Solar power tariffs may rise next fiscal on increased taxes, says report

Following the recent hike in taxes on critical components and the proposed customs duty on modules, solar power tariffs may rise to Rs 2.6-2.7 per unit from an all-time low of Rs 2 per unit, next fiscal, warns a report.

The government recently increased GST on critical components of a solar project such as photovoltaic cells and modules from 5 per cent to 12 per cent with effect from the beginning of this month.

This has increased the total taxation on a solar project from 8-9 per cent to 12-13 per cent and will more than double to 30 per cent when customs duty of 40 per cent on imported solar modules kicks in from April 2022, Crisil said in a report on Monday.

Additionally, module prices rose to 23-24 cents per watt in the first half of the current fiscal from an average 21 cents per watt (for a mono-crystalline module) last fiscal. This was primarily due to significant increase in the polysilicon prices, a key component used in solar cells, because of disruptions at the manufacturing units in China.

High module prices, taxes and duties are likely to result in project cost inflation for solar developers.

"Compared to fiscal 2021, we expect the project cost to increase by 15-20 per cent (Rs 60-70 lakh per mw) on average to Rs 4.2-4.3 crore per mw next fiscal from Rs 3.6-3.7 crore/mw seen during past few fiscals. This might make future solar bids expensive at Rs 2.6-2.7 per unit compared to the lows of Rs 2.0-2.2 per unit seen in fiscal 2021, for developers to maintain returns of 11-12 per cent," the report warned.

Components form 70 per cent of the EPC of a project cost and services form the remaining 30 per cent of the cost.

On the other hand, developers of already bid-out projects are expected to pass on the impact of taxes and duties under the change-in-law clause, which will also lead to higher cost for power generated.

This calculation on higher tariff includes an anticipated reduction in price of solar modules to 20-21 cents per watt next fiscal, with an expectation of smoothening of silicon prices after the ramp-up in operations of the planned and existing capacities.

If there is no correction, tariff may further rise by 15-20 paisa per unit to maintain the said returns, it warned and, distribution utilities have been wary in the past to participate in bids above Rs 2.5 per unit.

For instance, manufacturing-linked tender of 12 gw which was bid-out in January 2020 at Rs 2.9 per unit remained unsigned by distribution utilities. Only in Q2 of FY22, tender saw partial acceptance by these utilities and at lower tariffs of Rs 2.5 per unit, it said.

A likely increase in tariffs in future bids may scare away state distribution companies and add to an already large capacity of 20 gw that has been bid-out but haven't found a buyer.

On the other hand, if developers resort to aggressive bidding in a competitive market, it will likely increase the credit risk on new projects as cash flow cushion may be thinner than earlier, the report said, adding thus, the ability to take suitable tariff hikes and approvals under the change in law clause remain key drivers for credit quality of future projects.

Further, while custom duty will support cost competitiveness of domestic module manufacturers against imports, no notable module price correction is envisaged from these players over the medium term as it will take some time for domestic players to ramp up capacities along the entire value chain, and lower their operating cost.