India Ratings: Solar Power Tariffs to Reach Grid Parity by FY18

Solar power is likely to become cheaper than or equivalent to conventional thermal energy prices over the next two to three years and reach INR4.0/kWh-INR4.5/kWh by FY18, says India Ratings and Research (Ind-Ra). This will be driven by a decline in capital costs (solar modules and other balance of plant), an increase in efficiency, a shift towards large solar photovoltaic projects leading to the economies of scale and lower return expectations by developers.

According to International Renewable Energy Agency, solar photovoltaic prices have fallen nearly 80% since 2008. Additionally, solar module efficiency has witnessed an annual increase of 3.5%-4.5%. The increasing size of projects to 10MW and above from 5MW earlier also leads to the economies of scale in component procurement and better absorption of fixed costs. Moreover, the return expectation of developers is likely to moderate as the market matures, leading to a reduction in overall tariffs.

The recent solar bids conducted by MP Power Management Company Limited with per unit prices reaching as low as INR5.05/kWh are suggestive of the above trends. Globally in a recent bid, NV Energy, a Nevada utility, agreed to purchase 100MW solar power under a fixed-price 20-year power purchase agreement at 3.87cents/kWh (INR2.43/kWh).

Ind-Ra expects a strong pick-up in solar power installations over the next four-five years, driven both by the government impetus of 100GW of solar power by FY22 (60GW through grid connected solar projects) and a decline in solar power generation costs. These factors will increase the affordability of solar power for distribution companies and eliminate the requirement of government support by way of subsidies or viability gap funding (VGF). Ind-Ra sees a limited possibility of support by way of VGF, greater focus on infrastructure creation for the evacuation of solar power and higher possibility of distribution companies meeting their renewable purchase obligation.

The solar space has already seen a significant decline in tariffs. Solar tariffs declined to INR7.49/kWh-INR9.44/kWh in in Jawaharlal Nehru National Solar Mission phase I, Batch II during FY12 from INR10.95/kWh-INR12.76/kWh during FY11. In phase II, Batch I, the concept of VGF was introduced and the tariffs declined to INR5.45/kWh. However, the current tariffs are even lower than those offered by through VGF. The recent coal-based bids for the purchase of thermal power by Andhra Pradesh saw tariffs in the range of INR4.27/kWh-INR4.98/kWh, only 1%-14% lower than the solar tariff of INR5.05/kWh bid recently in the MP Power Management Company power purchase tender.

The feed-in-tariffs (FITs), outlined by respective state electricity regulatory commissions based on the cost-plus return on equity model, have also seen a significant decline. FIT for solar energy in Gujarat was lowered to INR8.03/kWh in FY15 from INR12.54/kWh in 2010. FIT for solar energy in Rajasthan has been declined to INR6.74/kWh for FY16 from INR15.32/kWh in FY11.

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