Boost for zero-emission sources as global capital backs Indian solar power

Indian solar power continues to draw foreign capital as plunging tariffs offer ample opportunities to invest in clean, zero-emissions energy sources.

A study jointly commissioned by US-based think tank Institute for Energy Economics & Financial Analysis (IEEFA) and JMK Research & Analytics shows that the current solar tariffs hovering at Rs 2.50-2.87 per unit is 20-30 per cent cheaper than the cost of power generated by existing thermal power stations. Also, the prevailing cost of solar power is nearly half the generation cost of new coal-fired power in the country.

These numbers (as on March 31, 2020) are a testament to the response from solar developers and global capital providers who despite some policy headwinds are willing to invest in the sector despite some of the lowest real solar tariffs in the world.

The tumbling tariffs of solar power, however, have slashed the expectations of returns by investors from 14 per cent to 12 per cent.

“While this rate is very competitive compared to thermal plant tariffs, and lucrative for power distribution companies entering long-term power purchase agreements, this is a floor for developers if they want to make money”, said Vibhuti Garg, energy economist at IEEFA and co-author of the report.

To earn reasonable returns from infrastructure projects such as these, it is crucial that the developers factor in the risks and rightfully estimate the costs of every component. It is difficult to generalise the return expectation as every investor/developer has a different objective and the bidding decisions at times are dependent on sources of funds, risk-taking appetite, and the project pipeline.

Jyoti Gulia of JMK Research said, “We found a number of competing concerns in our analysis. Interest rates, module costs, and capacity utilisation factors (CUF) in particular, have a major impact on solar tariffs and project returns.”

According to the report, the cost of financing is a big element in determining tariffs and returns. Significantly higher interest rates in India compared to other leading renewable energy countries is one of the reasons for higher domestic tariffs. The zero indexation for the 25-year period is also a key value for India that is not explicit in the year one tariff.

The landed cost of imported modules at a time of currency devaluation is also adversely affecting tariffs, however, this might be compensated by the falling module prices. Capacity utilisation factors (CUFs) differ across states in India, in light of significant variations in solar resource quality. Any drop in utilisation rates has a significant impact on project returns. As per the report findings, a three per cent drop in CUF results in over seven per cent fall in equity returns.”

In the last four years, solar installations in India have grown more than five-fold, from a mere 6 gigawatt (GW) of capacity in 2016 to almost 35 GW, achieving more than one-third of the country’s ambitious 2022 solar target of 100 GW. With another 23 GW of projects in the pipeline and 30 GW in the bidding phase, the sun is shining bright for India’s rising solar graph.