Continuous decline in solar power tariffs since the start of FY21 driven by a mix of structural and State-specific factors, with the former likely to sustain over the medium term, according to India Ratings.

During FY21, solar power tariffs declined to ₹2.36/kWh in June-July 2020 and later to ₹2.0/kWh in November 2020.

While the winning bids are at ₹2/kWh, the highest bid was at ₹2.43/kWh, which is lower than the earlier tariffs.

Impacting factors

The decline in tariffs is being driven by a lower capital cost/MW of around ₹40 million/MW because of an advancement in panel designs, enabling a higher capacity utilisation factor (CUF), reduction in panel costs globally, and lower financing costs.

Additionally, few State-specific factors impacting the tariffs include an exemption of ₹0.2 million/MW of cess that the government of Rajasthan levies on project development in the State which could translate to savings of 10-12 paise/kWh as the off-take is for the Rajasthan Urja Vikas Nigam Ltd and the exemption from safeguard duty on panel imports.

Given that the plant would be set up in Rajasthan with proven solar potential, the average CUF is expected to be higher at over 25 per cent. The bidders in the latest rounds are banking on the exemption from paying inter-State transmission system charges for the projects commissioned before June 2023.

Based on interactions with industry players, India Ratings has estimated that the use of bifacial modules with trackers could lead to around 4 per cent increase in CUF. Additionally, the panel costs declined to less than $0.4/MW in 2019 from around $3/MW in 2009.

Interest rates

Interest rates are on a decline and Ind-Ra expects it to remain muted over the medium-term. The lower interest rates have benefited high rated players which have sound access to financial markets.

Once the construction phase is over, the financing pattern typically sees a shift with project funding changing from a debt-equity ratio of 75:25-80:20. Ind-Ra estimates that a lower funding cost to foreign and domestic developers has resulted in a tariff decline of 10-15 paise/kWh.

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