Upward trend in imported solar PV module prices to impact the viability of recently awarded solar PV energy projects: ICRA

The imported photovoltaic (PV) module prices have shown an upward trend over the last three to four-month period, increasing by about 15%, from about 30-32 cents /watt in May 2017 to about 35-37 cents/watt in August 2017. This increase is due to factors such as a) advancement of module sourcing from China by companies in the USA, in anticipation of imposition of anti-dumping duty on Chinese modules by December 2017, and b) extension of feed-in tariff regime for solar power projects in China till September 2017 (source: industry), thereby increasing demand. In ICRA’s view, such pricing pressure on imported PV modules, if sustained over the next three to six-month period, will have an adverse impact on the viability of the recently bid solar power projects, where the bid tariff is below Rs. 3.5/unit. However, the magnitude of the impact will vary based on the tariff level and other assumptions. Further, any delays in delivery schedule and/or dishonoring of price terms agreed earlier by Chinese OEMs for supplies to the Indian IPPs having solar power projects under implementation, may lead to the risk of delays along with cost over-run. Given the present circumstances, where attempts are being made for renegotiation / cancellation of power purchase agreements (PPA)s by distribution utilities in a few states, any project execution / completion delay by the developers beyond the scheduled completion date as per PPA is a critical risk factor.

The solar PV energy project capacity awarded (both through the National Solar Mission and the State Policy route) with a bid tariff below Rs. 3.5/kwh as on August 2017 stood at 3250 MW, within which 750 MW bid capacity has a tariff below Rs. 3/unit (varying between Rs. 2.44/unit and 2.65/unit) and the balance 2500 MW capacity is with a bid tariff of above Rs. 3/unit (varying between Rs. 3.15/unit and 3.47/unit). As per ICRA estimates, a 6 cent/watt increase in the PV module price is estimated to result in an increase of about 11% in the capital cost, which in turn is estimated to result in a decline in cumulative average debt service coverage ratio (DSCR) by 0.12 times and decline in project IRR by 180 basis points for a solar power project with tariff of Rs. 2.5 per unit, assuming a debt: equity ratio of 70:30, INR-USD exchange rate of 65, cost of debt at 9.5% post commissioning with a debt repayment tenure of 18 years and a PLF level of 24% (with DC-AC ratio of 1.3 times and degradation factor of 0.5% per year). In this context, viability of solar bid tariffs remain critically dependent upon the capital cost, PLF level and availability of a long tenure debt at cost competitive rate. With imported PV module content, the capital cost for solar PV energy project remains exposed to volatility in both i.e. PV module price level and INR-USD exchange rate.

As seen from Chart 1, the competitively bid-based solar power bid tariff has been on a declining trend over the past five years with tariff declining from more than Rs. 12 per unit to less than Rs. 3 per unit. The tariff of Rs. 2.44 per unit discovered in the bidding for Badla solar park in Rajasthan in May 2017 is the lowest tariff in the solar power sector. The significant decline in solar power bid tariff as seen in the last six to eight-month period was supported by a decline in PV module prices, softening in the interest rate cycle and also the expectations by project bidders/IPPs towards further softening in PV module price level over the next six to nine months. However, the recent upward trend in the PV module prices due to reasons mentioned earlier, if sustained, would have an adverse impact on the viability of the recently bid solar power projects, where bid tariff is below Rs. 3.5/kwh.

The following table illustrates the sensitivity of capital cost for a solar power project to module prices and exchange rate. As the module price increases from 0.30 US$/watt to 0.38 US$/watt at a exchange rate of 65 INR/USD, the capital cost is estimated to increase from Rs. 4.34 crore per MW to Rs. 5.01 crore per MW. This in turn would adversely affect the viability of competitively bid based solar power projects having fixed bid tariff over the PPA period. At a tariff rate of Rs. 2.5 per unit, the increase in module prices from 0.30 US$/watt to 0.38 US$/watt would lead to a decline in cumulative DSCR from 1.20 times to 1.05 times, at an exchange rate at 65 INR/USD.

The following table illustrates the sensitivity of project IRR for a competitively bid-based solar power project with tariff of Rs. 2.5 per unit to module prices and exchange rate. As the module price increases from 0.30 US$/watt to 0.38 US$/watt at an exchange rate of 65 INR/USD, the project IRR is estimated to decline from 8.5% to 6.2%.

In addition to the module prices, the cumulative DSCR for a solar power project also remains highly sensitive to the interest rates. As seen here, the cumulative DSCR decreases from 1.11 times to 1.01 times as the interest rate is increased from 9.00% to 11.00% at a module price of 0.36 US$/watt and exchange rate of 65 INR/USD..

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