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Finance worries may cloud batch II projects of national solar mission

According to reports, the second round of National Solar Mission, which has seen the lowest of the low tariffs, could soon face financing hurdles. The 350 megawatts of solar power saw bids as low as little less than Rs 8 a unit. That is around 33 per cent lower than the current average solar power tariffs of around Rs 12 per unit.

Banks, which are already wary of lending to the power sector, are becoming more cautious with these projects. “I think these bids are aggressive to the extent that they might affect the long-term viability of these projects,” says B K Batra, executive director of IDBI Bank. “But developers might have made their calculations, we will have to see on what basis they were made.”

Sector experts say tariffs like Rs 7.50 per unit and Rs 7.9 could render these projects unviable if these projects were to get financing at current domestic rates of around 13 per cent.

“With non-recourse rupee financing of debt, it will be challenging to achieve these tariff numbers and deliver a reasonable return to the equity investor,” notes Debashish Mishra, senior director of accounting firm Deloitte Touche Tomatsu.

The first round of the same auctions, which took place a year back, have not seen financial closures. Banking sources say that only those projects, which leveraged their balance sheet to get financing, have achieved financial closure. Many projects that were by smaller developers have neither raised debt nor progressed. This time around, however, saw some bigger groups participate like Mahindra Solar, Welspun group, and private equity-backed companies like Azure Power and Kiran Energy Solar.

In spite of bigger companies, banks are only willing to offer recourse debt. “It is a way to cut the risk, notes a banker from a top private sector bank.

“This is a new sector for banks. We have not seen the full cycle of solar power projects and how they behave. We will look at them very cautiously and carefully even though we have heard that many of these bids were because cost of equipment has gone down considerably.”

For solar power, banks also seek high equity contribution from promoters, which is around 40 per cent of the project cost. “Solar projects are different,” says Batra. “They depend on the location, intensity of irradiation, technology, capacity utilisation and power output.” The capacity utilisation for solar thermal projects is around 19 per cent, while that of solar photovoltaic projects is around 23 per cent.

Even as the new regulations for these solar projects require them to source equipment domestically, industry players say there are chances of international equipment and associated financing to make an entry into these projects.

There is also a glut of solar equipment in the European markets. Developers could circumvent some of these rules by assembling the equipment in India.

“If the equipment is sources indigenously, these bids will not be viable,” says an industry insider.

Prof Rangan Banerjee of Indian Institute of Technology says the source of capital will determine the viability of lower tariffs in solar power.

According to him, low capital costs can change the game of the sector, as operational costs of solar power are almost negligible.

“This is interesting dynamics and many people can gain entry into the sector,” he adds.

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