to better solar radiation conditions. Rajasthan happens to be an excellent solar location, with high fraction of DNI (direct normal irradiance). Perhaps the use of mature single-axis tracker technologies that can tilt for a greater angle (e.g.: 55-60 degrees instead of 45 degrees) could enhance yield further. Lower ground coverage ratio (GCR), i.e. more land per MW Peak (MWp) could be additional factors. Use of shorter strings in the inverters could be a factor as well. Another possibility is the use of DC-optimizers in the architecture which would reduce balancing losses.

Cost Driver / Factor # 3 - CAPEX –


Lower cost of CAPEX owing to drop in module prices in the international markets. Solar module (or photo voltaic panel) costs account for more than 50% of the entire project CAPEX costs in India. The CAPEX segregation mentioned here shows the relative costs estimate of Rs. 400 lakh / MWp. Note that all the non-module costs (Land, Civil & General Works, Mounting structure, Power conditioning unit, Evacuation lines & equipment, power electronics, cabling) are single digit or close to 10 %.

And if we compare this CAPEX segregation with that of many of the western countries then we find that module CAPEX is only about 25-30% of total CAPEX due to their higher standard of living cost and higher commodity cost leading to higher supply chain cost and human installation costs.

Needless to mention here the Chinese factor due to which solar PV module costs have fallen faster. This Chinese factor has been originated by the temporary overcapacity in China resulting from delayed projects in several key markets.

As with every emerging technology, the prices for solar cells are falling with the increase in series production and technological innovations. Because similar programs to the ones in the USA are also being launched in other countries like Japan, Germany, Spain, Netherlands etc., it can be assumed that the costs for solar power will continue to fall in the coming years.

Moreover, based on the experience curve, it can be concluded and interpreted that each time the total production quantity has doubled; the prices for solar modules on the world market have fallen by 20 %.

So the CAPEX factor can be concluded that the ACME and SBG auction at Bhadla Solar Park phase III (Which allows 11 months for the project to be built) allows locking in some of these price-declines, and hedging to capture future price declines over 11 month period. Therefore, it is interpreted that the decline of 40-47% e.g. Rs 4.63 / KWh to Rs 2.44/KWh, essentially financed by bleeding module makers from China.

We can see that innovations to reduce capital costs or increase energy yield are the key to bringing solar to coal fired without subsidies. Also note the important role played by the "Weighted average cost of capital (WACC)" or “Cost of capital” or discount rate and term (N). We can say that financial engineering innovations have been a big part of solar companies work to make solar affordable to all. For instance in the western countries like US, Japan, Germany, etc., financial innovations have allowed the “cost of capital” to drop significantly, having a huge impact on affordability of solar as 25% decrease in “cost of capital” reduces the LCOE by more than 5 %. We now need to make similar innovations at the technical and financial levels to enhance the solar penetration and also to bring solar affordably to the emerging markets and the poor.

Capital Cost as per the Draft CERC (Terms and Conditions for Tariff determination from Renewable Energy Sources) Regulations, 2017( Dated: 16th February 2017)-

Capital Cost Norms (February 2017) - The Commission shall determine only project specific capital cost and tariff based on prevailing market trends for Solar PV project.

Capital cost as per the Central Electricity Regulatory Commission (CERC)’s proposal on Overall capital cost dated 23rd April 2016 –

Capital Cost Norms (April 2016) -


Central Electricity Regulatory Commission (CERC)’s Norms on Overall capital cost during Financial Year 2014-2015. The table below indicates CERC determined benchmark cost for Financial Year 2014-15.

Capital Cost Norms (FY 2014-2015) -


Cost Driver / Factor # 4 - OPEX –

OPEX is not likely to be significantly lower unlike CAPEX, though newly gained capabilities like robotic cleaning, drone-based image analytics (to catch quality/operational issues) are starting to be actively implemented at the commercial level that could reduce costs and revenue losses due to inconsistent operations quality.

