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Several companies that have won solar power projects at competitively bid tariffs in recent months are yet to start constructing these projects due to financing constraints.
Several companies that have won solar power projects at competitively bid tariffs in recent months are yet to start constructing these projects due to financing constraints.

Will low solar tariffs hurt India’s sunrise sector?

Low tariffs are denting returns for investors and could lead to fund crunch for projects under development

Mumbai: A fall in solar energy tariffs in India is hurting the investment climate for what’s been billed as a sunrise sector, analysts and sector experts warn.

Solar projects, being won at record-low tariffs in government reverse auctions, are denting the returns for investors and in some cases could lead to financing constraints for projects under development, they say.

Solar tariffs fell below 5 a unit in November, due to aggressive bidding by global companies, such as US-based SunEdison Inc, Japan’s SoftBank Group, Canada’s SkyPower Global, and Finnish state-run utility Fortum Oyj, which are looking to get a foothold in India’s high-growth renewable energy market. Questions now are being raised as to whether solar projects would be viable and whether they will get adequate funding.

Indian banks are cautious about funding projects which offer low returns or look unviable amid increasing instances of liquidity constraints at many renewable energy firms, said an investment banker, asking not to be named as he is not authorized to speak with the media.

Several of the companies that have won projects at competitively bid tariffs in recent months are yet to start constructing these projects due to financing constraints, this person said.

The tariffs quoted by bidders in reverse auctions are “very aggressive and the viability of such competitively bid tariffs hinges on keeping the cost of modules and financing costs within budgeted levels," ratings firm ICRA Ltd wrote in a 13 April report.

Project internal rate of returns (IRRs) for a solar photovoltaic project, with a tariff of 5 per kilowatt-hour (kWh), a project cost of 5.5 crore per megawatt (MW), and a cost of debt funding at 11.5% over tenure of 12 years, would remain below 10%, ICRA estimates.

While investors expect returns upward of 14-15% in renewable energy projects,those won at tariffs below 5 per kWh would give investors returns much below 10%, said Anubhav Gupta, analyst at Maybank Kim Eng Securities.

The crisis at SunEdison, the world’s largest renewable energy company, which has led it to put its India assets on the block has not helped the sentiment surrounding the sector.

SunEdison is in talks to sell its stakes in India assets to Fortum, Reuters reported on Thursday. SunEdison’s bankers are reaching out to every possible investor in the market, Pashupathy Gopalan, president-Asia Pacific, SunEdison, told Mint on Thursday.

Apart from SunEdison, there are others in the market looking for partners. In case of projects under-construction, firms can sell only up to 49% equity stake.

“There are several hundred megawatt of projects up for sale in the market, but sellers are looking for premium valuations they are unlikely to find," said a second person familiar with the industry. He also requested anonymity.

India needs $200 billion of investment to meet its target of setting up 100 gigawatt (GW) of solar and 60GW of wind energy capacity by 2022 as part of the Narendra Modi-led government’s efforts to lower dependence on coal-fuelled electricity.

This has seen global investors, including renewable energy firms and pension funds, make a beeline for the country.

India currently has 22GW of ready wind energy capacity and over 5GW of solar capacity.

Many have argued in order for a solar project to be viable for the long term, tariff needs to be upward of 5 per unit.

Yet, companies continue to quote aggressively low tariffs. On Tuesday, Fortum won a 100MW project in a reverse auction conducted by NTPC in Karnataka at a tariff of 4.79 per unit for 25 years, on a day it announced plans to invest €200-400 million ( 1,500-3,000 crore) in India’s solar energy sector to expand its greenfield projects and look at potential partnerships.

Recent bids in the range of 4.6-5.3 per kWh imply a return on equity in a band of 6%-13% depending on the cost of debt, said JM Financial Institutional Securities Ltd analyst Subhadip Mitra in an 11 April report.

Solar tariffs hit a record-low in November last year with SunEdison’s bid of 4.63 per kWh in a reverse online auction and fell to 4.34 at a January e-auction conducted by state-run National Thermal Power Ltd (NTPC).

These tariffs are at a significant discount to the normative solar tariff of 7.01 stipulated by the Central Electricity Regulatory Commission (CERC) for FY 2016, ICRA said.

In a reverse auction, the role of buyer and seller is reversed and a business bid is won by an entity quoting the lowest price.

Domestic and global companies have been able to bid low as government-provided solar parks give the developers ready-to-use infrastructure, such as land and transmission facilities, helping lower project risk and costs.

Large Indian power producers, including Tata Power Co Ltd and Adani Power Ltd, have stayed away from bidding low.

“With tariff under 5 per unit, debate would continue on the sustainability of low tariffs. However the foreign investors and big domestic corporate houses have started warming up for the huge investment potential in the renewable energy space sensing economic viability with lower capital cost and reduced counter party risk," a report by SBI Economic Research Department on 13 April said.

Italy’s Enel Green Power SpA, French Electricite de France SA, and Indian firms including Welspun Renewables Ltd, Goldman Sachs-backed ReNew Power Ventures Pvt. Ltd, Morgan Stanley-owned Continuum Wind Energy Ltd, JP Morgan-backed Leap Green Energy Pvt. Ltd and NuPower Renewables Pvt. Ltd, are also expanding in the Indian clean energy market.

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