Intense competition to limit growth potential of solar IPPs
Solar power projects under different state policies have been competitively bid and awarded at a tariff of about Rs. 6.5 per unit. This levelised tariff is significantly lower than Rs. 9.4 per unit, a level we believe is required to achieve reasonable equity internal rate of return (IRR) of, say, 16 per cent: CRISIL.
October 15, 2013 / 15:41 IST
IPPs are at a disadvantage compared to non-IPPs, which enjoy accelerated depreciation benefit: CRISIL
Solar power projects under different state policies have been competitively bid and awarded at a tariff of about Rs. 6.5 per unit. This levelised tariff is significantly lower than Rs. 9.4 per unit, a level we believe is required to achieve reasonable equity internal rate of return (IRR) of, say, 16 per cent. Stiff competition from players availing the benefit of accelerated depreciation has impacted the business case for independent power producers (IPPs). Also, going forward, players are unlikely to enjoy the advantage of falling capital costs as solar module prices are expected to stabilise (in rupee terms) in 2013. Thus, we believe that IPPs would have to significantly slow down their expansion plans.Stiff competition witnessed in various state solar bids
Sharp drop in capital costs in the last 2 years has prompted several states such as Tamil Nadu, Rajasthan, Andhra Pradesh and Karnataka to invite bids to set up solar projects. Players other than IPPs (non-IPPs), who can set off accelerated depreciation (refer box below) against profits from other businesses have bid aggressively in the last year. Non-IPPs such as Mohan Breweries and Essel Mining have bid at Rs 6.5 per unit or below whereas IPPs such as Welspun and Azure Power have bid in the range of Rs. 8-9 per unit. Thus, IPPs are compelled to match such low tariffs as projects under most state solar policies are awarded at the lowest bid (L1).Declining trend in capital costs to reverse in 2013-14
While aggressive bidding was also witnessed in Jawaharlal Nehru National Solar Mission (JNNSM) Phase 1 (Batch 2) in December 2011, the sharp fall in capital costs supported project returns. However, this benefit is expected to wane as solar module prices, which form about 50 per cent of capital costs, are estimated to stabilise (in rupee terms). Our view is driven by the continuing consolidation in the industry coupled with rising solar power capacity additions in China and Japan. We expect module prices to average at $0.70 per watt in 2013 from $0.79 per watt in 2012. However, this drop in module prices is expected to be offset by sharp rupee depreciation. (Imported component forms about 60 per cent of the total cost). Thus, we expect capital costs to rise marginally to Rs. 82-84 million per MW in 2013-14 from Rs. 80-82 million in 2012-13.IPPs likely to change bidding strategy in order to compete effectively
In view of stiff competition from players who are able to utilise accelerated depreciation benefit, we believe, going forward, IPPs will have to bid from their profitable parent company or other subsidiaries for availing accelerated depreciation. This will enable them to compete with non-IPPs. On the other hand, IPPs without such an option will be at a significant disadvantage, thus limiting their growth potential.Disclaimer: CRISIL Research, a division of CRISIL Limited (CRISIL), has taken due care and caution in preparing this Report based on the information obtained by CRISIL from sources which it considers reliable (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. This Report is not a recommendation to invest / disinvest in any company covered in the Report. CRISIL especially states that it has no financial liability whatsoever to the subscribers / users / transmitters / distributors of this Report. CRISIL Research operates independently of, and does not have access to information obtained by CRISIL’s Ratings Division / CRISIL Risk and Infrastructure Solutions Limited (CRIS), which may, in their regular operations, obtain information of a confidential nature. The views expressed in this Report are that of CRISIL Research and not of CRISIL’s Ratings Division / CRIS. No part of this Report may be published / reproduced in any form without CRISIL’s prior written approval. 
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