Setting up solar plant likely to get dearer by 30% on weaker rupee

After the goods and services tax (GST) and safeguard duty, the Indian solar industry is facing challenges due to a fluctuation in the rupee. Rating agency CRISIL recently estimated that close to half of the under-construction solar power capacity in India worth Rs 280 billion faces viability risk because of the continuous fall in the rupee.

The import-dependent solar power industry is now bracing for cost escalation of solar panels as the rupee weakens against the dollar. While the cost of a solar panel has touched as low as 28-20 cents per unit (kWh) in the global market, especially those coming from China, Indian developers would be unable to make the most of it due to a weak rupee. As both module and finance costs escalate, the cost of setting up a solar power plant could increase by more than 30 per cent. 

Last year, under the new GST regime, solar panels were taxed under the 5 per cent category. This year, India has imposed 25 per cent safeguard duty on imported solar panels. Sector experts pointed that for a country that has built 90 per cent of its capacity on cheaper imported panels, a cost escalation of 70-80 paise per unit is “catastrophic” for the sector. The total impact on the cost escalates the final tariff to above Rs 3 per unit – which will hardly find takers in the financially beleaguered state-owned distribution companies.

 “Solar modules account for 55-60 per cent of the project cost of a solar plant, which is typically Rs 50 million per megawatt (Mw). Today, over 90 per cent of them are imported. Our analysis shows that for every 10 per cent drop in the rupee, the cost of setting up a solar power plant increases by Rs 3 million per Mw, assuming other factors remain unchanged. Also, developers typically do not hedge the exchange rate before placing orders for modules,” said Subodh Rai, senior director, CRISIL Ratings.

CRISIL in its latest report also said that lenders could also turn cautious in financing projects at a tariff of less than Rs 3 per unit due to their slim debt service parameters. With most funding coming from private equity/venture capital (PE/VC) funds abroad, a lot of players in the Indian market could face financing struggles.

From $150 million last year, global corporate funding by PE/VC in the clean energy sector has gone below $100 million this year - lowest in the past four years, according to calculation by Mercom Capital Group.

CRISIL further said that financially strong developers may be able to manage the risk to some extent by prudently funding projects with lower external debt component and bringing efficiencies in the operation and maintenance cost per Mw because of scale and ability to negotiate with vendors.

SHIFTING COST

• Cost of solar panel has touched as low as 28-20 cents per unit in the global market, especially China 
• Last year, under the new GST regime, solar panels were taxed in 5 per cent category  
• The total impact on the cost increases the final tariff above Rs 3 per unit 
• From $150 million last year, global corporate funding by PE/VC in clean energy sector has gone below $100 million this year, lowest in the past four years, according to calculation by Mercom Capital Group