Sun shines on India's solar ambitions as prices nosedive

Even as the global market battles saturation in clean energy, solar power price in India is on its way down - a landmark 70 per cent decline from 2010 when solar capacity in the country was a mere 2 Mw against the present-day 4,000 Mw. The slide in global solar module prices due to oversupply coupled with the entry of new aggressive players in the Indian solar market, is pushing solar tariffs closer to the thermal power price. Solar capacity addition is also expected to outpace wind capacity for the first time, this fiscal end.

The two latest solar bids in Madhya Pradesh and Telangana saw tariffs touching a low of Rs 5.05 per unit and Rs 5.17 per unit, respectively. India's run-up to its solar dream has attracted foreign players, big corporate groups to have a dedicated solar arm and promote start-ups to be sector majors.

"Solar power prices have primarily moved south on account of the competitive allocation of projects and declining capex-largely modules. The fall has been further accentuated by the emergence of India as one of the top solar markets globally and investor confidence in the India solar story," said Rupesh Agarwal, advisory partner & leader-energy, BDO India LLP.

The downslide in prices started post large-scale allocations since 2011 with the launch of the Jawaharlal Nehru National Solar Mission (JNNSM). The first phase of the solar mission in 2011 pulled the price down to Rs 10.95 per unit. It was Rs 17.91 per unit in 2010, which came down to Rs 12.5 per unit when Gujarat tendered large-scale projects the following year.

"Since then, the prices have been gradually coming down. The price reduction would have been more pronounced if the Indian rupee had not depreciated by 20 per cent between 2012 and now," said Jasmeet Khurana, senior manager-consulting at Bridge to India, a leading consultancy firm monitoring foreign investment in Indian renewable energy space.

Module prices, which constitute 80 per cent of the cost of a solar power plant, fell to $0.60-0.70 a unit currently from $1.5-2 per unit in 2012. The global glut in demand of solar in the US and European markets and oversupply of modules because of aggressive Chinese manufacturers slashed prices of solar further to Rs 8.5 per unit in 2012 and then Rs 6.5 in 2013.

Come 2014, the Narendra Modi-led NDA government revised the solar mission target by five times to one lakh Mw. The government's first-of-its-kind investor meet for renewable RE-Invest in 2015 saw two lakh Mw worth of solar power commitments by prominent names in the energy sector.

Sector experts believe, solar tariff would now be in the range of Rs 5.9-5.7 per unit for some time. Khurana said for projects to be allocated this year, an internal rate of return of 15-16 per cent is economically sensible.

“Price stabilisation is an outcome of number of parameters like capex, financing cost and efficiency. While the industry has made significant strides in bridging capex and financing cost, the next big tariff breakthrough would be driven by efficiency gains,” said Mr. Agarwal.

Contrasting it with thermal power, where the recent power purchase bids have skyrocketed to Rs 4.9 per unit from Rs 2.5 per unit in just two years, solar could soon achieve grid parity.

“We certainly do not foresee capex falling in the proportion it did during the last 4-5 years and while competitive financing could lower tariffs by 50 paise in the near term eventually it’s the developers call on capacity utilisation factor that would determine the base tariff for solar,” said Mr. Agarwal.

Khurana, however, cautioned the biggest challenge for the solar sector would continue to be the financial ability of discoms to procure power. With the solar targets being revised to 1 lakh Mw, grid will also start becoming an issue as the penetration increases in select geographies.