Story behind falling solar power costs

In today’s solar market in India, almost every passing tender has promised to deliver cheaper electricity.

This is good news for the procuring utilities but it has got lenders worried on the sustainability of the projects and the security of their loans.

The project sponsors often find it hard to believe the tariffs quoted on a tender just lost, but soon appear prepared to match or better it in their next bid.

This year began with a winning tariff of around ₹7 (Punjab at ₹6.88 and UP at ₹7.02) per kWh and closed well below ₹5 (both solar parks in AP at ₹4.63) per kWh.

Since 2010, over 7500 MW of solar power projects have been tendered and the winning tariffs have fallen by 58 per cent. If we peer further back to the regulated era, winning quotes now are less than one-third of the 2009 solar feed-in tariff rates.

Cheap route The source of these gains is well recognised in the industry, as arising from lower polysilicon costs due to economies of scale and the learning effect, akin to that in the semiconductor industry.

China, which supplies over 51 per cent of the solar modules we deploy, has largescale vertically integrated units manufacturing crystalline silicon (c-Si) modules supported by a rich ecosystem.

Recent studies suggest that the supply-chain benefit from these clusters is continuing to deliver gains resulting in cheaper modules.

In India, meantime, savings from tender of larger capacity projects, a competitive EPC market, locally driven pre-development activity, and increasingly, lower cost of the balance of system (comprising inverters, power control systems, cabling) has reduced project costs.

Project developers, in response to a tender, innovate on the layout, design components, procurement models, and take a position on future pricing, module efficiency, and other parameters, in a manner that helps further differentiate their bids.

In the coming months, new solar power procurement plans totalling about 4720 MW, which is slightly larger than the entire existing installed solar capacity, have been announced.

The key question in the minds of bidders is what further declines can be expected on project costs. An equally relevant question for the government is what makes or mars this trend.

Cost, benefit To start with, narrowing of technology choices (c-Si now constitutes over 90 per cent of production) and sourcing (over two-thirds of global supply is from China or Taiwan) has made better deals possible.

The regulatory filings of major tier-1 global suppliers suggest that they continue to enjoy a sizeable gross margin on module sales, ranging from 20 per cent to 62 per cent and averaging 38 per cent, and so have headroom to compete on price to maintain their plant utilisation and market share.

A more recent cost benefit has come, ironically, from cheaper primary energy, in particular, coal.

The upstream segment of polysilicon manufacture is highly energy intensive and even as the quantity of silicon used in modules has steadily reduced over the last decade as wafers got thin, lower energy costs still translate into cost savings.

The energy consumed in the entire production cycle, from refining of metallurgical grade (MG) Silicon to polysilicon and modules, and that used in manufacture of the Balance of System, when costed at power tariffs for energy intensive industries in China, comes to about 8.2 cents per Wp of module.

This is a sizeable part of module price (47 cents per Wp, 2015), and buyers must look to extract energy cost savings in their procurement negotiations, besides the anticipated drop of 1-2 cents per quarter.

The translation of global energy prices is less direct, but competition from imports and subdued local demand caused Chinese coal mines to drop prices, by some accounts, by 24 per cent over last year.

The government reduced wholesale electricity tariffs earlier this year and has proposed another that together cut power tariffs by about 5.3 per cent.

Lower oil prices cut transport costs, both seaborne and inland, especially for the heavier glass back-sheet.

The cost involved is small at around 2 cents per Wp, but the margins of success in a widely contested Indian solar bid are slimmer still.

In the recent National Solar Mission tender for Ghani, the gap between the winning bidder and the second placed was just 0.2 US cents/kWh, and the top 10 bidders were separated by barely 0.6 US cents/kWh.

A new dawn India’s 100 GW plan is, by far, the most ambitious solar procurement programme globally, and the experience of the last five years has given it a well-drilled tender process; solar parks take out some of the development risk.

This has reduced the cost of participation for bidders, and several long-term players with interest to build a portfolio have emerged.

UDAY, a new government initiative to improve the performance of discoms and rebuild their creditworthiness, will encourage investors to pare risk margin in their target returns, and should attract global funds that have a lower threshold risk.

Local conditions are starting to have a more pronounced effect on tariffs as the hard costs have come down. The quality of the procurers’ balance sheet and payment record is now starkly reflected in the tariffs offered.

But other factors influence it too: State governments must provide a clear roadmap to permit advance procurement actions; regulators must permit transmission spend to minimise curtailment; and procurers must execute the PPAs on time and avoid the temptation to haggle prices after the bids are opened.

The global conditions are favourable and, from all indications, will continue to drive down costs. Market evidence suggests that solving local issues, such as the above-mentioned ones, are now a growing key to the success.

The next time we are surprised by a record low tariff in a solar auction, we can be certain that the tendering agency worked hard to achieve it.

The writer is Partner and Leader Energy & Utilities, PwC India

COMMENT NOW