Fall in solar prices attributed to scale effect, industry’s maturity

Going by the results of the bids in Andhra Pradesh and Karnataka, solar prices seem to be stabilising at under Rs 7 a kWhr, not much higher than the prices of electricity produced with imported coal.

The lowest tariff in the Andhra Pradesh bid was Rs 6 a kWhr (adjusted for the 3 per cent annual hike), by the US company, First Solar. In Karnataka, the best bid was Rs 6.83 by SunEdison, another US solar major.

Compare this with the tariffs quoted in December 2011, in a bidding round of the National Solar Mission—most of the winning bidders quoted between Rs 8 and Rs 9 a kWhr.

Given that prices of raw materials have not fallen as much as to explain a Rs 2.5 fall in tariffs in less than three years, experts attribute the recent bid results to two factors—scale effect and industry’s maturity.

Prices are coming down because solar companies could set up larger projects. Under the National Solar Mission, no bidder could put up more than 50 MW, and again, not more than 20 MW at a single location. Now, Andhra Pradesh allowed 100 MW for a single bidder and Karnataka went as high as 500 MW. Economies of scale have helped.

Vivek Jayakumar, Executive Director of the Mumbai-based solar consultancy, Arbutus, sees among solar companies “a desire to corner a large market share, thereby commanding an ability to influence pricing from suppliers.” He also notes that some solar power developers are also manufacturers of solar equipment (First Solar, SunEdison).

Madhavan Nampoothiri, who runs RESolve Energy Consultants, feels that the prices are also due to the industry maturing. Solar developers now know better, for example, what to buy from whom and are able to enter into long-term supply agreements, hammering costs down. Welspun’s agreement with Bonfiglioli for inverters is an example. Solar companies know more about project execution and teething problems and consequently do not have to leave a cushion in the prices they quote for unknowns.

Will prices fall further?

India today has 2,765 MW of grid-connected solar power and power purchase agreements (PPAs) have been signed for another 1,900 MW. But a lot more is to come.

The government of India wants to create 15,000 MW more by 2018-19—the road map for 3,000 MW by 2016-17 is clear. Then there are state tenders being readied—Telangana (500 MW), Haryana and Uttarakhand (50 MW each) and Maharashtra (75 MW). Tamil Nadu has announced a feed-in tariff of Rs 7.01, and some stir-up in interest is in evidence.

The question is, where are the solar prices headed? There seems to be consensus among solar companies that there is room for prices to go down further. This will come from incremental improvement in the amount of sun’s energy converted into electricity, breakthroughs in technology (SunEdison recently announced one that will bring polysilicon prices low enough to chip off Re 1 from cost per kWhr of solar power), economies of scale and possible reduction in cost of finance.