Solar power tariffs expected to fall to as low as Rs3.50 a unit in 3 years

Fall in solar power tariffs would be a shot in the arm for the government, which has pushed renewable energy to the top of its energy security agenda

Solar power tariffs in India, which have fallen below Rs.5 per unit since November, are expected to fall further as the industry doubles volumes every year and the cost of producing power continues to decline.

At least three industry experts Mint spoke to said that tariffs will fall to as low as Rs.3.5 per unit in three years owing to better use of technology, higher volumes, increased competition and a favourable regulatory environment.

“There is no question about whether they (tariffs) will go down or not. Typically we are seeing a 3-4% increase in efficiency and about 3-4% reduction in costs. So we expect that solar tariffs will continue to go down by 5-8% year-on-year,” said Vikram Kailas, managing director at renewable energy producer Mytrah Energy Ltd.

Solar module prices have already fallen sharply, down by 10% in the first half of 2016 , leading to higher margins and reviving projects which were termed unviable earlier, Mintreported on Monday.

“The cost of production continues to come down. The challenge of course is by how much and whether it becomes unsustainable in specific points in time,” said Vinay Rustagi, managing director, Bridge to India, a consulting firm.

Bridge to India sees tariffs falling by at least 5% annually and calls a sub-Rs.4 per unit tariff a realistic number.

“Other subsectors within power generation do not expect (a) decline in prices. So from grid-parity or competitive aspect, solar is the most attractive source of energy for long-term,” added Rustagi.

A fall in tariffs would be a shot in the arm for the government, which has pushed renewable energy to the top of its energy security agenda and has been looking to provide green power at less than Rs.4.50 a unit. India has targeted 100 gigawatts (GW) of solar and 60GW of wind energy capacity by 2022. It currently has about 8GW of solar capacity and about 27GW of wind power capacity.

Bigger factories and lower cost of manufacturing will ultimately lead to a reduction in tariffs over the next few years, said Pashupathy Gopalan, president, Asia Pacific, SunEdison Inc., which has over 1GW of operational and under-construction solar projects in India.

Indeed, solar tariffs hit a record-low in November last year when SunEdison bid Rs.4.63 per unit in a reverse online auction and fell to Rs.4.34 in Finland-based Fortum’s bid at a January e-auction.

To be sure, many have called the falling tariffs “unviable” and “suicidal”, citing instances of companies unable to find financial closure for their projects.

Power producers argue that they have been able to bid aggressively at government-provided solar parks thanks to ready-to-use infrastructure such as land and transmission facilities. Global firms such as Fortum, SoftBank and SunEdison have also used aggressive bidding as a means to get a foot in the door of this nascent sector.

Between 2010 and 2015, solar capacity addition had doubled annually. It is expected to grow even faster to touch 12GW by the end of this year. India will then become the fourth largest solar market, overtaking the UK, Germany and France.

While lower tariffs will be a positive for consumers and the environment, there are concerns that investors won’t get the returns they want. “This is, end of the day, a commodity industry,” SunEdison’s Gopalan said. Returns in the sector range from 12% to 16% depending on tariffs and other factors.

In India, which holds reverse auctions for tendering solar projects, the role of the buyer and seller is reversed and a business bid is won by quoting prices downwards. “In any other country, bidding is a double-edged sword, so they have a condition that one cannot bid below a certain price or IRR (internal rate of return). But India does not have any such condition. We believe that people will continue to be aggressive,” Mytrah’s Kailas said.

Tariffs will go down only if there will be a decrease in the overall cost of setting up solar projects from Rs.5.5 crore per MW to Rs.3-4 crore and plant load factors increase from the current 15-20%, said Anubhav Gupta, an analyst at Maybank Kim Eng Securities India.