23
Thu, May

Sliding Tariff Trend And Its Impact On The Overall Project Viability

Perspectives
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Mr Simarpreet Singh, Founder-Director, Hartek Solar Pvt. Ltd

What are your views on the record low tariffs discovered in the recent solar auctions?

The all-time low tariffs are a result of an appreciable decrease in the cost of equipment as well as the cost of finance. Competitive financing has led to healthy competition by attracting big private players. Declining tariffs will take us closer to the 100-GW target by augmenting the demand for solar power. The low tariffs have, in fact, even absorbed the impact of safeguard duty and GST.

Another major reason for the declining tariffs is the drop in prices of solar panels imported from China. About 80% of the solar panels and modules used in solar projects in India are Chinese. With local demand falling after the Chinese government stopped approving more solar projects and cut subsidies for its developers, the prices have weakened considerably as solar manufacturers in China are now banking on exports to recover their costs.

Yet another factor contributing to low tariffs is aggressive reverse bidding by developers participating in solar project auctions. However, it needs to be taken into consideration that the Rs 2.44 tariff is for a 600-MW mega project, which enjoys the advantage of economies of scale and viability gap funding (VGF) of 30 per cent. If we take out this capital subsidy, aimed at bridging the gap between the project cost dictated by the prevailing electricity rate and the price quoted by a developer, the tariff quoted would have been much higher.

Tariffs need to be evaluated with reference to execution costs so as to get a better picture of bid competitiveness. The solar industry has gone through many unfavourable changes over the past one year, which has only added to capital costs. While GST alone has led to a 6-8 per cent increase in capital costs, safeguard duty can raise the capital costs by 14 per cent. Uncertainty over import duties on panels, rupee depreciation and hedging costs have made developers cautious, prompting them to quote higher tariffs. SECI had to cancel a 300-MW solar tender awarded to Adani Green Energy because of high tariffs.

Solar tariffs hit an all-time low of Rs 2.44 per unit for the first time in May 2017 at a 500- MW auction conducted by the Solar Energy Corporation of India (SECI) for the Bhadla Solar Park in Rajasthan. But since then, the tariffs were increasing steadily due to the rising cost of solar panels and the impact of safeguard duty. They rose to Rs 2.94-3.54 for an 860- MW project auctioned by the Karnataka Renewable Energy Development Ltd in February last year. However, the prices have weakened since May when the Chinese government stopped approving more solar projects in the country, fearing excess capacity. This led to a drop in the prices of imported Chinese solar panels, which reflected in the subsequent auctions. With solar tariffs reaching grid parity, companies are betting big on renewables.

 

Supplementary inputs:

Sliding tariff trend and its impact on the overall project viability

While the downward trend may affect the viability of solar projects by making developers compromise on quality to meet the costs, there is reason to be optimistic. Since the developers who have quoted low tariffs have taken all factors into consideration, they will try their best to generate more electricity when there is a drop in tariffs so as to improve their profits and reduce investment-associated risks.

Moreover, the recent low tariffs have largely been witnessed in solar parks, where the economies of scale factor comes into play for developers, who also do not have to pay for the cost of land, transmission and evacuation. Tariffs for smaller projects have not fallen at the same rate. Ultra mega projects do not involve variable costs. The only cost the developers have to bear is the interest they pay after commissioning. With interest rates going down, the projects are expected to become increasingly viable.

Given the huge capital that has flooded the solar market, the cost of finance can make all the difference. A further drop in prices will depend more on the cost of finance than the cost of technology. If this happens, the government will be inclined to focus more on solar energy.

The imposition of safeguard duty will not immediately enable domestic solar module manufacturers to cater to all solar projects coming up in the country. As of now, the domestic module industry has a considerably low capacity which can meet only 15 per cent of India’s solar power requirements. That explains our reliance on Chinese imports and the need to withdraw safeguard duty on Chinese imports. Goldman Sachs Group Inc has rightly observed that solar installations are likely to slow and stretch project schedules as developers adjust to the tariffs.

The viability of bid tariffs for independent power producers largely depends on capital cost, long tenure debt availability at competitive cost and plant load factor level. The outlook for solar power demand is favourable in India owing to improved tariff competitiveness and strong policy thrust. At the same time, investors are worried about the viability of projects because of the rising cost of capital. Consequently, some auctions had to be cancelled as there were not enough participants. Developers are treading with caution, and understandably so.

Impact on the quality of projects

We should take into account that the current tariffs are based on the upcoming installed cost of solar, which further depends on module prices, capital costs and exchange rate. While solar module prices are likely to drop by 20 per cent over the next one year and a probable cut in interest rates will bring down the cost of capital, the exchange rate is also expected to remain stable. As a result, the per MW cost for solar may drop by 10-12% in the next one year, a development that will work in favour of the industry. But developers may also face immense pressure to match timely execution with optimal quality if these factors do not come into play. Many of them will be tempted to compromise on quality to maintain profits.

Though the rising demand will be accompanied by a pressure to reduce prices, developers will have more bargaining power to keep prices low on account of the larger projects offered in tenders. With falling tariffs, it is expected that the costs will also go down. In this scenario, the quality of projects will not suffer. Besides the decrease in module prices, Balance of System costs are also likely to fall due to better inverter designs. So, it has become imperative for developers and EPC companies to augment their procurement and design capabilities.

Possibility of Further de-scalation of Tariff

While solar power tariffs are expected to increase marginally in the short term, a recent study conducted by The Energy and Resources Institute (TERI) has estimated that the tariffs will come down in the range of Rs 1.90 to Rs 2.30/kWh by 2030. Module prices have fallen by 44 per cent over the past one year, but much of this advantage has been offset by safeguard duty, GST and rupee depreciation. The costs went up, execution challenges mounted and discoms had to cancel several tenders because of unrealistic tariff expectations.

In a study titled “Exploring Electricity Supply-Mix Scenarios to 2030”, TERI has found that “a high renewable energy scenario will have a deflationary impact on system tariff later in the projection period”. TERI has also projected a reduction in the capital cost of solar photovoltaic technology up to 3 per cent per year till 2024, 2 per cent from 2024 to 2027 and 1 per cent after 2027. Technological improvements and optimised manufacturing processes will lead to reduction in capital costs. The study has pointed out that the tariffs can even drop to Rs 1.90/kWh if the widespread deployment of tracking technology raises the capacity utilisation factor of new plants.

Storage technologies will also witness an appreciable reduction in costs. The levelised costs of solar plus three hours of storage could fall from Rs 13.6/kWh to Rs 6.34/kWh and the levelised costs of standalone storage from Rs 29.0/kWh to Rs 11.9/kWh by 2030. In contrast, coal tariffs are likely to increase because of rising transport and capital costs.

SECI’s auction recorded the lowest tariff of Rs 2.55 per unit, a modest increase as compared to its previous auction held in July 2018 which recorded an all-time low bid of Rs 2.44 per unit. SECI’s reverse auction of 1,200 MW has witnessed tariffs ranging from Rs 2.55 to Rs

2.61 per unit. US-based UPC Energy Group secured a 50-MW project at Rs 2.55 per unit, the lowest tariff in the auction. These tariffs are incredibly low for a 50 MW project, indicating that solar power will become even cheaper in the long term. Solar tariffs are again showing an upward trend with tariffs of Rs 2.70-2.71 per unit being quoted in the latest auction by SECI. The tariffs in the next one year are expected to hover around this mark.

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