Tuesday, May 06, 2014: If the Crisil Research report is to be believed, only about 50 per cent of the capacities that were bid under JNNSM are likely to be commissioned. The rest of the bids will reportedly not be commissioned courtesy the low returns and risk arising from the non-availability of domestic solar cells.
The scene on the Indian solar front is not as impressive as it appears to be. Highlighting the same, Rahul Prithiani, Director, Crisil Research, a division of Crisil, wrote in an article for Business Line. He wrote, “Following delays in signing power purchase agreements (PPAs) under various state solar policies, developers have shifted focus to solar projects initiated under the Central Government’s National Solar Mission which received bids nearly three times the capacity on offer.”
The phase II of Jawaharlal Nehru National Solar Mission (JNNSM) was able to garner strong interest from the developers and saw 2,170 MW of bids as against the tendered 750 MW. Prithiani wrote, “Clearly, developers were enthused by the adequate payment security mechanism and good track record of payments under JNNSM, which has been a key concern for solar power projects under State solar policies.”
The bids were invited in two categories based on the source of solar cells and modules. The first category was where the developer is free to use any source for equipment, while the second category stated that the equipment has to be sourced domestically. Competition for the first category was more intense as there were no restrictions on the import of cells and modules.
The bidding process closed successfully in March 2014 and then the question arose as to what kind of returns will players get in the process. He further wrote, “Bidding under the JNNSM Phase-II was based on viability gap funding (VGF). VGF is a mechanism where the government provides a capital grant to enhance project feasibility. To assess the viability of these bids, we calculated the VGF required to earn a minimum equity internal rate of return (IRR) of about 16 per cent.”
“Solar power projects also enjoy accelerated depreciation of 80 per cent in the first year of operations. Thus, players who can set off accelerated depreciation against profits from other businesses can bid more aggressively compared to others. Most independent power producers do not have access to accelerated depreciation as they operate their projects under different special purpose vehicles (SPVs) that, in the early years of operations, do not have adequate profits to benefit from the accelerated depreciation scheme. Based on current prices, capital costs under the open category are about Rs.6.80 crore per MW. However, players availing themselves of accelerated depreciation (typically includes entities from other businesses with limited execution experience in solar projects) incur 5-6 per cent higher capital costs given that the entire project execution would be outsourced,” wrote Prithiani.
The manufacturing cost of solar modules is higher in India as compared to the imported ones. Hence, the projects awarded under the DCR category, will incur 5-7 per cent higher costs as compared to the open category.
