Rise in PV Module, Steel and Freight Costs To Hit 5 GW Solar Capacity Under Implementation: Crisil

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Crisil Ratings stated on Wednesday that 5 gigawatts of solar capacity will be affected by an increase in steel and solar module costs, as well as higher logistics costs.


The return on equity (ROE), for nearly half of the 25 GW of private solar capacity, will be affected by a sharp rise in the prices and commodities of solar modules, as well as rising freight costs. The capacity of 5GW was largely bid out between December 2020 and 2021. It is currently being implemented. These projects could see their ROE drop by 140-180 basis points, to around 7%.

These projects totalled 5 GW and were offered at low tariffs of less that Rs 2.35 per kilowatthour (kWh), at a moment when module prices were falling and commodities prices were benign.

CRISIL Ratings Senior Director Manish Gupta says that the remaining 80% (20GW) projects will be affected, but their relatively higher tariffs will reduce the impact to 60-80 basis points. These projects are at advanced stages of their implementation, and most have either imported or held onto some modules at lower prices than the current level.

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The landed cost for solar modules has increased by 40% in the past year. This is due to higher commodity prices, including polysilicon, and supply chain issues like a shortage of shipping containers.

In January-February 2021, mono-crystalline modules were priced at $0.21/kWh. They are expected to either remain stable or fall marginally. Spot prices rose to $0.28/kWh in April of this fiscal due to strong global demand, continued supply disruptions in China, and extended lockdowns, as well as a resurgence in Covid-19 cases.

Director, CRISIL Ratings Ankit Hakhu says, “But, there are three things that will partially offset the loss in returns – they include improved module efficiency and new revenue streams from carbon credits certificate revenue and lower costs of debt.”

First, mono-perc and bi-facial modules are more efficient than the multi-crystalline or poly-crystalline modules of two years ago. This could increase P50 plant load factors by 1.5% and cushion returns by 130-150 basis points.

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A second market has emerged for carbon credits due to the focus on environmental, social and governance (ESG) for corporates, which includes mainly oil and mining companies in Europe, North America, and Australia.

Recent carbon credit contracts were executed at $6-7 per credit. This is due to the growing ESG focus. These are generally split between developers and counterparts to power purchase agreements. If you take a conservative approach, $2 per carbon credit would result in overall revenue of between Rs 0.8- 1 crore per MW (before 50% sharing), which will support cash flow. This will in turn contribute to 100 basis point returns.

Finally, solar developers’ interest rates have dropped significantly since fiscal 2021. Even after taking into account the recent rise in interest rates of 40-50bps and the expected further increases, the net benefit of a lower interest cost over the project’s life is approximately 100bps compared to the expectations at the time the bidding began. This could contribute to 120 basis point of returns.

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Despite this, RoE estimates are still sensitive to any further increase in commodity and module prices due to geopolitical problems or disruptions to supply chains.

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