When the first 150 MW of solar was tendered under the National Solar Mission (NSM) Batch-I in 2010, the average tariff quoted was Rs 12.16/kWh. Since then, the prices have dropped at a level which no developer could have imagined. But, the current fall in bid triggers two warning signs: can it be sustainable? And, does inadequate risk pricing pose a severe viability challenge for the sector? SOLAR TODAY tries to decode what it calls the 'great tariff decline'.
It's not just the sun, but the entire universe seems to be conspiring to make solar power tariffs fall in India. And, much to the chagrin of some losing bidders, even the state governments are chipping in to escalate the fall in solar power tariffs. Just on the heels of the fall of tariffs to new lows in the Rewa (Madhya Pradesh) project bids, India witnessed Solairedirect committing a new low (in Andhra Pradesh) that has left investors from around the world wondering, 'What's happening in India?' Solairedirect had gained 'notoriety' very early in the game, when it set tariff benchmarks below Rs 11/kWh against the prevailing benchmark tariffs of around Rs 15/kWh.
In this tariff war, some winners were supported by the prevalent eco-system to eventually commission their projects, while some other winners faced the threat of losing their performance bank guarantees provided to the governments.
As we all know, the one single factor that contributed majorly to the success of the implementing winners was the continuous fall in solar PV cells and modules across the world, notably in India's major source China. The other has been the developers' ease of access to low cost capital - debt as well as equity. These two continue to contribute majorly to the trend that we see in the market place.
With specific reference to the large Madhya Pradesh and Andhra Pradesh projects (each of 250 MW), one tends to overlook other contributing factors. In case of MP, the PPA provides for an escalation of 5 paise per kWh over a period of 15 years out of the 25-year-tenure. And, in both cases, the other significant contributing factor has been the fact that the state governments are providing the required land and power evacuation infrastructure.
The latter two contributions remove major risks relating to the timely implementation of projects, bringing in comforts for developers who look for quick turnaround in their projects.
Here, Bhupesh Trivedi, CEO, REECODE Energy Solutions went deeper into financial models and played with various permutations to arrive at the desired IRRs from such tariff.
In case of Madhya Pradesh, the project barely managed a pre-tax equity IRR of 14 per cent, with project implementation cost estimated at Rs 3.70 crore per MW (all inclusive), power generation of 1.60 million kWh per MW DC per annum, debt-equity ratio of 80:20, interest on debt of 9 per cent (including hedging costs), and O&M cost of Rs 4 lakh per MW DC (direct current) per annum, with 4 per cent annual escalation. With all other assumptions, remaining equal in case of Andhra Pradesh, the projected pre-tax equity IRR goes below 13 per cent. Average debt-service coverage ratio (DSCR) in both cases goes below 1.20 and will surely dissuade Indian banks from funding these projects.
So, what's the harm if foreign equity as well as cheap debt come into the country and enable state power discoms and large power consumers to get committed low-rate solar power and meet their renewable purchase obligations?
That said, many industry experts including those who have earlier supported the idea of low pricing raised some valid questions. What is driving the movement and variation in tariffs? How are project developers pricing risk? Can they raise capital to implement the projects? Like to be seen in other sectors, most notably thermal power and roads, that many projects have either not been implemented because of viability concerns or have been implemented but subsequently ended up in financial distress.
There are multiple variables which affect bid tariffs such as location, size and timing of tender, design of tender (simple tariff vs VGF bidding, availability of solar park and its charges). ST has examined the recent bidding history for solar projects, to understand the impact of these variables and delve deeper into the underlying trends.
Is it a slowdown?
No, we are not referring to what India has witnessed in 2008, but, the reason for such low price bidding.
The only possibility of such low price bidding is mainly due to slowdown in tenders or upcoming projects.
Consider this: Pace of new utility scale solar tender announcements and project allocations has slowed down considerably to just 4.2 GW and 6 GW respectively, down 70 per cent and 33 per cent between FY2015-16 and FY2016-17.
This slowdown is putting severe pressure on the 30-40 active developers in the market. The developer community is hungry for more projects to meet their internal targets and to scale up to monetise previous investments.
A testimony to this is recently witnessed Bhadla Solar Park, Rajasthan. A total of 33 developers are believed to have submitted bids for an aggregate capacity of 8,750 MW - an over subscription of almost 12 times. Coming in the wake of intensely competitive bidding in Rewa and Kadappa tenders, the signs are that competition for new projects is getting fiercer, particularly as the supply of new projects has slowed down in the last 12 months.
Says, Vinay Rustagi, Managing Director, Bridge to India, 'Lower solar tariffs should ideally provide demand boost for solar projects, but ironically, they are adding to short-term slowdown as central and state governments reconsider procurement policies.'
