Sunny days ahead for solar energy capacity addition; aggressively bid solar PV tariffs may cast a shadow on profitability prospects for Independent Power Producers (IPPs): ICRA

• 5.7 GW of Solar Capacity addition expected in FY 2017

ICRA expects the growth witnessed in capacity addition in the solar energy segment to be maintained in the near foreseeable future. This growth is largely being driven by a significant improvement in the tariff competitiveness of solar PV, which has been facilitated by substantial reduction in capital costs on one hand as well as adoption of competitive bidding by procuring utilities on the other. However, ICRA believes that tariffs quoted by the successful bidders is very aggressive and the viability of such competitively bid tariffs hinges on keeping the cost of modules and financing costs within budgeted levels.

In ICRA’s view, the amendment in the solar renewable purchase obligation (RPO) norm from 3% to 8% by FY2022 in the National Tariff Policy (NTP) is a key positive for the solar energy sector. This should facilitate capacity addition in line with the revised capacity target of 100 GW by FY2022 (earlier 22 GW) under National Solar Mission (NSM) by Government of India (GoI), says ICRA in the study.

In ICRA’s estimates, assuming a 7% annual energy demand growth, an additional 78 GW in solar energy capacity would be required over the seven-year period from FY2016 to FY2022 to hit the revised solar RPO target of 8% by FY2022.

“Going by the project awards and tenders floated as on date, about 5.7 GW of capacity addition is expected to happen in the current FY. However the caveat is, the actual addition to capacity would hinge on timeliness in the award of projects under State and Central Government policies and the subsequent signing of power purchase agreements (PPAs) with the buyers, viz. the State-owned utilities” says Mr. Sabyasachi Majumdar, Senior Vice President, ICRA Ratings.

Moreover, tariff competitiveness of solar PV has significantly improved with State-owned power utilities and the nodal agency under the NSM adopting the competitive bidding route during calendar 2015. The power tariffs quoted by independent power producers (IPPs) over the last six months have been low, ranging between Rs. 4.34 and Rs. 5.1 per kWh, and are at a significant discount to the normative solar tariff (Rs. 7.01) stipulated by the CERC for FY2016.

“As these competitively bid tariffs remain aggressive from credit perspective, the viability of such competitively bid tariffs hinges on structuring of debt with longer tenures, competitive funding costs, and the ability of IPPs concerned to keep the cost of modules within the budgeted levels”, says Mr Sabyasachi Majumdar. In ICRA’s estimates, the project IRR for a solar PV project, with tariff at Rs. 5/kWh, project cost at Rs. 5.5 crore/MW, cost of debt funding at 11.5% over a tenure of 12 years, and PLF at 19%, would remain below 10%, with the cumulative average debt service coverage ratio (DSCR) at 1.09 times.

Further from a regulatory perspective in ICRA’s view, “the solar sector further continues to face a major regulatory challenge, particularly with regard to compliance with RPO norms. While the solar RPO target has been recently revised upwards, timely alignment of the modified solar RPO trajectory under NTP by the State electricity regulatory commissions (SERCs) remains crucial.”