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‘Solar tariffs may dip further on capital cost cuts’

Solar tariffs are likely to fall further on a reduction in capital costs and solar power companies’ access to competitive funding, says India Ratings and Research (Ind-Ra).

Despite aggressive bidding, debt viability of projects with low execution and counterparty risks (especially those under the Jawaharlal Nehru National Solar Mission scheme and Solar Park scheme), is likely to remain intact.

However, creditors will have to avoid the pitfalls of thermal power where aggressive assumptions and leverage build-up at the holding company level to fund equity contributions in underlying special purpose vehicles resulted in significant stress. The solar sector has huge potential and, if developed responsibly, it could transform the structure of India’s power sector.

Ind-Ra expects that the developers will favour projects under the Jawaharlal Nehru National Solar Mission scheme state projects on account of healthy credit profiles of the off-taker, ie, NTPC Ltd (‘IND AAA’/ Stable/‘IND A1+’) compared to weak credit profile of the state distribution companies. “We expect that the projects floated under the viability gap funding (VGF) scheme will attract larger participation provided the tariffs remain above Rs 5/kWh,” Ind-Ra said.

Ind-Ra believes that with the increase in competition, a scenario of developers paying premiums instead of availing VGF funding (similar to the road project tenders back in 2012) cannot be ruled out.

The internal rate of return (IRR) for the recently awarded solar projects is likely to shrink to 12%-14% from the over 20% registered by projects awarded over the past few years.

Ind-Ra expects capacity additions to remain robust with 12.5GW to be added by FY18, taking the cumulative capacity to 17GW in FY18 from 4.9GW in December 2015. However, it will still fall short of achieving the Government of India’s target of 19GW by FY18. The government plans to increase renewable energy capacity to 175GW by 2022, including 100GW of solar capacity (60GW from ground mounted and 40GW from rooftop installations).

Source: ICMW