CRISIL Opinion
Bidding aggression set to recoil on solar projects
CRISIL Opinion
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Last updated: August, 2014
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Background : The government proposes to allocate 3,000 mw of solar photovoltaic projects under National Solar
Mission (NSM) Phase II - Batch II, awarding for which is expected to complete by the end of next fiscal. As of
January this year, bidding for 1,520 mw of projects has already been completed. This includes a 1,000 mw [850
mw under open category and 150 mw under domestic content requirement (DCR)] in Kurnool Solar Park, Andhra
Pradesh; a 420 mw in Bhadla Solar Park, Rajasthan; and, a 100 mw in Uttar Pradesh under non-solar park open
category allocations. Power purchase agreements (PPA) for all these projects would be signed with NTPC Vidhut
Vyapar Nigam Ltd (NVVN), the power trading arm of National Thermal Power Corporation (NTPC). For the salient
features of the scheme, please refer to Annexure I
Key conclusions
Foray of large foreign and domestic IPPs with access to cheap foreign funding, lower expectation of returns
and large scale of projects under execution has led to aggressive bidding
Bidding to remain aggressive at Rs.4.0 - 4.5/unit with falling capital costs, improving efficiencies, rising scale
and significant interest from large players
We expect equity IRR to be low at 12-14 per cent; debt servicing unlikely to be an issue
Nevertheless, adequate payment security in PPAs with NVVN, ready land and evacuation infrastructure has
significantly reduced project execution risk, leading to aggressive bidding
For the 1,520 mw of allocations under Phase II Batch II of NSM, several bids were conducted between November
2015 and January 2016.
List of successful bidders in recent NTPC Vidhut Vyapar Nigam Limited (NVVN) biddings
Classification: INTERNAL
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CRISIL Insight
repayment) compared with 10-12 years earlier. In fact, for large IPPs, financing costs would already be lower by
200-250 bps (after adjusting for hedging costs), given availability of foreign funding. In line with this, the
expectation of returns of such players (refer table below) would also be lower to that extent.
Developers are also relying on reducing capital costs through significant bargaining with equipment suppliers,
given the relatively large scale of capacities under construction. For instance, large IPPs, such as Sun Edison (2.9
gw global & ~0.8 gw in India), ACME (1.5 gw in India), Azure (~0.3 gw in India), Adani (0.8 gw in India) ReNew (0.5
gw in India), Solaire direct (~60 mw in India), etc have a substantial pipeline of projects, which helps them avail
bulk discounts. Moreover, such players usually forward contract (~6 months) the module capacities. Both these
strategies typically reduce the cost of modules by $0.05-$0.06 per watt. Hence, their landed cost of modules is
usually lower (at ~$0.45-0.48 per watt) than the market price of ~$0.50-0.53 per watt.
($ per watt)
1.0
0.9
Avg. Prices for FY
0.8 2014-15 is US $ 0.62 Avg. Prices for FY Gradual decline of
per watt 2016-17 (E) is US prices
0.7 $ 0.48-0.53 per watt
0.6
0.5
0.0
Apr-14 Apr-15 Apr-16 Apr-17
(E)
Crystalline module prices
In Rajasthan, in particular, players are banking on higher plant load factors (PLFs) owing to higher irradiation
which is one of the highest in India at 6.35 (kWh/sqm/day) compared with 5.81 (kWh/sqm/day) in Andhra Pradesh.
In fact, projects set up under NSM Phase I in Rajasthan have reported PLF of 20-21% over the last 2-3 years.
2 2
Average PLFs of plants under NSM (Batch 2)
30%
23% 23%
25% 22% 22%
20% 21% 21%
20% 20% 19% 20%
20%
15%
10%
5%
0%
Q4 FY 14
Q2 FY 13
Q3 FY 13
Q4 FY 13
Q1 FY 14
Q2 FY 14
Q3 FY 14
Q1 FY 15
Q2 FY 15
Q3 FY 15
Q4 FY 15
Avg PLF (Batch 2) - 350 MW
Taking all this into consideration, we believe equity IRR is expected to be 12-14% for 1,000 mw awarded in Andhra
Pradesh and 420 mw in Rajasthan.
Capital costs: For players not availing accelerated depreciation under open category, we have assumed a
capital cost of Rs 51 million per mw. For projects awarded under the DCR category, the cost would be ~10%
higher compared with those awarded under the open category, mainly because of higher cost of domestically
manufactured modules and relatively lower scale of project.
Debt to equity ratio: 70:30
Cost of foreign funding: 10% (including hedging costs)
PLF (Andhra Pradesh): 19%; PLF (Rajasthan): 20%
O&M cost: Rs 0.5 million per mw
PLFs and interest rates vary from project to project. Hence, we have provided sensitivity of these parameters to
equity IRR in the table below.
