Solar tariff of under ₹2.50 is unviable, says report

Renewable energy company ACME, which created ripples in the industry in May 2017 and July 2018 by offering to sell solar power at ₹2.44 a kWhr, in capacity auctions conducted by state-owned SECI, is now again in the news for backing out of the project.

The company has invoked the force majure clause to escape penalties for turning back on a 600-MW solar project it had won in July 2018, quoting a tariff of ₹2.44.

ACME’s quote became a benchmark of sorts, with the government frowning on higher quotes, suspecting cartels at work in rigging the prices at auctions. This suspicion led to the government bringing a ‘cap’ on solar tariff — an upper limit, quotes above which would not be considered for project awards.

The government removed the cap as much due to the industry’s protestations, as because of the futility of the cap — tariff quotes at auctions have consistently been considerably lower than the cap, rendering the cap itself meaningless.

But yet, ACME’s quote of ₹2.44 a kWhr — some projects won at that rate still live — has become a record.

The industry has often expressed concern at such suicidal quotes at capacity auctions. Many insiders have observed that such low tariff offers are unviable and would inevitably entail cutting corners to contain costs, with all the deleterious consequences on the robustness of the plant.

Now, a new research paper is saying that tariffs under ₹2.50 a kWhr for solar power plants in India are not viable.

Sample case

Researchers Jyoti Gulia and Shilpi Jain at JMK Research and Analytics and Vibhuti Garg at the Institute for Energy Economics and Financial Analysis (IEEFA) took a hypothetical 250 MW power plant in Rajasthan’s Bhadla solar park (where ACME wanted to put up its project) and studied its economics.

They assumed the project cost to be ₹3.82 crore a MW, debt-equity mix of 75:25, loan tenor of 18 per cent and interest rate of 11 per cent and capacity utilisation factor of 19.5 per cent. If solar power from such a plant is sold for ₹2.55 ($3.54) a kWhr, the project would yield an internal rate of return of 12.9 per cent.

Three years ago, solar projects typically enjoyed an IRR of 14 per cent. But with increasing competition and the consequent nosediving of tariffs, energy companies have settled for equity returns of 12-13 per cent.

The researchers note that the cost estimates for the study are so liberal in favour of the projects that many things could go wrong. Interest rates could be higher, electricity generation could turn out to be lower than estimated, project may get delayed, currency fluctuations may raise the project cost or the purchaser of the power may delay payments.

If all these risks are priced, any tariff under ₹2.50 a kWhr is not viable, the study notes.

This, though, is a typical case. There could be some unexpected tailwinds. The study says that it is possible that because of the pandemic, global demand may hammer module prices further down — they are 19-20 cents right now, nearly half of what they were in mid-2017. Large companies may raise debt for refinancing, perhaps through green bonds, at rates of 7-9 per cent, fully hedged against currency fluctuations. Investors may settle for a lesser return. Breakthroughs in cell technology could help milk more energy out of the sun’s rays.

You never know the future, but under the present conditions, any solar tariff under ₹2.50 a kWhr is a risky bet.

India today has 38,811 MW of solar power capacity; 23,000 MW more in the pipeline and another 30,000 MW in the auctioning stage.

COMMENT NOW