In The Financial Model I have estimated OPEX improvement at 5.72% over last year. Also sunk CAPEX dominates OPEX in solar farms especially with high interest rates.

Accelerated Depreciation (AD) rules on CAPEX have tightened up in India since last year (allowing only 40% depreciation per year, down from 80%). This is a modest negative factor relative to 2016 and 2015.

As per the Financial Model, from an LCOE perspective, a net CAPEX drop of 40-47% (aggressive) will lead to a linear drop in LCOE of 40-47% from Rs 4.63/KWh to Rs 2.44/KWh

Cost Driver / Factor # 5 – Debt Equity Ratio (Leverage factor), Hedging Risk, Risk during tenure, Interest Rate, Debt Tenure –

Strengthening of Indian Rupee against US dollar amalgamated with Economies of scale is also a factor as it is a 200 MW / 300 MW plant.

The park capacity, cheap financing / capital options and the lack of any big tender are some of the other contributing factors.

Cheap credit owing to lower Interest rates, lower weighted average cost of capital, including lower risk premium, and longer loan tenure are important factor and this amalgamated with lower risk and higher leverage (i.e. debt-to-equity ratio) matters a lot in reducing the LCOE

As mentioned in my earlier article "Financial Model of 200 MW Solar Park" , A 8-10% decrease in after-tax cost of debt, reduces the LCOE from 2.6 to 3.0%

In the recent past, Infra projects IDC (Interest during construction) is squeezing because of decline of after-tax cost of debt.

Here in India, the long term interest rates for 12-25 year financing are higher than the short term rates and this can be substantiated by the MCLR of 7.5-8.5% by several nationalized and private banks of India.

Many argue on the point that overseas loan offered by Government financial institutions from Japan, Europe and by the World Bank are cheaper and therefore the financing should be sourced from that overseas financial institutions and banks. In spite of minimal interest rate (almost close to zero) associated to overseas funding, we should be aware that these money from overseas sources have the inherent currency risk owing to devaluing Indian currency and subsequent costs of hedging. And there are chances that the bidders have not fully hedged their exposures over the entire tenure of the financing. Therefore, bidders may have inherent risk through currency risks for their un-hedged exposures which will bleed them later unless these bidders and competent enough to be smart currency traders.

If the leverage ratios assumed to have increased beyond the industry standard of 70% debt / 30% equity to 85 % debt / 15% equity then the risk-adjusted interest rates derived from Weighted Average Cost of Capital (WACC) shall drop from 8.36 % to 7.15% under the condition that (i) Loan tenure is 25 years (ii) Beta is 1 (Assuming that in Rajasthan the sun rises every day and the yearly irradiance averages are relatively stable and solar PV equipment is relatively long lived) (iii) the risk free rate of return is 1.5% (iv) the expected market return is 14% and (v) after-tax cost of debt is 9%. All these has been estimated in the Financial Model

Cost Driver / Factor # 6 - Grid integration-

Grid connected solar power plant is a big hidden cost of renewables that is being absorbed by the government today. Currently we are more focused on decreasing LCOE (Rs/KWh) and now-a-days constantly decreasing quoted LCOE is considered a milestone for India. On the brighter side for the perspective of GOI, in future, we can see the movement from LCOE to balancing cost where this hidden cost shall be borne by developers.

Line Graph perception is that the solar power price has gone down by half since Q1 2016:-



About Author: Ujjwal Kumar Gupta, MBA - XLRI; B.Tech - IIT; Sectorial experience - Infrastructure, Energy, EPC, OEM, Power, Mining, Construction, Steel

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Disclaimer: The author contributed to this article in his personal capacity out of the passion of writing as a hobby and also by doing judicious utilization of available free time. The views and opinions expressed in this article are those of the author and do not necessarily reflect or represent the views or the official policy or position of the any entity, institution and organization. Assumptions made within the analysis are not reflective of the position of any entity, institution and organization. The author disclaim any liability in connection with the use of this information. Examples of analysis performed within this article are only examples. They should not be utilized in real-world analytic products as they are based only on very limited and dated open source information.


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