Solar tariffs are 30 percent lesser than thermal power in India

The current solar tariffs in India, which are between `2.50- 2.87 per kilowatt hour (kWh), have stabilised at rates 20-30 percent below the cost of existing thermal power in India and up to half the price of new coal-fired power, according to a latest study. It added that these prices would provide enormous opportunities to invest in the solar industry.

According to Vibhuti Garg, co-author of the study by IEEFA and JMK Research & Analytics and energy economist at IEEFA, as per current market conditions, tariffs below `2.50 per kWh are financially not viable in India’s solar sector. “Developers have already reduced their return expectations from 14 percent to 12 percent, with tariffs being achieved as low as `2.5 per kWh,” she said.

Garg added that while this rate is very competitive compared to thermal plant tariffs, and lucrative for power distribution companies entering long-term power purchase agreements, this was a floor for developers if they want to make money.

SECI and NTPC played a key role in building international investor interest, according to the report titled ‘Developers and Global Investors Snap Up India’s Solar Power Tenders – Decoding Tariffs vs Returns for Solar Projects in India’. It added that contractual certainty was in place with counterparty and payment risk assurance from these central government agencies.

According to Jyoti Gulia of JMK Research and co-author of the study, conditions in India are very different to other energy markets. “We found a number of competing concerns in our analysis. Interest rates, module costs, and capacity utilisation factors in particular have a major impact on solar tariffs and project returns,” said Gulia.

She added that the cost of financing was a big element in determining tariffs and returns. Significantly higher interest rates in India compared to other leading renewable energy countries were one of the reasons for higher domestic tariffs. The zero indexation for the 25- year period is also a key value for India that is not explicit in the year one tariff.

“Finally, capacity utilisation factors (CUF) differ across states in India, given significantly different solar resource qualities. Any drop in utilisation rates has a significant impact on project returns. As per our report findings, a 3 percent drop in CUF results in over 7 percent fall in equity returns,” said Gulia.

Garg said that to earn reasonable returns on project investments, it was crucial for project developers to factor in the risks and rightfully estimate the costs of every component