High Module Prices May Lower Returns For 12 GW Solar Projects


As per CRISIL Ratings’ estimates, ~12 GW of projects were bid at low tariffs of less than Rs 2.5 per unit since March 2020. These projects had factored in the price trend of solar modules which had fallen by more than 10% compounded on-year over the 5 year period ending March 2020.


However as these projects are nearing the module procurement phase, a reverse price trend is visible with module prices spiking to USD 0.24/watt in June 2021 – a good 10% increase since January 2021. Remaining components of project cost being land and other electrical equipment, have been fairly stable.

Solar modules form over 50% of the total project cost and bulk of them are imported. Thus material variations in their price and exchange rates from expectations at the time of bidding can pose viability risks on the projects.


Developers typically buy the modules 9-12 months after they win the auction. This wide gap exposes projects to risk of fluctuations in solar panel prices and currency exchange rates. More so because these variables remain unhedged and are also not a pass-through as per agreements.

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Says Ankit Hakhu, Director, CRISIL Ratings, “Although some support has come from a stronger rupee, assuming no further strengthening of rupee against dollar, at USD 0.25 per watt, landed cost of solar modules will be higher by over 10% in rupee terms, and project costs by 6-7% in this calendar year. This will ultimately squeeze equity returns by 200 bps, down from a typical range of 10-12% for bid out solar projects having lower tariffs.”

Module price rise is driven by an increase in cost of critical raw materials such as polysilicon, aluminum and copper, together forming more than 50% of the module cost. While prices for these commodities are cyclical, presently they are showing firmness (having increased by 2-25% since January 2021) given the strong demand of these commodities from other industries (such as auto, construction and electronics).

Says Varun Marwaha, Associate Director, CRISIL Ratings, “Further, if the module prices remain high at over USD 0.25 per watt, the future solar bids are also likely to become relatively expensive compared to the low tariffs of around Rs 2 per unit seen around January 2021. Tariffs could jump by Rs 10 – 15 paise per unit to factor higher module costs and to maintain returns of 10-12%.”

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This is in addition to the impact of 25 – 30 paise per unit because of imposition of basic customs duty applicable on import of solar modules2.

Rise in tariffs may disincentivise the distribution companies to sign the offtake agreements given they have been wary in the past of signing such agreements where the tariffs have been relatively higher. This may add on to an already high pipeline of capacities bid out but not finding a buyer or even cancellations.

1 Return (equity returns) refers to cash returns received by developer after paying off lenders and other stakeholders
2 Given typical project implementation timelines, solar modules are imported 12-18 months from the date of auction. Hence, projects auctioned now would import modules post April 1, 2022 from when basic customs duty of 40% on import of solar modules comes into effect.

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