Sensitivity analysis of equity IRR to PLFs and bid tariffs (Interest rate: 10 per cent)
Tariffs
Equity IRR
4.3 4.6 4.9 5.2
16% 2.0% 4.3% 6.8% 9.5%
17% 4.1% 6.7% 9.5% 12.4%
PLFs
Classification: INTERNAL
3 33
CRISIL Insight
Sensitivity analysis of equity IRR to Interest rates and bid tariffs (PLF: 19 per cent)
Equity Tariffs
IRR 4.3 4.6 4.9 5.2
8% 11.3% 14.3% 17.0% 19.7%
Interest rates
While returns are expected to be low, we believe debt repayment is not expected to be an issue. As per our
analysis, at a tariff of Rs 4.63 per unit, and with rescheduling of principal repayment for the project, we believe that
the project cash flows will be better aligned with the debt to be serviced.
DSCR to be just over 1.0x, equity returns to be low at Rs 4.63 per unit tariff
7 2.0
1.7
1.6 1.8
6 1.5 1.5 1.6
1.4
1.3
5 1.2 1.4
1.2
1.1
1.0 1.1 1.2
4 0.9 1.0
0.9 0.9
1.0
3
0.8
2 0.6
0.4
1
0.2
0 0.0
Year 10
Year 11
Year 14
Year 12
Year 13
Year 15
Year 3
Year 4
Year 6
Year 7
Year 1
Year 2
Year 5
Year 8
Year 9
Suitable land becomes critical in Uttar Pradesh as only few parts of the state, i.e., Bundelkhand and parts of
western Uttar Pradesh, have reasonable level of solar radiation (though still less than Andhra Pradesh and
Rajasthan), and higher solar days. In fact, so far, only ~140 mw out of the ~400 mw tendered in Uttar Pradesh
since 2011 has been commissioned due to land acquisition and clearance issues.
We estimate equity IRRs for these projects at 13-14%. However, they could face execution risk as witnessed in the
past in solar projects in Uttar Pradesh, which could pull down IRRs.
4 4
Aggressive bidding to keep prices at Rs 4-4.50 per unit in near term
Going forward, we expect the bid prices for newer allocations (under Central level allocation in solar parks) to
remain less at Rs 4-4.50 per unit in the near term on account of:
Plunging module prices, improving efficiency: As highlighted earlier, module prices are estimated to drop
10% in 2016. Efficiencies have improved by on average ~0.5% annually over the last 3-4 years and would
continue to improve at a similar pace over the medium term.
Increase in project size: With the availability of land under solar parks, and availability of grid infrastructure,
the average size of projects has increased from ~15 mw under NSM Phase II Batch I to 50 mw in Batch II
Tranche I. This boosts the developers ability to bargain with suppliers and engineering, procurement and
construction (EPC) players, leading to decrease in per MW cost of project.
Availability of foreign funds: The solar market in India is well entrenched, with ~4.5 gw of installed solar
capacities providing satisfactory PLFs, which has given comfort to funding agencies for sanctioning loans to
new capacities. Further, many large conglomerates with strong promoter backing have entered this segment,
which has led to a fall in the cost of capital for new capacities. Therefore, we expect lower bid prices to prevail
in the near term.
New entrants: A few players, including Sky Power, SBG Cleantech (a joint venture of Softbank, Bharti
Enterprise Ltd and Foxconn), Yarrow Infrastructure (a special purpose vehicle of Indiabulls) and Enel Green,
are bidding aggressively to establish their presence in the solar power market.
However, over the medium term, bids are expected to get less aggressive as few players build up sizeable
portfolios and near their targeted capacity additions in the sector, and as module prices stabilise.
Classification: INTERNAL
5 55
CRISIL Insight
Annexure I
Annexure II
List of bidders for 850 mw (under open category) Kurnool Solar Park, Andhra Pradesh
6 6
Sr. Bid price Allotted project capacity Bid project capacity
Bidder
No. (Rs/kWh) (MW) (MW)
26 Amity Solar Power Park Pvt Ltd 5.75 50
27 Welspun Renewable Energy Pvt Ltd 5.9 50
28 AMPL Cleantech Pvt Ltd 5.93 50
29 Sky Power Southeast Asia Holdings Ltd 5.94 100
30 Azure Power India Pvt Ltd 4.76
List of bidders for 150 mw (under DCR category) Kurnool Solar Park, Andhra Pradesh
Annexure III
Classification: INTERNAL
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CRISIL Insight
Annexure IV
Analytical Contacts:
Rahul Prithiani Pranav Master
Director, Industry Research, CRISIL Limited Associate Director, CRISIL Limited
Email: rahul.prithiani@crisil.com Email: pranav.master@crisil.com
8 8
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