solar sector recently reached record low tariff levels in the auction conducted
at the Rewa Solar Park in the state of Madhya Pradesh. India was one of the
first countries to adopt reverse auctions for solar projects since the
inception of its national solar policy and the government’s goal has always been to procure solar power at
the lowest price possible.
Trajectory of Solar Tariffs
The recent record low bid of Rs.3.30 (~$0.494)/kWh
(levelized over 25 years) at the Rewa Solar Park by ACME was lower by Rs.1.05
(~$0.02) and 24 percent compared to the previous low of Rs.4.35 (~$0.07) quoted in Rajasthan (by
Fortum) in January 2016.
When the first 150 MW of solar was tendered under the
National Solar Mission (NSM) Batch-I in 2010, the average tariff quoted was Rs.12.16
(~$0.17)/kWh. Average tariffs have fallen by about 73 percent since 2010, almost
in line with Chinese spot module prices, which have fallen by approximately 80
percent since 2010.
entire global solar market was about 17 GW in 2010; Indian solar installations at
that point were only about 18 MW. When NSM was initially rolled out, neither
the government agencies nor developers had much experience installing solar
power projects, nor was there a supply chain in existence. With subsequent
auctions, intense competition to get into a new sector resulted in aggressive
bidding leading to continued drops in tariffs.
What Led to Such Low Tariffs?
Intense competition in reverse auctions due to a limited
supply of projects has pushed companies to bid lower and lower, sacrificing
margins, in order to gain market share.
Highly competitive reverse auctions, falling module and
component prices, the introduction of solar parks, lower borrowing costs, and the
entry of large power conglomerates with strong balance sheets and access to cheaper
capital have all contributed to the dramatic fall in bids.
An increase in lending by Indian Renewable Energy
Development Agency (IREDA), the World Bank, the Asian Development Bank and
other development banks have provided developers with cheaper loans which has
enabled developers to bid at much lower prices, stated an official at Ministry
of New and Renewable Energy (MNRE). In the last two years, average domestic
borrowing rates have declined by approximately 14 percent for solar projects.
ever falling Chinese cell and module prices due to expanding global market,
scale, supply and demand imbalance is the single most important reason that has
enabled project developers in India to aggressively bid and build projects.
Initially, Rs.5 (~$0.08)/kWh was the benchmark that we
did not want to cross while bidding, but if the government provides support in the
form of a guarantee and a must-run status, then projects will be viable at
close to three-rupees per unit. In the future, it can even reach the Rs.2
(~$0.03)/kWh, stated a solar project developer.
Chinese module prices have declined by
approximately 80 percent since 2010. The module price declines in 2016 (31
percent) is the second largest decline following the 45 percent price crash in
2011. After huge price declines in 2011-2012, there was some price
stabilization between 2013-2015 during which module prices fell by only 11
percent. In fact, there was a 1.5 percent price increase in 2013 due to the tightening
of module supplies. These massive price declines have more to do with global
demand and supply than what has happened in India which has installed 10 GW
since 2010. China installed 34 GW just in one year in 2016.
Solar park programs have helped to bring down tariffs to
some extent as large projects can be constructed in a single location with the
necessary grid infrastructure and land provided, bringing down project costs
and associated risks. Though solar parks have contributed to bringing costs
down, most of them have had a lot of challenges
including, lack of access roads, cleared lands, and clear demarcation of land
areas in these solar parks. Rewa was an exception as the state of Madhya
Pradesh worked hard to eliminate the risks typically associated with Indian
projects, such as: curtailment, payment delays etc. The Madhya Pradesh
government is also providing a payment guarantee for the park and developers
can get deemed generation benefits - all these have contributed to record drop
in tariff. However, nothing is built yet and it will be 18 months or so before
we know how it all turns out.
The central government just doubled solar park capacity to
40 GW, which is expected to help bring down costs as long as the parks are
built and operated efficiently. The MNRE has also released new
guidelines for auctions which brings in some of the lessons learned from
REWA park. The additional 20 GW, when tendered, will change the face of the Indian
solar sector and make it cheaper than thermal in some cases. At least that’s the expectation stated by an MNRE
government is also developing a green energy transmission corridor. Although the
progress has been slow, the grid is getting ready to take on large renewable energy
capacities. In addition, solar park capacities have doubled. You add these to falling
module prices and the MNRE guidelines for solar tenders and we have the perfect
environment for a solar boom in India, stated a project developer.
Rewa auction was unique and is not a direct comparison to previous auctions or
low bids. After many years of experimentation, the government is finally realizing
that eliminating risks leads to lower bids, which results in lower tariff pay
outs, saving possibly billions in the future. It took them seven years, but
they are learning,”
commented Raj Prabhu, CEO and Co-Founder of Mercom Capital Group. The
government is extremely pleased with these record low bids; the question is - can
developers and investors make attractive returns at these levels? There is no
margin for error.