Developers who have bid below Rs 9 a unit in batch 2 of the Jawaharlal Nehru National Solar Mission need low-cost debt to keep margins intact, a Crisil Research report said.
The report said that in 2011 the capital costs of solar photovoltaic (PV) projects fell by 30 per cent. This was consequent to a 50 per cent drop in prices of solar PV modules. The PV modules make up half the total capital cost of projects.
Module prices have been sliding due to weak demand from key European markets following withdrawal of incentives. Further, significant capacity additions, led by Chinese, resulted in module overcapacity of about 50 per cent in 2011.
Crisil expects the decline in module prices to slow this year . Capital costs are expected to decline by 10-13 per cent to Rs 8.7-9 crore a MW in 2012, it said.
Internal rate of return
However, some players under batch 2 of the Mission have bid aggressively anticipating a sharper decline. For healthy equity internal rate of returns (IRRs) of about 15 per cent, a tariff of Rs 9 a unit is necessary, assuming a plant load factor of 19 per cent and typical debt equity of 70:30, with borrowing costs of nearly 13 per cent, it said.
“Almost half the bids under JNNSM batch 2 have been below Rs 9 per unit and about a fourth of the bids below Rs 8.5 per unit, making these investments highly risky”, said Mr Rahul Prithiani, Director, Industry Research, Crisil Research.
These projects can become viable if solar power producers can tap low cost foreign funds. However, the domestic procurement clause imposed by JNNSM could limit access to such funds.
“In contrast, the fixed tariff of Rs 10.37 per unit and the absence of a domestic procurement clause make Gujarat state's solar power policy more attractive, as it enables equity IRRs of 18-22 per cent”, said Mr Prasad Koparkar, Senior Director.