Structural Factors Responsible For Decline In Solar Power Tariff

In the current financial year 2020-21, solar power tariffs declined to Rs 2.36/kWh between June-July 2020 and Rs 2.0/kWh in November 2020. In the latest bidding, while the winning bids were at Rs 2/kWh, it was noted that the highest bid was at Rs 2.43/kWh, which is lower than the earlier tariffs. According to a recent research report released by India Ratings and Research (Ind-Ra), the decline in solar tariffs is being driven by a lower capital cost/MW of around Rs 40million/MW due to advancement in panel designs enabling a higher capacity utilisation factor, reduction in panel costs globally, and lower financing costs.

According to the report, interest rates are on a decline both domestically and globally. The rates are expected to remain muted over the medium term. The lower interest rates have benefitted the high rated players which have sound access to the financial markets and are able to enjoy the low-interest rates. Entities that are backed by foreign parents are also looking at exploiting the foreign markets for project debt tie-ups, given the existing low interest rates and hedging costs.

Some of the state-specific factors are also impacting the solar tariffs in the latest round. These include an exemption of Rs 0.2 million/MW of cess that the government of Rajasthan levies on project development, which could translate to savings of 10-12 paise/kWh as the offtake is for the Rajasthan Urja Vikas Nigam Ltd.

Further, given that the plant would be set up in Rajasthan with proven solar potential, the average capacity utilization power is expected to be higher at over 25 per cent. The bidders in the latest rounds are banking on the exemption from paying the interstate transmission system charges for the projects commissioned before June 2023.