Global capital powering new benchmarks

Buoyed by lower interest rates, declining solar panel prices, improved technology and assured purchase of power, solar tariffs have fallen to new lows of Rs 1.99/unit and Rs 2/unit at auctions conducted by the Solar Energy Corporation of India (SECI) since November. Significantly, most of the winning developers at auctions in 2020 are backed by foreign capital. At a time stress-ridden state-run discoms are looking to cut power procurement expenses, the continuing fall in solar tariffs augurs well for RE’s wider acceptance in the mainstream grid.

At the SECI auction in November, for supply of power to consumers in Rajasthan, it was the Saudi Arabia-based Al Jomaih Energy and Water and Green Infra Wind Energy, a unit of Singapore-based Sembcorp Industries, that quoted the tariff of Rs 2/unit—bagging contracts for 200 MW and 400 MW projects, respectively. Following close behind was state-run NTPC, which was awarded 470 MW at Rs 2.01/unit. Rajasthan contributed to the tariff discovery by waiving off an additional development cost of around Rs 0.13/unit. Also important has been the 13% fall in solar module prices since last year.

Two of these winning bidders —Jomaih Energy and NTPC— have also bagged contracts at the latest SECI auctions, which saw the tariff benchmark go down further to Rs 1.99/unit. Torrent Power and Aditya Birla Renewables were the other winners at the auctions conducted on Saturday for Gujarat, a state which draws power players owing to its swift payment mechanisms.

At the SECI auctions held in June, Spanish firm Solarpack’s India arm quoted the lowest tariff of Rs 2.36/unit, while Avikiran Surya (backed by Italian utility Enel), New York-based Eden Renewables’ India unit, a subsidiary of Germany’s Ib Vogt and Canadian firm AMP Energy’s India unit bagged contracts at Rs 2.37/unit. In February, SoftBank Group’s SB Energy, AMP Energy’s India unit and Eden Renewables’ India arm were awarded contracts at Rs 2.50/unit.

Experts attribute the aggressive tariffs being quoted by foreign-funded companies to their eagerness to establish themselves as important solar players in the Indian market, which is expected to quadruple its RE base in the coming decade. Speaking recently at the third edition of RE-Invest, an investors’ meet held by the Centre every year, Prime Minister Narendra Modi told investors India is “likely to generate business prospects of around $20 billion per year, which is a big opportunity to invest in India”.

But there’s more to the interest shown by foreign players in the sector. “International renewable energy players’ novel financing methods during the construction stage and timely refinancing during the operations phase improve the projects’ coverage ratios and equity returns,” analysts at India Ratings and Research have pointed out. So, while global companies opt for corporate guarantee backed letters-of-credit for capex during the construction stage, these are refinanced with a term loan at an economical interest rate after two years of stable operations.

NTPC matching up to the aggressive bidding by foreign players at recent auctions is also a result of the lower finance cost for the behemoth. According to initial estimates by analysts at ICICI Securities, the cost of the Rajasthan project would be around Rs 4.2 crore per MW for NTPC, resulting in 12-14% internal rate of returns (IRRs), helped by a 54-bps y-o-y decline in the average cost of debt to 6.37% in H1FY21. Being implemented by a new company, NTPC Renewable Energy, the project would also attract the lower tax rate set by the FY21 Budget.

At the same time, experts have warned that solar developers quoting such low rates are walking a tightrope as IRRs could slip significantly to single digits if project cost assumptions do not hold true. While that lies in the future, the level the tariffs have plumbed to have set a benchmark for upcoming auctions. “We believe the historic low solar tariff of Rs 2/unit discovered during the latest SECI auction (since bettered) will remain the benchmark and tariffs will continue to be in Rs 2-2.5/unit range in the near term,” ICICI Securities has said.