Vivek Sharma, Prac­tice Leader and Direc­tor - En­ergy and Nat­u­ral Re­sources, CRISIL, sheds light on the vi­a­bil­ity of ag­gres­sive bid­ding rates, ex­pec­ta­tions from the UDAY scheme and key chal­lenges fac­ing the rooftop seg­ment.

Vivek Sharma, Prac­tice Leader and Direc­tor - En­ergy and Nat­u­ral Re­sources, CRISIL, sheds light on the vi­a­bil­ity of ag­gres­sive bid­ding rates, ex­pec­ta­tions from the UDAY scheme and key chal­lenges fac­ing the rooftop so­lar seg­ment in In­dia, in an in­ter­view wi

Power Watch India - - CONTENTS -

Enu­mer­ate the key fi­nan­cial re­quire­ments of the so­lar power in­dus­try in view of cur­rent poli­cies and trends.

The In­dian gov­ern­ment has set a tar­get of 100 GW so­lar power by 2022 un­der the Jawa­har­lal Nehru So­lar Mis­sion (JNNSM). While an es­ti­mated $45 to $48 bil­lion are re­quired to ex­e­cute large and medium scale grid-con­nected projects to gen­er­ate 60 GW, $50 to $60 bil­lion are needed for the re­main­ing 40 GW of rooftop so­lar. The fi­nan­cial re­quire­ment works out to ~$95-110 bil­lion.

Con­sid­er­ing the high lend­ing rates in In­dia and the fact that cur­rency volatil­ity is dis­cour­ag­ing de­vel­op­ers from go­ing for in­ter­na­tional fi­nance, would you sug­gest any pol­icy changes to ease fund­ing for so­lar projects in In­dia?

The de­clin­ing in­ter­est rates, which have fallen ~100 ba­sis points in the do­mes­tic mar­ket dur­ing the past year, is a pos­i­tive fac­tor. In­vestors are also eval­u­at­ing the op­tion of re­fi­nanc­ing from banks once the project is com­mis­sioned with more re­li­able rev­enue streams. How­ever, with non-per­form­ing as­sets ris­ing, the due dili­gence of each project be­comes crit­i­cal for bankers. Banks are shy­ing away from fund­ing so­lar projects which have rel­a­tively higher risk, tight mar­gins, and lower debt ser­vice cov­er­age ra­tios or in­ter­nal rates of re­turn (IRRs).

Yes, cur­rency volatil­ity has dis­cour­aged some de­vel­op­ers from go­ing for in­ter­na­tional fi­nance, es­pe­cially debt, after in­clud­ing the hedg­ing cost. How­ever, in­no­va­tive hedg­ing so­lu­tions and set­ting up funds can help mit­i­gate this con­cern. In this re­gard, the gov­ern­ment has: Cre­ated the Na­tional In­vest­ment and In­fra­struc­ture Fund (NIIF) as an al­ter­nate in­vest­ment fund (AIF) to en­hance in­fra­struc­ture fi­nanc­ing. NIIF aims to so­licit eq­uity par­tic­i­pa­tion from an­chor part­ners. Due to the gov­ern­ment’s con­tri­bu­tion, NIIF can be vir­tu­ally con­sid­ered as a sov­er­eign fund and is ex­pected to at­tract for­eign sov­er­eign/quasi sov­er­eign/ mul­ti­lat­eral in­vestors.

Formed the So­lar Al­liance to en­dorse clean en­ergy and sus­tain­able en­vi­ron­ment by rais­ing funds from mem­ber­ship fees and through in­ter­na­tional agen­cies.

Com­ment on the vi­a­bil­ity of ag­gres­sive bid­ding rates in the so­lar sec­tor. Do you think this trend is sus­tain­able?

Let us first un­der­stand fac­tors be­hind the low tar­iffs ob­served dur­ing the past few years - Global fac­tors such as over­sup­ply of so­lar parts due to the worldwide eco­nomic cri­sis have def­i­nitely favoured fall­ing prices. While so­lar panel prices have more or

Ther­mal power is good for meet­ing In­dia’s base load re­quire­ments. For meet­ing the re­main­ing power de­mand, a mix of so­lar, wind, hy­dro, and biomass is re­quired. Although there is no ideal mix of so­lar, wind and biomass, an op­ti­mum util­i­sa­tion of the three sources needs to be made to meet en­ergy de­mand. Hy­dro power, which is im­por­tant to sup­port re­new­able en­ergy sources as well as man­age peak load, is miss­ing at this stage and needs a push from the gov­ern­ment.

less sta­bilised dur­ing the past year, the cost of man­u­fac­tur­ers has re­duced along with ef­fi­ciency im­prove­ments. More­over, so­lar parks with bet­ter economies, as­sur­ance of land and trans­mis­sion fa­cil­i­ties, and bet­ter pay­ment se­cu­rity with NVVN/NTPC bids have helped re­duce tar­iffs. Lastly, the fall­ing in­ter­est rates with the op­tion of re­fi­nance and low­ered re­turn ex­pec­ta­tion be­cause of lesser risk per­cep­tion are also caus­ing the tar­iffs to de­cline.

