Indian solar developers not pricing risks fully

Share on facebook
Share on twitter
Share on linkedin
Share on reddit
Share on email
Bridge to India has harmonised utility-scale solar tariffs over an 18-month period. Credit: Bridge to India

Indian solar developers have been more aggressive than their international counterparts in solar tenders and their risk pricing appears to have been inadequate, according to a new report from consultancy firm Bridge to India.

By analysing India's recent auction history on PPA-based, open category solar projects during the eighteen months up to the end of 2016, Bridge to India found that bidding in the sector has been relatively aggressive and even “lucky” with some of the assumptions made about rapid falls in module prices.

Indian developers were found to have a greater risk appetite than foreign firms when accounting for offtaker risks, project completion timelines, land acquisition and transmission hurdles.

For its modelling, Bridge to India harmonised bid results for 10.9GW of tenders to a 50MW PV project in the state of Andhra Pradesh commencing construction in January this year. Using this analysis, the simple average of all harmonized tariffs was INR4.31/kWh (US$0.063), excluding a 215MW tender in Uttar Pradesh as an outlier.

Jasmeet Khurana told PV Tech: “We have harmonised all kinds of external factors, because it is very difficult to compare a two-year-ago tender […] to a tariff of today; the module prices have fallen; the EPC prices have fallen; the offtaker might have changed. We have normalised for all these things to come to a comparison of which tenders were more competitive than the others.”

Bridge to India stressed that, contrary to general perception of the market, harmonised solar tariffs have not actually trended downward once these additional factors such as changes in project costs are accounted for (see graph above). Instead, harmonized tariffs have oscillated around the average mark with no significant trend over time.

Perhaps the most important takeaway from these results was a calculation that the average harmonised tariffs gives an equity IRR of just 14.2%, which is significantly below the benchmark expectation of 18%.  

This led Bridge to India to conclude that bidding has indeed been aggressive, resulting in developers “focusing relentlessly” on optimization of technical and financial project parameters in a manner that can push up IRR by 200-300 basis points. Developers are also making speculative assumptions about falling equipment prices, land sale values and debt refinancing among other factors.

The report stated: “Low equity IRRs suggest that the Indian developers, in particular, are not pricing risks fully and too much faith is being placed on an optimistic future scenario. The sector has been very lucky with rapid falls in solar module prices easing most of the financial and execution challenges. Any dislocation in module sourcing or even a price stabilization will spell trouble for winning bidders.”

“We are aware of several instances of developers making further aggressive assumptions on future land sale values, debt refinancing, salvage value etc. and not building sufficient risk buffers. It is clear that project risks are not being priced fully and base cases are being modelled optimistically.”

The consultancy cited grid curtailment as a particular area where Indian developers are being too optimistic about the future risks it poses.

It also warned against going down the same troubled road of other Indian sectors, such as thermal power and roads where historically many projects have either become unviable or ended in financial distress.

PV Tech recently caught up with Manoj Kumar Upadhyay, the founder, chairman and managing director of Indian developer ACME Group, who said that developers had not been aggressive and had taken factors such as the improved financial environment into account. Just a few weeks later ACME won 250MW with record-breaking low tariffs at Rewa.

Read Next

April 14, 2021
While recent solar auctions in Spain and Portugal have made headlines with low prices and high levels of participation, the power purchase agreement market will be key to helping both countries reach their 2030 solar deployment targets, it was suggested during a panel discussion.
PV Tech Premium
April 8, 2021
After a challenging year, India’s solar sector stands primed for something of a rebound. But a host of familiar issues, from the perilous state of DISCOMs to regulatory uncertainty, run the risk of stymying future growth. Vinay Rustagi, managing director at consultancy Bridge to India, talks to PV Tech about the future prospects for Indian solar.
April 8, 2021
Tata Power Solar has expanded its PV manufacturing facility in Bengaluru, India, taking the total production capacity of modules and cells to 1.1GW.
April 1, 2021
Norwegian independent power producer Scatec is looking to collaborate with project developers in India as part of efforts to gain a foothold in the country’s burgeoning solar sector.
PV Tech Premium
March 26, 2021
Solar developers have welcomed clarification on India’s new import duties for modules and cells that will come into effect next year, but questions have been raised about the ability of domestic manufacturers to ramp up production to meet rising demand.
March 23, 2021
Scatec has unveiled a NOK 100 billion (US$11.7 billion) plan that will see the company expand its renewables portfolio to 15GW over the next four years.

Subscribe to Newsletter

Upcoming Events

Solar Media Events
April 20, 2021
Upcoming Webinars
April 28, 2021
4:00 - 4:30 PM CET
Solar Media Events
May 11, 2021