In Conversation with Mr. Girishkumar Kadam,Vice President and sector Head Corporate Ratings ICRA Limited
∙ Let’s start with the recent developments for solar sector in last one year.
Solar capacity addition on all India level remained at 5.5 GW in FY 2017 and 2.5 GW in H1FY2018. While solar energy capacity share in the all-India installed overall power generation capacity still remains limited at 4% as on Sept 2017, its share is rising considerably in renewable segment, also given the fact that wind capacity addition in near term remains adversely affected due to migration from feed-in tariff to bid tariff with limited progress seen in signing of bid based PPAs for wind energy in the current FY. The bidding activity for award of solar projects has however slowed down in CY 2017 (till Nov) as reflected in awarded project capacity of 3.75 GW as against 7.2 GW in the corresponding period of CY 2016. This is also in the midst of several factors like GST roll-out w.e.f. July 2017, an upward pressure on PV module price level in recent months, uncertainty on anti-dumping duty as well as the finalization of the new bidding guidelines for award of solar projects in August 2017. Further, the tariff competitiveness of solar photovoltaic (PV) energy has also improved in CY 2017 (9M) as evident from a decline in weighted average bid tariff to Rs. 3.12/kwh from Rs. 5.01/kwh in CY 2016 which is on account of the declining price trend of an imported PV module till May 2017 & also, the aggressive expectations by the bidders on module price level forecast. The lowest solar PV bid tariff so far remains at Rs. 2.44/kwh discovered in May 2017 for the project capacity awarded by Solar Energy Corporation of India Ltd (SECI) under National Solar Mission in Badhla Solar Park, Rajasthan.
∙ As the assets become older, will aggressive bidding today become a pain point for the industry a few years down the line?
The imported PV module prices have shown an upward trend over the last five month period, increasing by about 15-17%, from about 30-32 cents /watt in May 2017 to about 36-38 cents/watt in September 2017. This increase is due to factors such as a) advancement of module sourcing from China by companies in the USA, in anticipation of imposition of anti-dumping duty on Chinese modules by December 2017, and b) extension of feed-in tariff regime for solar power projects in China till December 2017, thereby increasing demand. Such pricing pressure on imported PV modules, if sustained over the next three to six-month period, will have an adverse impact on the viability of the recently bid solar power projects, especially where the bid tariff is below Rs. 3.5/unit. However, the magnitude of such impact will vary based on the tariff level and other assumptions. As per our estimates, a 6 cent/watt increase in the PV module price is estimated to result in an increase of about 11% in the capital cost, which in turn is estimated to result in a decline in cumulative average debt service coverage ratio (DSCR) by 0.12 times and decline in project IRR by 180 basis points for a solar power project with tariff of Rs. 2.5 per unit, assuming a debt: equity ratio of 70:30, INR-USD exchange rate of 65, cost of debt at 9.5% post commissioning with a debt repayment tenure of 18 years and a PLF level of 24% (with DC-AC ratio of 1.3 times and degradation factor of 0.5% per year). In this context, viability of solar bid tariffs remain critically dependent upon the capital cost, PLF level and availability of a long tenure debt at cost competitive rate. With imported PV module content, the capital cost for solar PV energy project remains exposed to volatility in both i.e. PV module price level and INR-USD exchange rate.
∙ Assessment for new bidding guidelines for award of solar projects to mitigate concerns for solar sector
The new bidding guidelines provide for compensation to solar power generators in case of off-take constraints arising from the delay in commissioning of transmission infrastructure, grid unavailability and grid back-down, which is favourable for solar power generators. While wind and solar power projects enjoy a “must run” status under the Indian Electricity Grid Code (IEGC) and have to be scheduled before any other source of power, there have been instances in a few states like Tamil Nadu and Rajasthan, where grid curtailment has been observed. Given the single-part tariff structure for these projects, the project cash flows and hence debt serviceability is directly linked to the actual generation and off-take by the procurers. In case of a delay in commissioning of transmission infrastructure or grid unavailability leading to loss of generation in any particular year, the compensation is in the form of procurement of excess generation (generation in excess of the maximum capacity utilisation factor (CUF)) equal to the generation loss, during the succeeding three contract years at PPA tariff. In case of a grid back-down, the minimum compensation shall be based on the average generation per hour during the month and the number of hours lost due to grid back-down at 50% (min) of the PPA tariff. For a solar power project having long-term PPA at Rs. 3.00 per unit and set up at a capital cost of Rs. 5.00 crore per MW, the cumulative debt service coverage ratio (DSCR) for the project would decline from 1.28 times to 1.14 times in case of a grid back-down for 10% of the time and without any compensation. However, the availability of compensation at 50% of the PPA tariff, would lead to a cumulative DSCR of 1.21 times, thereby lowering the impact of the grid back-down on the debt coverage metrics of the project.