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CRISIL says solar power bids below Rs 9 per unit in India, risky

Solar power is emerging as an important source of power in India with the Government of India pushing through policies to meet its larger agenda of encouraging green power and diversifying its energy mix. The Gujarat state solar policy and the centre’s Jawaharlal Nehru National Solar Mission (JNNSM) are at the forefront of solar power development in India, with the Gujarat solar policy contributing to almost 70 per cent of the capacity additions in 2011-12.

In addition to government support in the form of solar power purchase obligations for state distribution utilities, a rapid decline in capital costs of solar photovoltaic (PV) projects also encouraged capacity additions, taking total generating capacity from a mere 20 MW in 2010-11 to 940 MW in  2011-12. CRISIL Research, India’s largest independent integrated research house, however, believes that the pace of reduction in capital costs of solar PV projects is expected to moderate in 2012 resulting in pressure on profitability of players who have bid aggressively below Rs. 9 per unit under batch 2 of JNNSM. Almost half the bids under JNSSM have been below Rs 9 per unit and about a fourth of the bids below Rs 8.5 per unit, making these investments highly risky.

Both JNNSM and Gujarat’s solar policy encourage capacity additions and investments by facilitating long term offtake agreements between project developers and distribution companies (discoms) at preferential tariffs. As solar power is nearly four times as expensive as conventional coal-based power, the power producers need to be compensated at higher cost-reflective tariffs. In order to spur demand for the more expensive solar power, states have been mandated to procure 0.25 per cent of their power requirements from solar power under the solar renewable purchase obligation (RPO).

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