Even as the government's decision to lift tariff ceiling for renewable energy is likely to give a fillip to capacity addition, the average tariff will continue to be competitive, mainly due to lower module cost and continued tendering of large capacities, ratings agency Crisil said.
Last month, the Ministry of New and Renewable Energy (MNRE) removed tariff ceilings from renewable energy tenders will give the beleaguered industry a much-needed leg-up.
The tariff ceiling was one of the reasons cited by the industry players for poor participation in tenders by Solar Energy Corporation of India (SECI) and state utilities, thus slowing down the pace of capacity addition.
Capacity addition dropped to 9 GW in fiscal 2019, compared with 11-12 GW over fiscals 2017 and 2018, and remained subdued through fiscal 2020 as well.
According to Crisil, the move to remove the cap will give an incremental fillip of 6-7 GW over the medium term.
"Solar energy developers will now have the leeway to factor in higher risk in cases where the counter party has a weaker profile, or irradiance is low, or there are other execution hurdles. This will allow for higher bid tariffs and improve subscription to tenders, though positive impact is expected to materialise only once the Covid-19 pandemic ends," Crisil Director Miren lodha said.
However, Crisil expects solar weighted average tariff to remain in the current Rs 2.50-2.60 per unit range as lower module cost, larger scale of projects and continued tendering activity in the segment continue to pique competition among players.
"As for wind energy tenders, though tariffs have remained sticky at the Rs 2.8 per unit mark, viability remains a concern as the sector grapples with execution challenges on the ground," the rating agency noted.
It further said that the removal of tariff cap opens up an avenue for wind developers to bid higher.
The agency also expects that bids nearer to the Rs 3 per unit-mark will improve returns and activity in the segment.
"That said, the weak financial profile of most state distribution utilities limits their ability to buy expensive power. This would compel renewable energy tariffs to remain more competitive compared with non-conventional power so as to propel demand," it said.
The average cost of non-renewable energy power to states, which stood at Rs 3.60 per unit in fiscal 2019, and the recent medium-term power purchase agreement auctions for conventional power, which saw bids at Rs 3.26 per unit, may act as implied tariff ceilings, according to the agency's Associate Director Mayur Patil.
"Hence, although the tariff cap removal will provide greater flexibility to developers to factor in risk, prices of renewable energy will still be lower than those of non-conventional power," Patil added.
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