However, in the current fiscal, Rustagi expect a slight reduction in new solar capacity addition, before activity picks up again from 2019 onwards.
Most of the active project developers in India including Adani, ReNew, Acme, Azure, SolaireDirect (Engie), FRV, Sembcorp, EDF, Canadian Solar, Aditya Birla, Shapoorji Pallonji, Mytrah, Fortum and Trina Solar have participated in this tender. Notably, Welspun has made a comeback after the sale of its assets to Tata Power. ReNew, SoftBank and Saudi-based Alfanar have submitted bids for the entire 750 MW capacity. Adani and SolaireDirect have bid for 550 MW and 500 MW, respectively.
Industry pundits believe that while the large over subscription in Bhadla tender is primarily due to slowdown in new tender issuance, the improved credit rating of SECI is also a relevant factor.
The Indian government's announcement of 100 GW solar target led to a big surge in new tender announcements in H2/2015 and H1/2016 with some large states front-loading their solar power procurement programs. At the peak of tender activity in 2016, SECI tenders were over subscribed by only about 2x (Maharashtra 450 MW, Andhra Pradesh 400 MW) or even under subscribed (Odisha 300 MW, Karnataka 950 MW). But growing interest from many large global and domestic solar developers in the sector, combined with slowdown in new tenders is leading to a tough, competitive environment for project developers.
The main problem here is sustaining a high level of new solar power demand from states when many of them are facing power surplus. Solar tariffs in the sub-Rs 3.50/kWh (USó 5.4) range should provide huge demand boost for solar power in the long run, but ironically, lower tariffs have led to unique challenges in the short-term.
Central and state governments are reconsidering their procurement policies leading to postponement of some tenders. Meanwhile, some discoms, having completed auctions with higher tariffs (notably Jharkhand and Odisha), are now having second thoughts on signing power purchase agreements (PPAs).
Trajectory of solar tariffs
The recent record low bid of Rs 3.30/kWh (levelised over 25 years) at the Rewa Solar Park by ACME was lower by Rs 1.05 and 24 per cent, compared to the previous low of Rs 4.35 quoted in Rajasthan (by Fortum) in July 2016.
When the first 150 MW of solar was tendered under the National Solar Mission (NSM) Batch-I in 2010, the average tariff quoted was Rs 12.16/kWh. Average tariffs have fallen by about 73 per cent since 2010, almost in line with Chinese spot module prices, which have fallen by approximately 80 per cent since 2010.
What led to such low tariffs?
Intense competition in reverse auctions due to a limited supply of projects has pushed companies to bid lower and lower, sacrificing margins, in order to gain market share. Highly competitive reverse auctions, falling module and component prices, the introduction of solar parks, lower borrowing costs, and the entry of large power conglomerates with strong balance sheets and access to cheaper capital have all contributed to the dramatic fall in bids.
An increase in lending by Indian Renewable Energy Development Agency (IREDA), the World Bank, the Asian Development Bank and other development banks have provided developers with cheaper loans which has enabled developers to bid at much lower prices, stated an official at the Ministry of New and Renewable Energy (MNRE). In the last two years, average domestic borrowing rates have declined by approximately 14 per cent for solar projects.
However, ever falling Chinese cell and module prices due to expanding global market, scale, supply and demand imbalance is the single most important reason that has enabled project developers in India to aggressively bid and build projects.
'Initially, Rs 5/kWh ($0.08), was the benchmark that was not to be crossed while bidding, but if the government provides support in the form of a guarantee and a must-run status, then projects will be viable at close to Rs 3-4 per unit. In the future, it can even reach Rs 2.03/kWh, stated a solar project developer,' says Raj Prabhu, CEO and Co-Founder, Mercom Capital Group.
India-China love affair
Chinese module prices have declined by approximately 80 per cent since 2010. The module price declines in 2016 (31 per cent) is the second largest decline following the 45 per cent price crash in 2011. After huge price declines in FY2011-2012, there was some price stabilisation between FY2013-2015, during which, module prices fell by only 11 per cent. In fact, there was a 1.5 per cent price increase in 2013, due to the tightening of module supplies. These massive price declines have more to do with global demand and supply than what has happened in India, which has installed 10 GW since 2010. China installed 34 GW just in one year, in 2016.
In the last 12 months, Chinese module prices have now fallen by about 33 per cent, enabling the recent low bids of Rs 3.30 /kWh in Rewa, Rs 3.15/kWh in Kadapa and Rs 2.62 /kWh in Bhadla.
Meanwhile, KS Popli, Chairman and Managing Director, IREDA, puts his view straight. 'Solar park programs have helped to bring down tariffs to some extent as large projects can be constructed in a single location with the necessary grid infrastructure and land provided, bringing down project costs and associated risks.'
