Solar power bids unsustainable bridge to India
Consulting firm Bridge to India has termed the recent low winning bids for solar power projects in India “unsustainable” and warned that “inadequate risk pricing poses a severe viability challenge for the sector”.
The warning comes after solar power developers last month bid as low as Rs2.97 per kilowatt hour (kWh) for a 750-megawatt (MW) project at Rewa in Madhya Pradesh. The winning bid offered a so-called levelized tariff—the value financially equivalent to different annual tariffs over the period of the power purchase agreement (PPA)—of around Rs3.30 per unit.
In a note titled Bidding behavior in the Indian solar sector not sustainable, Bridge to India noted that India allocated 12.6 gigawatt s from July 2015 to December 2016 to winners through a bid process. The tenders saw tariffs falling from Rs5.50-6.00 per kWh in mid-2015 to Rs3.29 per kWh in 2017.
“The average harmonized tariff of Rs4.31 (¢ 6.3)/kWh gives us an equity IRR (internal rate of return) of 14.20%, significantly below the benchmark expectation of 18%,” the report released on Monday said.
“This is a clear demonstration of aggressive bidding in the sector and we believe the developers are bridging the gap in two ways. First, by focusing relentlessly on optimization of technical and financial project parameters, they can push up IRR by 200-300 basis points. Second, the developers are making speculative favourable assumptions on future equipment prices, land sale values, debt refinancing, salvage value, etc., to defend project returns,” the report added.
India’s solar power generation capacity has increased by a third to 10,000 MW from 2,650 MW as of 26 May 2014. Of India’s installed power generation capacity of 314,642 MW, green energy accounts for 16%, or 50,018 MW.
“Low equity IRRs suggest that the Indian developers, in particular, are not pricing risks fully and too much faith is being placed on an optimistic future scenario,” the report said.