Some of India’s solar bets risky, 3 GW expected by 2014 – Crisil Research

Crisil Research, a unit of credit rating agency CRISIL, has warned that developers are making risky bids in their effort to win solar power contracts in India.

The agency pointed out that solar power developers are promising to deliver solar power for as little as Rs 8 per unit. In its opinion, solar tariffs need to be at least Rs 9 per unit to be considered healthy.

It also expects a huge boom in solar power capacity in India, with nearly 3,000 megawatt (MW) or 3 GW of extra capacity to be put in place by March 2014. In comparison, India had about 30-50 MW of grid connected solar power capacity in March 2011 and currently, has a few hundred MW.

Even though solar power will be unprofitable at rates such as Rs 8 per kwh (one unit of power), operators have bid such rates in the expectation that, by the time they have to buy the equipment to build the plants later this year or early 2013, the solar equipment prices would have fallen again. Solar equipment prices fell about 30% in 2011. The prices of modules, which make up about half the costs involved in setting up a solar plant, fell 50%.

Keeping the expected fall in prices of solar equipment, operators have bid aggressively in the second round of bidding in Jawaharlal Nehru National Solar Mission. This, however, may not exactly be how things play out, Crisil Research warned.

Plant costs will be in the range of Rs 87-90 ($1.7) per watt, it said, and pointed out that the cost of equipment may not decline this year as fast as they did last year.

“Expecting a steeper decline in the capital costs of solar PV projects, players have bid aggressively in JNNSM batch 2 (350 MW bid out in December 2011) bringing down the average tariff to Rs 8.8 per unit from Rs 11.6 per unit in batch 1 (150 MW bid out in December 2010).

“.. a levelised tariff of Rs 9 per unit is necessary for healthy equity internal rate of returns (IRRs) of around 15 per cent at a plant load factor of 19 per cent, debt to equity of 70:30 and borrowing costs of 13 per cent.

“Nearly half the bids in batch 2 of JNNSM have bid below Rs 9 per unit, and about a fourth have bid below Rs 8.5 per unit, making these investments highly risky,” it said.

It expects the pace of decline in module prices to moderate in 2012 due to the significant erosion in the margins of module suppliers in 2011 and increasing consolidation in the global module industry.

“Several manufacturers across US and Europe have announced production cuts while players including Solyndra (USA), Q Cells (Germany) and Solar Millennium (Germany) have filed for bankruptcy.”

This will be compounded by rising rupee depreciation, it warned.

“As a result of the increasing consolidation in the global module industry and a depreciating rupee, CRISIL Research expects capital costs to decline by only 10-13 per cent (y-o-y) to Rs 87-90 million per MW in 2012. Whereas, some players who have made aggressive bids for batch 2 JNNSM projects expect a sharper price decline, which is unlikely to materialize,” it warned.

With latest bids, such as those of Welspun Energy , solar power tariffs are expected to fall to about Rs 8 per unit by the end of this year.

In comparison, the biggest segment of power generation in India — coal — makes power at about Rs 3.5 per unit. Natural gas makes it at about Rs 3.25 per unit. (see chart above)

However, solar has another advantage over conventional sources in that it doesn’t require separate expenditure in the form of nation-wide grids and transmission lines, as solar is, technically, available everywhere. Including the cost of transmission and distribution, the difference between the costs of solar and conventional energy will narrow even further.

Not surprisingly, most high volume consumers end up paying Rs 5 to 8 for conventional power as well.

That said, India’s thrust is now on centralized solar power generation, focused on sunny states such as Gujarat and Rajasthan.

Crisil expects a total investment requirement of Rs 350 billion to create the roughly 3 billion megawatts of solar power through 2014 — at a rate of about Rs 116 ($2.25) per watt.

“However, given the weak financials of the state discoms and the high cost of solar power, sustaining the demand for solar power would hinge upon the strict enforcement of penalties on states that fail to meet their mandated purchase obligation,” it warned.