Though solar parks have contributed to bringing costs down, most of them have had a lot of challenges including, lack of access roads, cleared lands, and clear demarcation of land areas in these solar parks. Rewa was an exception as the state of Madhya Pradesh worked hard to eliminate the risks typically associated with Indian projects, such as: curtailment, payment delays, etc. The Madhya Pradesh government is also providing a payment guarantee for the park and developers can get deemed generation benefits - all these have contributed to record drop in tariff. However, nothing is built yet and it will be 18 months or so before we know how it all turns out.
Will they? Will they not?
With exponential growth in the sector, the government wants to ramp up domestic manufacturing to decrease the volume of solar module imports which, along with installations, has also increased dramatically. The challenge, like in most markets, has been cost competition from Chinese manufacturers. India also lost the World Trade Organization (WTO) ruling last year which decided that its Domestic Content Requirements (DCR) discriminated against US manufacturers. With this backdrop, policy makers are looking at various options to support domestic manufacturers without violating trade agreements.
The Indian solar manufacturing sector was active long before any policy or significant market demand existed in India. Exports boomed in 2008 with massive growth in global demand, but the slump in 2009 (due to the global recession) slowed the sector. As manufacturing took off in China, prices dropped to record low levels. From the beginning of 2011 through the end of 2012 module prices fell from $1.80/W to $0.65/W, a 65 per cent drop. State funded and subsidised Chinese manufacturers captured most of the global market at the cost of manufacturers elsewhere, including Indian ones.
Installed capacity of domestic solar cells and modules in the country is estimated to be 2,815 MW and 8,008 MW respectively, while operational capacity of solar cells and modules is 1,448 MW and 5,246 MW respectively as of December 2016, according to Mercom's Manufacturing Tracker.
However, manufacturers paint a different picture. Most of them are of the opinion that true working module manufacturing capacity was approximately 3 GW as of the end of 2016. This huge disparity in figures is due to old and obsolete manufacturing lines that are still being counted by manufacturers as 'operating capacity'.
The MNRE called a meeting with manufacturers that have a capacity of 500 MW or more to discuss these issues in June last year. The MNRE asked the manufacturers to build polysilicon manufacturing facilities of about 500 MW each, either in partnership with a foreign company or joining forces with Indian companies like Waaree, Vikram and Goldi Green. In return, these companies would get independent power producer rights to develop a 1,500 MW solar project at a fixed tariff by MNRE. 'While the offer was made, we have not heard back from MNRE on this topic,' said a source at Vikram Solar.
Manufacturers were hoping for some kind of subsidy or incentive from the government to scale up production, but were disappointed that the current budget did not provide any. Manufacturers also want more clarity around state-sponsored incentives so they can determine which states are better and more profitable for building manufacturing units.
According to Mercom, Indian non-DCR modules typically cost about 10 per cent more compared to Chinese modules. With highly competitive auctions like the one we saw in Madhya Pradesh at the Rewa solar park auction, tariffs have come down below Rs 4.0/kWh (~$0.059) for the first time to Rs 3.30/kWh (~$0.049). These tariffs are only viable with cheaper Chinese panels, posing an even bigger challenge to local manufacturers.
Developers meanwhile are thrilled at declining Chinese module prices, without which most of the recent aggressively bid projects would not be viable. The government, on the other hand, is saving hundreds of millions due to low aggressive tariffs in auctions which reduces its off-take bill, but this is only possible because of cheaper Chinese panels.
What Lies Ahead
The MNRE in its recently released guidelines for auctions brings in some of the lessons learned from Rewa park. The additional 20 GW, when tendered, will change the face of the Indian solar sector and make it cheaper than thermal in some cases. At least that's the expectation stated by an MNRE official.
The government is also developing a green energy transmission corridor. Although the progress has been slow, the grid is getting ready to take on large renewable energy capacities. In addition, solar park capacities have doubled. 'You add these to falling module prices and the MNRE guidelines for solar tenders and we have the perfect environment for a solar boom in India,' stated a project developer.
While developers remain bullish about the market prospects, there have been widespread concerns that the falling tariffs are unsustainable, even though some of these concerns have been mitigated post-facto because of sharp decline in module prices (fall of 26 per cent in 2016 alone, way ahead of the 5-7 per cent annual decline projection by most industry experts).
"Lower solar tariffs should ideally provide demand boost for solar projects, but ironically, they are adding to short-term slowdown."
- Vinay Rustagi, Managing Director, Bridge to India
"If GoI provides guarantee and a must-run status, then projects will be viable at close to Rs 3-4 per unit."
- Raj Prabhu, CEO & Co-Founder, Mercom Capital Group
"Solar parks have helped bring down tariffs as large projects can be constructed in a single location."
- KS Popli, Chairman & Managing Director, Ireda
- Rahul Kamat