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Solar energy sector: Intense competition to limit growth potential of IPPs, says Crisil

According to reports, Crisil believes that intense competition will limit growth potential of independent power producers (IPPs) in thesolar energy sector, the rating agency said in a research report.

“IPPs are at a disadvantage compared to non-IPPs, which enjoy accelerated depreciation benefit…Stiff competition from players availing the benefit of accelerated depreciation has impacted the business case for IPPs,” Crisil said in a report.

Solar power projects under different state policies have been competitively bid and awarded at a tariff of about Rs 6.5 per unit. According to Crisil, the levelised tariff is significantly lower than Rs 9.4 per unit, a level which their research indicates is required to achieve reasonable equity internal rate of return of around 16%.

“Going forward, players are unlikely to enjoy the advantage of falling capital costs as solar module prices are expected to stabilise (in rupee terms) in 2013. Thus, we believe that IPPswould have to significantly slow down their expansion plans,” the report said.

In the last two year, the capital cost for setting up solar power units has dropped significantly, prompting states like Tamil Nadu, Rajasthan, Andhra Pradesh and Karnataka to invite bids to set up solar projects.

Crisil says that non-IPP, which are companies with diversified business interest, have been bidding aggressively in the last year as they can set off accelerated depreciation against profits from other businesses.

Non-IPPs such as Mohan Breweries and Essel Mining have bid at Rs 6.5 per unit or below whereas IPPs such as Welspun and Azure Power have bid in the range of Rs 8-9 per unit. This has compelled IPPs to match such low tariffs as projects under most state solar policies are awarded at the lowest bid.

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