India’s solar tariff stabilises, lower than thermal power, says IEEFA


A new study revealing that current tariffs in the Indian solar sector (hovering at Rs2.50-2.87/kWh) have stabilised at rates about 20-30% below the cost of existing thermal power in India, and up to half the price of new coal-fired power, concludes that the lucrative prices provide enormous opportunities to invest in clean, zero-emissions energy.


The study undertaken by IEEFA and JMK Research & Analytics compared domestic tariffs and the conditions enabling project returns, with the results juxtaposed against solar developer expectations.


Vibhuti Garg, IEEFA energy economist, said their modelling found that as per current market conditions, tariffs below Rs2.50/ kWh are financially not viable in the Indian solar sector. “DEVELOPERS HAVE ALREADY REDUCED THEIR RETURN EXPECTATIONS FROM 14% TO 12%, with tariffs being achieved as low as Rs.2.5/kWh.” “While this rate is very competitive compared to thermal plant tariffs, and lucrative for power distribution companies entering long-term power purchase agreements, this is a floor for developers if they want to make money,” Garg said.

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He said Solar Energy Corporation of India (SECI) and national power company NTPC also played a key role in building international investor interest. Contractual certainty is in place with counter-party and payment risk assurance from these central government agencies.

According to Jyoti Gulia of JMK Research, conditions in India are very different from other energy markets. “We found a number of competing concerns in our analysis,” said Gulia. “Interest rates, module costs, and capacity utilisation factors (CUF) in particular, have a major impact on solar tariffs and project returns.”

THE COST OF FINANCING IS A BIG ELEMENT IN DETERMINING TARIFFS AND RETURNS, according to the report. Significantly higher interest rates in India compared to other leading renewable energy countries is one of the reasons for higher domestic tariffs. The zero indexation for the 25-year period is also a key value for India that is not explicit in the Year-1 tariff.

“The landed cost of imported modules at a time of currency devaluation is also adversely affecting tariffs, however, this might be compensated by the falling module prices.

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Finally, the capacity utilisation factors differ across states in India, in light of significant variations in solar resource quality.

“Any drop in utilisation rates has a significant impact on project returns. As per our report findings, a 3% drop in CUF results in over 7% fall in equity returns.”

Developers must be mindful of all the parameters impacting tariffs when bidding. “To earn reasonable returns on project investments, it is crucial for project developers to factor in the risks and rightfully estimate the costs of every component,” said Garg.

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