Lower tariff will put industry's margins at risk


"Matured players have slowly become cautious in bidding and the trend indicates that these players are bidding higher tariffs" - points out Krishnan Rajagopalan, (Head - Solar Business), Anchor Electricals Pvt Ltd (A Panasonic Group Company) 

What factors are involved in aggressive tariffs, considering the decline is over 25% since mid-2015?

Lower module prices, interest rate of debt financing, perceived reduction in BOS cost and further drop in module price are the primary factors responsible for the aggressive tariffs. Moreover, due to usage of trackers in every single project as tariff drops, energy generation increase compensates.

Given such drastic tariff decline, have investors adequately calculated and provided risk free funds?

Many of the investors are aggressive. The market is flooded with new players who are taking a strive. Old players have slowly become cautious in bidding and it is seen the trend points out that the old players are bidding higher tariffs.

Private sector players with long-term PPAs have problems with discoms. Do you think this has been examined?

Poor financial health of discoms has always been a key concern for the industry. Frequent changes in the Open Access (OA) policy has been another major concern. For captive players, it is very important to have consistency in policy, fool-proof implementation and priority status for RE power. Yes, due diligence is being done and GoI is taking some measures to improve the financial condition of discoms.

Is evacuation infrastructure - a major cost challenge - being provided by states at zero cost?

Yes, it is a major factor in evacuating RE power today. Land right of way (ROW) and delay in permissions and constructions of these lines pose a major threat to the viability of any RE power project. Some of the measures taken by institutions like NTPC for their projects or MP government's projects, where evacuation is in their scope and the developer's job is limited only to develop the solar power plant is simple and makes it easier.
Land is provided on long-term lease basis by the states at nominal cost,but is there additional cost towards conversion of land to non agriculture?
Fundamentally, certain states provide no conversion requirement or deemed conversion of land to non-agriculture (NA). Since solar projects are supposed to set up 'non-aerated' land or lands which are not used for agriculture, there is no issue to provide NA status to these lands. But, general approval given may also allow people to convert good fertile agriculture land to NA and use for solar purpose. So there needs to be balance. There is an additional cost involved in case NA approval is required. Sometimes since the land area is higher, the process includes involvement even of the DC to obtain the NA clearance.

Do bidders consider O&M costs (in per MW per annum terms)?

Majority of the project developers consider the O&M value to be minimal initially and that is a major issue today. In reality, the actual O&M costs are higher. So, a proper evaluation of O&M costs, considering escalations, component failures, replacement of out of warranty equipments after 10 years need to be factored.As per our understanding some bidders have arranged foreign debt at around/below 9% interest (including hedging cost). However, hedging is not for the entire duration of the PPA and can go up to 3-5 years. Your assessment on it.
This is like a risk strategy. Hedging is purely done on a short term basis. The moment one tends to add factors to hedge for long term the costs go higher.
So, the developers have to strike a balance between hedging and the risk that they can take to make the project risk free.

Lastly, according to you how many of the low-tariff projects have really come up on stream?

Multiple issues exist in the said projects as of today. Lower tariff, poor quality of the performance of past projects, land issues and financial closures are some of the main hindrances towards getting a project executed. However, developers who have financial stability and are able to bring equity in time have been able to set up their projects and make them operational. However, many projects; including the projects awarded by SECI - last under VGF scheme have not taken off at all. This is a serious concern for the government to look into. This is mainly because, the developers who have bid for the project and are today unable to execute it, and have deprived the opportunity to another developer who would have completed the project on time.
However, I believe that lower tariff for solar from the current position will put the entire industry at risk as margins will be squeezed and ultimately warranty and long-term performance will be affected.