Any slight changes in project costs could dent operating margins, says Tata Power Renewable Energy CEO Rahul Shah. — PHOTO: AFP
Low tariff bids for recent solar projects could prove risky for developers as any slight changes in costs could dent operating margins, Tata Power Renewable Energy CEO Rahul Shah toldThe Hindu in an interview.
“A lot of industry people were surprised by the kind of bidding that developers have done. They must have good reasons for it. But I think those bids have very tight assumptions and if any one assumption moves adversely even a little before the commissioning of the project, then it could be a very risky project,” Mr. Shah said.
For example, he explained, if developers are banking on the fact that module prices have been falling and so will fall in the future, then this could work adversely for them since module prices have already started plateauing. Similarly, if the developers have not hedged against the depreciation of the rupee, then that too could render projects risky.
Solar tariffs hit a historic low of Rs 4.34 per unit in January following the bid for a 70 MW project in Rajasthan by Finnish solar power company Fortum Energy. At the time, many experts said that the tariffs are moving too low and that they would dissuade private lenders from giving loans for solar projects.
“My view is that as long as the plant has been built with good equipment and will last for the entire term of the power purchase agreement (PPA) with minimal downtime, then although the promoter may not make much on their equity, the lender will make money on their loan,” Mr Shah said. “But if the developer cuts corners, then lender may have exposure to risk. In my view, though, lender exposure is not very high in solar since solar projects don’t face the same kinds of input fuel risks as thermal plants do,” Mr. Shah said.
The key to boosting rooftop solar adoption — something that has been sluggish so far—is to make the power distribution companies (discoms) more financially secure, he said.
“The challenge has been that rooftop solar has been viable only for industrial consumers whose power tariffs are on the higher side. It is not viable for residential users at the moment whose tariffs are lower. When commercial and industrial users install rooftop solar, this displaces the electricity they are buying from the discoms. Because they buy less, the discoms are earning less from their highest-paying consumers,” he said.
At a time when the health of the discoms is so poor, they don’t particularly favour people going for rooftop solar and buying less from the grid, Mr Shah said, adding that the cure is to improve the financial health of the discoms.
The renewable energy sector in India, though benefiting from the huge push by the NDA-government, still needs some incentives—both in policy and in the upcoming Budget—for the sector to take off, Mr. Shah said.
“Unlike thermal or hydro plant, where they have multiple options for the sale of power, solar energy is usually sold to a bulk buyer like a discom. So, by the time the plant is commissioned, the developer needs clarity on the tariffs that will be available, the fact that the discoms will be willing to sign a PPA, and that any incentives that the government might have for the industry will be available by the time the project is commissioned,” he said.
The upcoming Budget must also have a provision for solar equipment to be exempt from value added tax, Mr Shah said, echoing a view voiced by several industry leaders recently.
At the moment, the country has 34 GW of operating wind capacity and 4 GW of operating solar capacity. Going by the bid processes in the last year, an additional 2 GW should be under construction in each of the sectors.
“The government is giving solar a very big push and I think there will be significant capacity addition in the coming years,” Mr Shah said.
