The changing dynamics of India’s National Solar Mission

As expected, there was a considerable leaning towards the open (non-DCR ie no restrictions on module sourcing) category that was oversubscribed by over four times as against only two times for the DCR category. But average bid for the DCR category was much higher than expected at approximately INR 20 million ($330,000), which is more than double the price difference between domestic and imported modules.

This price difference is most likely evenly split between the domestic module suppliers (to finance their working capital and augment their limited manufacturing capacities) and project developers, who expect a considerable risk premium for using domestic modules with associated supply uncertainty and poor bankability. The use of a separate DCR category has starkly highlighted the limitations of Indian manufacturing sector and caused a big split in the Indian solar industry with module suppliers and project developers in firmly opposite camps. The question now is that where does the domestic manufacturing sector go from here and what is the best way for the government to boost local industry?

It is not entirely clear as to how much capacity was awarded on accelerated depreciation (AD) basis but we believe that it may be as high as 150 MW. We have always maintained that this policy provides a large and unnecessary financial incentive to a small part of the industry and is not in the best long-term interest of the solar industry. Ceterus paribus, the 70 paise tariff difference for AD bidders still favours them unduly against non-AD bidders. Not only does AD incentive detract from quality approach to project execution and development, but it also crowds out genuine long-term investment in the sector.

One of the more encouraging outcomes from the bidding process was the considerable interest shown by foreign project developers and utilities. This is a very welcome move in many ways as it reduces the cost of capital and makes solar power more competitive. It also brings more credibility to the market and hopefully, will result in much needed international expertise in project execution and deliverability.

Bridge to India’s analysis shows that almost 50% of total capacity has been won by international bidders. Prominent names include Sun Edison (100 MW), Acme (backed by EDF, 100MW), Fortum and Focal Energy (40 MW each) and SolaireDirect (30 MW). Indian IPPs including Azure Power, Hero Energy and IL&FS also fared strongly with nearly one-third of total allocation.

The list of winning bidders was just as interesting for missing names – thanks in part to the stretched balance sheets and parlous state of the economy, the traditional Indian corporate houses (Jindals, GVK, GMR, Lanco, Adani, Reliance, Aditya Birla) were conspicuous by their absence. And many prominent Indian IPPs either did not participate or did not win anything (TATA power, Welspun, Kiran energy, Green Infra, ReNew to name a few). This is an indication that the bids were too aggressive either because of strong overseas interest (lower cost of capital) or perhaps a compromise on project quality/returns.

With average project cost of around INR 58 million/MW for tier 1 imported modules, a fixed tariff of INR 5.45/kWh doesn’t seem nearly attractive enough even accounting for the INR 10 million of capital cost subsidy (VGF). Our calculations show that a typical project will show a risk adjusted equity IRR of 14-15% with these numbers. Many of the successful bidders are likely to have a tough time with project costs creeping up and interest rates not softening anytime soon. But a stronger Rupee will provide a much needed respite.

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