In the near term, at a 16% post-tax eq­uity IRR, we ex­pect bid prices in the range of Rs 5.00-5.20 per kWh (Con­sid­er­ing 20% over­siz­ing on DC side, CUF of 21% (on AC) and in­ter­est at 10.5% ), for so­lar park-based projects to be vi­able. How­ever, with mit­i­ga­tion of project risks and temp­ta­tion to enter the In­dian so­lar mar­ket, eq­uity hold­ers may ex­pect lower re­turns and this could re­flect in the tar­iffs.

In the long run, how­ever, sus­tain­abil­ity of tar­iffs will de­pend on project-spe­cific fun­da­men­tals and con­trac­tual risks. Con­certed ef­forts for risk mit­i­ga­tion – be it pay­ment se­cu­rity, land ac­qui­si­tion, evac­u­a­tion fa­cil­ity, or the ease of com­pet­i­tive fi­nan­cial clo­sure – will be crit­i­cal fac­tors for tar­iffs as well as how the so­lar ecosys­tem shapes up.

With the per unit cost of gen­er­a­tion be­ing roughly Rs 10 in the case of rooftop so­lar (for 1-2 kW set up), how does the lay­man get mo­ti­vated to in­stall the sys­tem on his roof?

The per unit cost of so­lar elec­tric­ity comes to Rs 6-10 for non-sub­sidised small rooftop cus­tomers, de­pend­ing on state-spe­cific so­lar ra­di­a­tion and other project con­di­tions. How­ever, the Min­istry of New and Re­new­able En­ergy pro­vides do­mes­tic con­sumers 30% cap­i­tal sub­sidy, which rises to 70% in spe­cial cat­e­gory states (such as North East, Ut­tarak­hand). Post this, the cost per unit comes down to Rs 4-8. While this may not be com­pa­ra­ble with con­ven­tional ther­mal power, it is def­i­nitely bet­ter than costly diesel genset power or even re­tail tar­iff in some states.

The vi­a­bil­ity of so­lar rooftop is not a ma­jor con­cern for in­dus­trial and com­mer­cial con­sumers, but dis­coms are con­cerned over their rev­enue tak­ing a hit. This is ev­i­dent from the fact that even though there is net me­ter­ing pol­icy across 25 states, it has re­ceived a muted response in so­lar rooftop ca­pac­ity ad­di­tion. This con­cern needs to be ad­dressed to ex­pand so­lar rooftop power.

While there are new calls for bid­ding and ten­ders ev­ery 2 weeks, are so­lar projects getting ma­te­ri­alised and ex­e­cuted at the ex­pected pace also? If not, why?

Even though many so­lar projects are be­ing com­mis­sioned, we will al­ways see a few projects getting stuck or mov­ing slug­gishly dur­ing im­ple­men­ta­tion.

While achiev­ing the 100 GW tar­get seems am­bi­tious, a lot would de­pend on how road­blocks are tack­led. One fac­tor will be in­te­grat­ing 100 GW so­lar with the over­all grid.

Some projects have been com­pletely held up. Take ~35 MW out of the 500 MW so­lar PV dur­ing Phase I of JNNSM and 50 MW out of the 750 MW in Phase II Batch I VGF scheme. Oth­ers have seen de­lays in ex­e­cu­tion which have led to cost over­runs.

The de­lay/non-ex­e­cu­tion is due to var­i­ous hur­dles that come into play in a so­lar project post the bid­ding stage, such as land ac­qui­si­tion, evac­u­a­tion fa­cil­ity, fi­nan­cial clo­sure, and bid­ders not will­ing to sign power pur­chase agree­ments. One or a com­bi­na­tion of th­ese will ham­per project vi­a­bil­ity and dent in­vestor con­fi­dence.

Do you think the 100 GW tar­get set by the gov­ern­ment is achiev­able con­sid­er­ing sec­toral is­sues such as grid sta­bil­ity, projects getting de­layed, WTO’s rul­ing against In­dia’s DCR clause and un­vi­able tar­iffs?

While achiev­ing the 100 GW tar­get seems am­bi­tious, a lot would de­pend on how road­blocks are tack­led. One fac­tor will be in­te­grat­ing 100 GW so­lar with the over­all grid. A stronger fo­cus is re­quired to tackle prob­a­ble is­sues such as grid cur­tail­ment, where ef­fi­cient man­age­ment and im­proved fore­cast­ing along with com­ple­men­tary/ an­cil­lary power sources is needed. Sec­ond, ad­dress­ing land ac­qui­si­tion will be a chal­lenge in many states.

Last, cost of pro­cure­ment from so­lar is re­quired to be passed through to con­sumers and there­fore, the fi­nan­cial health of dis­coms will be an im­por­tant fac­tor in achiev­ing this tar­get. One needs to closely mon­i­tor the im­pact of the UDAY scheme on dis­coms as well as how they progress in achiev­ing ef­fi­ciency tar­gets with in­creas­ing re­tail tar­iffs.

What should be the ideal en­ergy mix of so­lar, wind and biomass to meet In­dia’s high en­ergy de­mand?

Ther­mal power is good for meet­ing In­dia’s base load re­quire­ments. For meet­ing the re­main­ing power de­mand, a mix of so­lar, wind, hy­dro, and biomass is re­quired. Although there is no ideal mix of so­lar, wind and biomass, an op­ti­mum util­i­sa­tion of the three sources needs to be made to meet en­ergy de­mand. Hy­dro power, which is im­por­tant to sup­port re­new­able en­ergy sources as well as man­age peak load, is miss­ing at this stage and needs a push from the gov­ern­ment.

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