Low bids hurt IRR of solar power developers, aggressive bids to continue

Solar power industry is expecting solar modules prices to fall further owing to global oversupply

The fall in bid rates for solar power in this financial year is likely to spill over to the coming year. This could hurt the internal rate of return (IRR) of solar power developers.

Sector experts say the low bids are due to the declining input price of solar modules. Bridge to India (BTI) estimates that the  average harmonised rate now gives an equity IRR of 14.2 per cent, significantly below the benchmark expectation of 18. The body tracks investment in the Indian clean energy sector. Solar energy rates touched a historic low last month in the bidding for the Rewa solar power park in Madhya Pradesh, where  these went down to Rs 2.97 a unit. BTI said this was a clear demonstration of aggressive bidding. Adding: “We believe the developers are bridging the gap in two ways. First, by focusing relentlessly on optimisation of technical and financial project parameters, they can push up the IRR by 200-300 basis points. Second, making speculative favourable assumptions on future equipment prices, land sale values, debt refinancing, salvage value, etc, to defend project returns,” goes its report. The projection is based on the 15 Gw worth of projects offered during FY17.

BTI feels that contrary to general perception, adjusted for changes in project costs and other factors, solar rates in India haven’t trended down in 18 months. “The pattern is affected by many variables but, most important, by falling equipment costs and competitive bidding dynamics,” it said. 

The industry is expecting solar module prices to fall further, owing to global oversupply. “Global prices of solar modules might fall 20 per cent this year. Currently, the price of module manufacturers of tier-1 lies between 31 and 33 cents. Due to the oversupply in China, the price is likely to fall between 27 and 30 cents in the second half of 2017,” says Vinay Goyal, chief executive of Ganges Internationale, an entity in solar engineering.

BTI has cautioned that the sector has been very lucky, with rapid falls in solar module prices easing most of the financial and implementation challenges. Any dislocation in module sourcing or even price stabilisation will spell trouble for the winning bidders, it said.

Another stinker is an almost empty pipeline of mega solar power projects from states. 

Some states have postponed tenders and others have downsized these, to not burden their respective power distribution companies with too much renewable energy. 

Examples given are in Madhya Pradesh, Uttar Pradesh, Maharashtra, Rajasthan and Andhra Pradesh.