The mismatch between tariffs and costs in the Indian solar sector

Graphic: Mint

Graphic: Mint

Auctions are aimed at bringing out the most competitive bids. But of late, solar capacity addition auctions are seeing rather cautious bids from developers. Even as tariffs have softened from recent highs, they are still at levels of a year ago.

What’s strange is, this is despite an estimated 20% fall in average global photovoltaic (PV) module rates from the end of 2017. Modules are key components constituting around half of the project cost. Most of the utility scale solar projects use imported PV modules, primarily sourced from China.

That’s not all. With China restricting new installations that require subsidy resulting in excess manufacturing capacities, module prices are projected to come down further. “Before the Chinese announcement, our team was already expecting a 27% fall in PV module prices this year. Now we have revised that to a 34% drop, to an end-2018 global average of 24.4 U.S. cents per watt,” Pietro Radoia, senior solar analyst, Bloomberg New Energy Finance (BNEF), said in a statement.

Developers are given almost two years to execute and commission the project, giving them sufficient time to capture low prices. But as the adjoining chart from Mercom India research indicates, the translation in tariffs in India has been rather slow till now. What gives?

Allen Tom Abraham, analyst, India, BNEF, attributes the slow transition to rupee depreciation and a simultaneous rise in the cost of debt. “In addition, they (developers) are also uncertain about the proposed safeguard duties that could be slapped on Chinese modules,” Abraham adds.

Vinay Rustagi, managing director, Bridge to India, a consultant, says tariffs have to be evaluated with reference to execution costs to get a view of bid competitiveness. Even so, the solar industry has seen many adverse changes over the past year which has added to capital costs, he says. “GST alone has increased capital cost by 6-8%. Commodity prices for steel, copper etc. have gone up increasing cost of most components and there is also a considerable risk of duties on modules,” adds Rustagi. “There are other minor niggles related to import duties on modules and testing requirement for modules and other equipment.” GST is goods and service tax.

The head of a components supplier echoes these views. Uncertainty surrounding the import duties on panels, rupee depreciation and related hedging costs have made developers cautious. “Developers have no idea what the rupee will be when they buy the modules,” the person says.

Importantly, the person cited above says module prices have seen renegotiations indicating some translation of low global prices. But the uncertainty on duties and other factors mentioned above made developers conservative—a marked change for a sector that not too long ago was seeing aggressive competition.

First Published: Fri, Jul 13 2018. 11 22 AM IST

Source: livemint