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.
