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India Ratings: Low Tariffs Face Uncertainty; Capex Pressure and Robust Capacity Additions to Continue in Solar Power Sector

India Ratings: Low Tariffs Face Uncertainty; Capex Pressure and Robust Capacity Additions to Continue in Solar Power Sector

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Ind-Ra-Chennai: Low solar bids, while causing disruption in the power sector, have little financial buffers to face challenges such as cost overrun, increased interest rate and counterparty delays, according to India Ratings and Research (Ind-Ra). An analysis, where specific project features have been assumed by Ind-Ra, shows that a tariff of INR2.44/kWh could have an equity internal rate of return of 10%.

Falling panel prices and increased competition have contributed to aggressive bids. In addition, an increase in panel conversion efficiency has contributed to a reduction in land required for panels and a fall in the balance of system cost. Falling panel prices have encouraged developers to have a high DC/AC capacity ratio to optimise supply.

Risk allocation in tenders has taken centre stage in bids. Tenders floated consciously address payment security and grid curtailment to attract low bids. The Rewa bid started this trend. Solar Energy Corporation of India and NTPC Limited (‘IND AAA’/Stable) have witnessed low bids from developers, because of the comfort derived from their credit profiles.

Utility scale solar capacity additions are likely to be in line with the Ministry of Power targets. The pace of solar capacity auctions, along with an emphasis on compliance with renewable purchase obligations, is critical. On the other hand, rooftop solar capacity installation is lagging behind ground-mounted installation owing to no concerted efforts to achieve targets.

Payments days across counterparties, except Tamil Nadu’s distribution utility, have been observed at less than 90 days. Adverse financial conditions can derail renewable projects. Also, the grid curtailment risk, albeit likely to be temporary in nature, is a concern as renewable penetration increases. Against the backdrop of distribution utilities trying to reduce power purchase costs, the emerging threat of renegotiation and termination of power purchase agreements can derail developments in the sector.

Developers seem to be favouring USD bonds for financing because of ease of placing large issuances. Rupee bonds for renewable projects have taken a backseat owing investor perception of fast-changing dynamics and doubts about long-term sustainability.

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings.

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

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Source: indiaratings.co.in
Anand Gupta Editor - EQ Int'l Media Network

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