High Solar Module prices may reduce returns of projects by 200 basis points: Crisil

Spurt in module prices is likely to diminish returns for 12 gigawatts (GW) of the bid out solar projects by 200 basis points and inflate tariffs of future bids by 10 to 15 paise per unit, according to Crisil Ratings.

Since solar modules constitute over 50 percent of the total project cost and bulk of them are imported, hence variations in their price and exchange rates from expectations at the time of bidding can pose viability risks on the projects. 

Meanwhile, India has also decided to impose 40 percent basic customs duty on solar modules and 25 percent on solar cells from 1 April 2022, a move that would make imports costlier to encourage local manufacturing. 

Also, MNRE has issued an order enforcing a list of approved solar photovoltaic models and module manufacturers for government-supported schemes, including projects from where distribution companies procure electricity for supply to their consumers.

Solar project developers typically buy the modules 9 to 12 months after they win the auction.

This wide gap exposes projects to the risk of fluctuations in solar panel prices and currency exchange rates. More so because these variables remain unhedged and are also not a pass-through as per agreements.

According to Crisil, 12 GW of projects were bid at low tariffs of less than Rs 2.50 per unit since March 2020. These projects had factored in the price trend of solar modules which had fallen by more than 10 percent compounded on-year over the five-year period ending March 2020.

However, as these projects are nearing the module procurement phase, a reverse price trend is visible with module prices spiking to USD 0.24 per watt in June 2021, which is a 10 percent hike since January. Remaining components of project cost being land and other electrical equipment has been fairly stable.

Ankit Hakhu, Director at Crisil Ratings said although some support has come from a stronger rupee (assuming no further strengthening of rupee against the dollar) at USD 0.25 per watt, landed cost of solar modules will be higher by over 10 percent in rupee terms and project costs by 6 to 7 percent in this calendar year.

“This will ultimately squeeze equity returns by 200 basis points, down from a typical range of 10 to 12 per cent for bid out solar projects having lower tariffs,” said Hakhu. 

The price rise for modules is driven largely by an increase in the cost of critical raw materials such as polysilicon, aluminum, and copper, together forming more than 50 percent of the module cost.

While prices for these commodities are cyclical, presently they are showing firmness (having increased by 2 tp 25 percent since January) given the strong demand for these commodities from other industries like auto, construction, and electronics. 

“If the module prices remain high at over USD 0.25 per watt, future solar bids are also likely to become relatively expensive compared to the low tariffs of around Rs 2 per unit seen around January,” said Varun Marwaha, Associate Director at Crisil Ratings.

The rise in tariffs will also act as a disincentive for distribution companies to sign offtake agreements given that they have been wary in the past of signing such agreements where tariffs have been relatively higher. This may add to an already high pipeline of capacities bid out but not finding a buyer or even cancellations.

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