India’s JNNSM: Projects under batch II are a “risky” proposition

Many of the batch II solar projects under Phase I of India’s Jawaharlal Nehru National Solar Mission (JNNSM) have been deemed a risky proposition in a new research report by India-based CRISIL Research.

The organization stated that falling photovoltaic module prices and overcapacity “led by Chinese module suppliers” have impacted heavily on capital costs for projects. “In 2011, the capital costs of Solar Photovoltaic (PV) projects fell by 30 percent, following a 50 percent decline in the prices of solar PV modules,” wrote the analysts.
They said, however, that due to the “sharp” margin erosion this prompted, combined with increasing industry consolidation, module price drops are expected to slow this year, meaning that capital costs should decline by just 10 to 13 percent, to INR 87 million (around €1.2 million; US$1.6 million) to INR 90 million per megawatt this year.
However, anticipating bigger decreases, some project developers submitted “aggressive” bids to the JNNSM’s Phase I Batch II program – as low as INR 7.49 (around €0.10; US$0.13 ) per Watt, said CRISIL – which will place pressure on their margins unless they can access low-cost foreign debt.
“For healthy equity internal rate of returns (IRRs) of around 15 percent, a levelised tariff of Rs 9 per unit is necessary, assuming a plant load factor of 19 percent and typical debt equity of 70:30, with borrowing costs of nearly 13 percent,” stated the report. However, as around half of the bids have been below Rs 9 per unit, many of the investments are “highly risky”.
Financing the projects at INR 9.00 and below will be a great obstacle for the power producers, believes CRISIL.
It added that while it is possible these projects can be financially viable, if project developers tap cheaper foreign funds – foreign developmental finance institutions may provide low cost debt to solar power producers so that they purchase solar equipment from suppliers in their country – there are two factors in India, which are working against this: (i) the domestic procurement clause imposed by JNNSM for crystalline PV cells and modules, which is limiting access to such funds; and (ii) the INR is gaining traction against the U.S. dollar, thus making borrowing in dollars is an increasingly risky proposition.
Comparison of batch I and batch II bidding
French company, Solairedirect was the lowest bidder for a five megawatt (MW) project under batch II of the JNNSM, at INR 7.49. Meanwhile, the highest bid under this batch, INR 9.44, was from Green Infra. Looking to batch I, INR 10.90 was the lowest tariff quoted by bidders. While higher than the bids from batch II, this figure created controversy at the time, with industry insiders skeptical that such a low bid could turn a profit.
Overall, the average tariff dipped downward by 27.5 percent in batch II, compared to batch I. The table below shows the successful bids for photovoltaic projects under batch II, which ranged from INR 7.49 per kilowatt hour (/kWh) to INR9.39/kWh. Meanwhile, in batch I, the value varied from INR 10.95/kWh to INR 12.76/kWh, with an average bid price of INR 12.15/kWh.