Depreciating currency: Is the Sun still shining?

The solar experts share what they think has happened to the solar industry amidst the rupee depreciation and whether the Sun still shines brightly on India renewable sector.

Solar industry is not new to challenges as every now and then the industry keeps facing challenges, pushing back gains achieved in the sector. Safeguard duty on import of solar modules, application of GST in solar equipment, to having no clarity on applicable GST on solar power, and now the newest challenge faced by industry is Indian rupee depreciation.

Amit Barve, Vice President, Business Development and Marketing, Enerpac Energy Pvt Ltd says, “As solar modules are mostly imported items and which constitutes anywhere between 55-60 per cent of project cost, depreciation has caused significant impact for larger projects, which needs longer time to build and projects which were under construction, putting pressure on IRR or even questioning the viability of tariff quoted and project secured earlier at cost.”

DISCOMs bears the burden
Solar industry is a net importer wherein 60 per cent of the project cost is linked to PV modules, so if the rupee depreciates by 10 per cent, it will increase the capex requirement by 5-6 per cent. So, the current trend of rupee depreciation will, in turn, lead to an increase in the solar tariffs. Nikunj Ghodawat, CFO, CleanMax Solar says, “At CleanMax Solar, we factor the currency risk upfront while negotiating the PPA tariffs and it is relatively less complex for rooftop project as capex cycle is low. For the utility-scale project, it’s difficult to perfectly hedge this risk.”

The major cost component for all solar PV projects is the price paid for modules. This constitutes 50-60 per cent of the total cost, and 90 per cent of modules are imported. Mridul Chadha, Senior Analyst and Market Advisor Climate Connect, “Any rupee depreciation has a significant impact, which typically translates into higher tariffs from the project developers. This, in turn, increases the price DISCOMs must pay, and ultimately means the end-consumer bears the burden.”

Being unviable and NPAs
From an economy-level perspective, due to overall project cost increases, developers will have problems servicing their debts. Mridul says, “A few years ago, some prominent coal plant owners entered PPAs, where they planned to procure coal at very cheap rates from Indonesia. However, shortly after signing, a change in policy by the Indonesia Government, caused coal prices to increase greatly. This meant the cost of generation for the plants went up, leading to higher tariffs, and the PPA counter parties refusing to buy. As such, the plants became unviable, and were almost declared non-performing-assets (NPAs).”

This is a worst-case scenario example, and very unlikely for solar projects. Because the government wouldn’t allow depreciation to reach such an extent. There is a limit at which the Reserve Bank of India (RBI) would intervene and implement national protection measures. Further, in tender documents, and most PPAs, there is also a protection provision. Whereby any unforeseen costs of this nature can be passed on by the developer to the buyer, who must accept them. As such, unsurprisingly, it ultimately circles back round to the end-consumer having to bear the burden, adds Mridul.

Repercussions on project execution
The depreciating rupee will adversely impact the returns of developers bidding for solar projects. This will lead to an increase in project costs in the event of a significant variation in exchange rate on account of the increase in prices of imported modules, which account for 55-60 per cent of the project cost.

Simarpreet Singh, Founder-Director, Hartek Solar Pvt Ltd, “A mere 1-rupee increase in the rupee-dollar exchange rate results in a 2 paise per unit increase in tariff, which is substantial considering the fairly low profit margins at which developers operate. A drastic fall in rupee may delay the execution of projects if developers try to renegotiate their contracts with module suppliers to keep the costs at the same level.”

The rupee has depreciated by about 7 per cent since January this year, and the repercussions have started percolating to the solar supply chain in India. Since developers are bidding at very competitive rates, the price pressure is eventually being passed on to solar inverter and Balance of System (BoS) suppliers. It is feared that the burden may even be passed on to consumers. Given the immense pressure on pricing due to competitive bidding, there is a need to introduce a price variation clause in solar projects orders.

About half of the solar projects worth 280 billion which are in the implementation stage face viability risk owing to the constant fall in rupee. A 10 per cent drop in rupee will push up the project cost by about 30 lakh per MW, making even lenders tread with caution. Simarpreet adds, “What is even more worrisome is that the increase in project costs can pose a hurdle in the way of achieving the 2022 target of 100 GW as DISCOMs will be reluctant to buy solar power at higher tariffs.”

In the last 4-5 months, rupee depreciated from 64-65 to 67-68 per USD. Therefore, solar market faced 4 paisa per unit reduction in margin. This exchange rate contributes more than 50 per cent in the total cost of solar project. Krishnendu Mukherjee, COO, Sova Solar says, “Due to the reduction of the value of rupee, the execution of the solar project becomes delayed. In addition to this, there is a huge pressure on pricing due to competitive bidding which leads the vendors in difficulty.”

Rupee depreciation will impact solar projects negatively as major raw material of solar module (solar cells) is imported. Also, as developers are bidding competitively, the price pressure eventually falls on modules and BOS suppliers. Rajendra Kumar Parakh, Chief Financial Officer, Vikram Solar says. “The MMS and other BOS items are also getting costlier, which would increase the project cost, leading to scaring off developers and investors. As prevention, there should be introduction of price variation clause in solar projects orders.”

“There is a huge pressure on pricing due to competitive bidding which leads the vendors in difficulty”
Krishnendu Mukherjee, COO, Sova Solar

“There should be introduction of price variation clause in solar projects orders”
Rajendra Kumar Parakh, Chief Financial Officer, Vikram Solar

“DISCOMs will be reluctant to buy solar power at higher tariffs”
Simarpreet Singh, Founder-Director, Hartek Solar Pvt Ltd

“Every change ultimately circles back round to the end-consumer having to bear the burden”
Mridul Chadha, Senior Analyst & Market Advisor Climate Connect

“If the rupee depreciates by 10 per cent, it will increase the capex requirement by 5-6 per cent”
Nikunj Ghodawat, CFO, CleanMax Solar

“Depreciation has caused significant impact for larger projects and those under construction, putting pressure on IRR”
Amit Barve, Vice President, Business Development and Marketing, Enerpac Energy Pvt Ltd