With the pace of reduction
in capital costs of solar
photovoltaic projects
moderating in the current
year, margins of solar power
companies which have bid below
9 per unit under batch II of Jawaharlal
Nehru National Solar Mission
could come under considerable
pressure in the absence of
low-cost foreign debt.
According to CRISIL Research,
capital costs of solar PV projects
fell by 30 per cent in 2011 following
a 50 per cent decline in the
prices of solar PV modules that
make up for half of the total capital
costs in PV projects. Prices of
these modules have been sliding
due to weak demand from key
European markets including Germany,
Italy and Spain following
the withdrawal of incentives after
a period of explosive growth in
capacity additions. Moreover, significant
capacity additions, led by
Chinese module suppliers, resulted
in module overcapacity of
almost 50 per cent in 2011, leading
to pressure on module prices.
CRISIL Research expects the
pace of decline in module prices to
slow down in the current year due
to sharp erosion in the margins of
module suppliers and increasing
consolidation among global players.
As a result, capital costs are
expected to decline only by 10-13
per cent to
87-90 million/MW in
2012. However, some players
under batch II of JNNSM had bid
aggressively anticipating a steeper
decline in capital costs, which
may not materialise.
For healthy equity internal rate
of returns of around 15 per cent, a
levellised tariff of
9 per unit is
necessary, assuming a plant load
factor of 19 per cent and typical
debt equity of 70:30, with borrowing
costs of nearly 13 per cent.
"Almost half the bids under
JNNSM batch II have been below
9 per unit and about a fourth of
the bids below
8.5 per unit, making
these investments highly
risky," said Rahul Prithiani, Director,
Industry Research, CRISIL
Research.
CRISIL Research is of the view
that these projects could become
viable if solar power producers are
able to tap cheaper foreign funds.
Often foreign developmental
finance institutions provide low
cost debt to fund purchase of solar
equipment from suppliers in their
country. The domestic procurement
clause imposed by JNNSM
for crystalline PV cells and modules,
however, could limit access
to such funds.
"In contrast, the fixed levellised
tariff of
10.37 per unit and the
absence of a domestic procurement
clause make Gujarat state's
solar power policy more attractive,
thus enabling healthy equity
IRRs of 18-22 per cent," said
Prasad Koparkar, Senior Director,
Industry and Customised
Research, CRISIL Research.