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Low bids hurt IRR of solar power developers, aggressive bids to continue

According to reports, the falling bid spiral for solar power in this fiscal is likely to spill over to coming year. However, it will hurt the Internal Rate of Returns (IRR) of the solar power developers. Clean energy sector experts have pointed out low bids have been possible due to declining input price of solar modules.

In an estimate by Bridge to India, at average harmonised tariff of Rs 4.31 (¢ 6.3)/ kWh gives us an equity IRR of 14.20 per cent, significantly below the benchmark expectation of 18 per cent. Bridge to India tracks investment in the Indian clean energy sector.

Solar tariffs touched a historic low last month in the bidding for the Rewa solar power park in Madhya Pradesh, where tariff spiralled down to Rs 2.97 a unit.  BTI said this is a clear demonstration of aggressive bidding in the sector and we believe that the developers are bridging the gap in two ways.

 “First, by focusing relentlessly on optimisation of technical and financial project parameters, they can push up the IRR by 200–300 basis points. Second, the developers are making speculative favourable assumptions on future equipment prices, land sale values, debt refinancing, salvage value etc. to defend project returns,” said Bridge to India in its latest report.

The projection is based on the 15 GW worth of projects which were offered during the current fiscal. BTI observed that contrary to general perception, adjusted for changes in project costs and other factors, solar tariffs in India haven’t trended down in the last eighteen months. “The tariff pattern is affected by many variables but most importantly, by falling equipment costs and competitive bidding dynamics,” it said.

The solar power industry is expecting solar modules prices to fall further owing to global oversupply. “Global prices of solar module might fall 20 per cent this year. Currently, the price of module manufacturers of tier 1 lies between 31- 33 cents. Due to the oversupply in China, the price of module expected to fall down and likely to fall between 27-30 cents in second half of 2017,” Vinay Goyal, CEO of Ganges Internationale Pvt. Ltd, a solar EPC player.

BTI, however, cautioned that the sector has been very lucky with rapid falls in solar module prices easing most of the financial and execution challenges. Any dislocation in module sourcing or even price stabilisation will spell trouble for winning bidders, it said.

Another stinker is almost empty pipeline of mega solar power projects from the states. Some states have postponed tenders and others have downsized tenders, to not burden their respective power distribution companies with too much renewable energy. Solar power projects are seeing a bleak future in larger states such Madhya Pradesh, Uttar Pradesh, Maharashtra, Rajasthan and Andhra Pradesh.

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