High solar module price to reduce auctioned project’s returns, increase tariffs

A high solar module price of 25 cents per kWh may not only lower returns on bid-out projects by 200 basis points but may also increase solar power tariffs by 10-15 paise per unit in future bids, Crisil Ratings said in a statement on Friday.

“Rising module prices may diminish returns for 12 GW (gigawatt) of bid-out solar projects by 200 bps and inflate tariffs of future bids by 10-15 paise per unit,” the statement said.

Starting in December, Chinese module manufacturers upwardly revised prices by more than a fifth and began reneging on their contracts to supply equipment that had already been contracted for, even at the risk of their bank guarantees getting encashed, as reported by Mint earlier.

“Although some support has come from a stronger rupee, assuming no further strengthening of rupee against the dollar, at $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,” Ankit Hakhu, director, Crisil Ratings said in the statement.

India has also decided to impose 40% basic customs duty on solar modules and 25% on solar cells from 1 April 2022, a move that would make imports costlier and encourage local manufacturing. Also, MNRE has issued an order enforcing a list of approved solar photovoltaic models and module manufacturers for government-supported schemes, including projects from where distribution companies procure electricity for supply to their consumers.

“Solar modules form over 50% of the total project cost and a 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 the 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,” the statement added.

This comes at a time when developers are currently eyeing projects of at least 9 GW. At present, India has a domestic manufacturing capacity of only 3 GW for solar cells and 15 GW for solar modules.

“As per Crisil Ratings’ estimates, ~12 GW of projects were bid at low tariffs of less than 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 $0.24/watt in June 2021 – a good 10% increase since January 2021,” the statement said.

To ramp up domestic production, state-run Indian Renewable Energy Development Agency Ltd has invited bids for setting up solar manufacturing units under the government’s ambitious production linked incentive (PLI) scheme. The 4,500-crore PLI scheme for solar photovoltaic modules aims to help India ramp up its domestic manufacturing capacity by 10 GW capacity and bring a direct investment of around 17,200 crore.

“Module price rise is driven by an increase in the 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),” the statement added.

India is running the world’s largest clean energy programme to achieve 175 GW of renewable capacity, including 100GW of solar power by 2022. According to the Central Electricity Authority, by 2030, the country’s power requirement would be met from 280GW of solar energy alone.

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