Solar power counts the price for bidding cheap in race for projects

Even as companies are stretching themselves for funds, calling for a clarity in government policy, Shreya Jai explains the problems pulling down solar power

When SoftBank Energy two weeks ago withdrew its $600-million bond issue after failing to find enough investors, it showed the burn in India's solar power business. Investors found SB Energy solar rates competitive, but the cost of the fund's projects was higher than market expectations.
 
Solar power rates are falling, but investors and experts are alarmed at the finances of project developers. In turn, developers are worried about the cost of funding, the ban on Chinese imports and the nagging issue of power distribution companies not paying up their dues. Almost 80 per cent of India’s solar power capacity is built on imported solar cells and modules from China.

 
The government has indicated it will levy customs duty on imported solar cells and modules, aiming to discourage the use of Chinese products and promote domestic manufacturing. All Chinese imports would need regulatory approval.
 

Additionally, the Directorate General of Trade Remedies (DGTR) recently recommended extending for one more year a 15 per cent safeguard duty levied on Chinese solar imports and due to expire in July. Domestic solar manufacturers had petitioned for a level-playing field against cheap Chinese imports, prompting the DGTR to recommend a 14.9 per cent duty when it’s extended.
 
“Today at module level there is more than 50 percent value addition and highest direct and indirect employment. So, the 15 per cent duty is not enough to stop dumping in our country, still this is a good step for the country. We are looking forward to more tariff and non-tariff base barriers to stop dumping in our country,” said Hitesh Doshi, chief of All India Solar Industries Association and the chairman of Waaree Group, a solar-equipment maker.

 
Going cheap
 
The safeguard duty has been counterproductive though. In two years, developers have either stalled their projects by holding off imports or they are fighting legal cases to pass on to consumers the increased cost of imported solar equipment.
 
“Under the safeguard duty regime, all those projects which were bid earlier or under execution were given a pass through. This meant that even if one wants to buy from India, they cannot because Indian products were not given a pass through. It was also counterproductive to the project developers because pass through took a lot of time. This delay put a pressure on the developers’ working capital. Even the lenders did not support it,” Ashish Khanna, president of Tata Power Renewables, recently told Business Standard.

 
All solar power projects awarded in two years are running late, with several extending their deadlines for the third or fourth time. Yet, bids for projects keep lowering the bar. In a recent tender for setting up 2,000 MW solar power projects, Spanish renewable firm Solarpack Corporation quoted the lowest ever tariff of Rs 2.36 per unit for constructing a 300 MW project.
 
Before Solarpack's bid, the lowest tariff for a solar power project in India was Rs 2.44 per unit. Quoted by ACME Solar in 2018 for a 600 MW project in Rajasthan, the project went into litigation when ACME sought to cancel it. Experts say the ACME project shows low tariffs don’t help the sector.

 
In five years, solar power tariff has fallen by 110 per cent and is now the cheapest energy source in the country. Comparatively, average tariff of thermal plants stands at Rs 3.5 per unit and that of hydro Rs 5 per unit. Solar power capacity addition has grown by 800 per cent to stand at 34 GW by the end of 2019-20.
 
“It is not just foreign players, but Indian companies as well who bid tariff in the range of Rs 2.5/unit. Most players in Indian solar industry are aggressive bidders. But they are also the same ones to which lenders pose questions on their EBITDA and Capex ratio,” said a senior executive working in the sector.

 
Assets built in the tariff range of Rs 2.4-2.55/unit are unsustainable for everyone in the supply chain. At such low tariffs, even if a company commits an internal rate of return (IRR) of 10-12 per cent, it leaves no value for the investors, said a second executive working for a renewable company.
 
“Most solar companies have high cost structure including both capital expenditure and operational expenditure but they have aggressively bid low tariffs for their projects. There are companies which have debt seven-nine times of their EBITDA. Payment from discoms, we all know, is dismal and no certainty on when it will improve. These assets are eroding value for the investors,” said the second executive.

 
As companies bleed by offering power for cheap, government policy stumps them. “While tariff bidding is a call an investor takes, but to have a sustainable business model at lower tariffs one would need long-term clarity on import duties as well as non-tariff barriers. Let the government protect the domestic industry but also keep in mind the investors sentiments which are hurt with frequent changes in policy or no action on concerns,” said Sunil Jain, chief executive officer at Hero Future Energies.
 
Seeking funds
 
Companies have had to take radical measures for investments. “Barring PFC and REC, there is no big domestic financing agency for renewable projects. Companies are trying to tap the bond market and pension funds but not all are successful due to their own weak financials,” said a sector expert, referring to the Power Finance Corporation and Rural Electrification Corporation, the two state-owned organisations.

 
Hero Future Energies recently shifted to the UK to expand its portfolio overseas and access cheaper funding. A company it has registered in London will control its India business through a Singapore entity.
 
Adani Green Energy plans to raise up to $12 billion in five years by selling green bonds to fund solar manufacturing. It has received the government approval to construct 2 gigawatt (GW) of solar cell and module manufacturing and 8 GW of solar power plant in five years. This would entail an investment of Rs 45,000 crore.
 
Adani Green raised $362 million in October 2019 by selling dollar bonds to refinance its existing debt and enhance its capital expenditure. The company said it was the first 20-year bond out of India and first such investment grade bond.

 
ReNew Power, which counts Goldman Sachs, Abu Dhabi Investment Authority and Canada Pension Plan Investment Board among its international investors, has announced its entry in solar manufacturing.
 
Experts said the market could see a wave of consolidation in the market, leaving companies with strong balance sheets standing. They said there are close to 10 GW solar projects on sale but there are no buyers.
 
The sector expects prices of Chinese solar panels to crash by up to 15 cents per KWH: an 80 per cent fall from the current price range. “So even if there is a duty imposed on imports, the cost would still be competitive. Project developers are betting on this price crash,” said an expert.

 
Project developers hope government policies match trends in the market, irrespective of tariff. “If we have a stable framework on the policy front then I am sure tariffs can be even lower,” said Jain.
 
India's solar capacity of 87.6 GW constitutes 23 per cent of its total energy basket. It has set a target of sourcing 40 per cent of its energy needs from renewable sources by 2040 as part of its Climate Change commitments. For this, it will set up 175 GW of renewable power capacity, of which 100 GW is solar power.
 
The sector would need urgent amends if that target were to be achieved.