Viability cloud over solar power as price hits new low
Firms offer as little as ~2.62/unit, lower than average price of coal-based power
The price of solar power touched a new low on Wednesday in the bidding held for the Bhadla Solar Park in Rajasthan’s Jodhpur district.
Companies looking to put up a 250-megawatt (Mw) unit there put a bid of ~2.62 a unit, lower than the average price of coal-based power in the country. This could mean thin margins for developers; ~2.62 could be the starting point for a further low when bidding for another 500 Mw at the park comes up on Thursday.
Phelan Energy Group from South Africa and Avaada Power Group quoted ~2.62 a unit. SBG Cleantech bid ~2.63 a unit. Avaada is promoted by Vineet Mittal; his earlier company, Welspun Energy, sold off its entire fleet of renewable energy projects to Tata Power last year. SBG is a joint venture between Japan’s SoftBank Group, India’s Bharti Enterprises and the Taiwan-based Foxconn Technology Group. The three winning bidders would develop power units for the 250-Mw portion that is being developed by Adani Power. The balance 500 Mw being developed by IL&FS would be bid on Thursday.
The sector was still coming to terms with the ~3.19 a unit bid last month in Andhra Pradesh. The ones at Bhadla, to be valid for 25 years and with no escalation, are also lower than even the first-year bids at the Rewa Solar Park in Madhya Pradesh that attracted ~2.97 a unit (the levellised rate there was ~3.3 a unit).
The bidders at Bhadla have also not sought any viability gap funding from the government, said officials.
The average rate for coal-based power sold by NTPC, the country’s largest thermal power producer, was ~3.2 a unit during the quarter ended December 2016.
“One of the main factors contributing to the low Bhadla tariff (rate) are the seven-eight per cent higher yield in Rajasthan due to better solar radiation conditions, drop in module prices in the international market, and strengthening of the 0 against the dollar,” said Ashwini Kumar, managing director, Solar Energy Corporation of India (SECI). The latter, which manages the solar energy bids, is an undertaking under the Union ministry of new and renewable energy.
Even if the factors Kumar mentioned are valid, rates below ~3 a unit assure only a 10-11 per cent return for the project developer, by industry calculations. Sources in the Indian Renewable Energy Development Agency, the sector’s lead financier, say it is not comfortable funding any project that has an internal rate of return (IRR) below 10 per cent.
Vineet Mittal did not respond to phone calls and messages. Phelan could not be reached.
“Two months ago in March, we began operating a solar power plant. Yesterday, we won a project and we will win more. We will be increasing the size to become the No. 1 solar power operator in India,” Masayoshi Son, founder and chief executive of SoftBank, had said on Wednesday.
Vinay Rustogi, managing director at Bridge to India, consultancy entity in renewable energy, said a 50 paise a unit decrease between two bids was unprecedented and the desperation in the sector was visible. “There are new competitors with every bid. Compared with the past, the demand-supply scenario has changed, with more companies and less tenders. So, everyone is trying to grab whatever is available,” he said.
Some say this does not bode well. “An internal rate of return of 15 per cent looks unlikely to come back in solar power and this is a bad sign. These projects would find it difficult to achieve financial closure. No domestic financer would fund any project with an IRR below 10 per cent,” said an executive with a leading agency tracking the sector.
“Avaada and Phelan wanted a big-bang entry in the Indian solar market. SBG had not bagged any project in the past year and had to win something to keep up with its strategy for the market,” said a senior executive with a leading clean energy company.
“Hence, it is too early to say the projects would not come up. Whoever has strong foreign fund backing will be able to put up projects.”
As mentioned earlier, the expectation is for ~2.62 a unit to be the base rate now for the balance 500 Mw at Bhadla, meaning that bids are likely to fall further. “The best or the worst, whatever you want to call, is yet to come. It is when the bids for the 500 Mw unfolds when we will get to know how capacity additions will overshadow the return criteria for solar projects,” said Sunil Jain, chief executive, Hero Future Energies.
Jasmeet Khurana, associate director at Bridge to India, said the sector should now live with the fact that there would be an additional surprise when an auction ends. “Usually, this gets justified in retrospect, when equipment cost reduction beats market expectations. We would like to hope that developers have done their homework and will continue to be as lucky as they have been in the past,” he said.