<b>Vandana Gombar:</b> How low solar prices can go

The record low bid of Rs 4.63 per unit for a 500 Mw project in AP indicates that rates will fall further as more firms seek opportunities in the solar power sector

Solar panel prices will continue to fall. Does that mean that, ceteris paribus, there is scope for a further lowering of solar tariff bids in India? The short answer would be yes.

SunEdison, earlier this month, bagged the right to develop 500 megawatts of capacity in Andhra Pradesh by offering to supply power at a record low tariff of Rs 4.63 per unit. Many are sceptical about the project actually getting built at this price.

There are reasons not to be: a) About 10 bidders quoted below Rs 5 per unit, as this newspaper reported, so this was not exactly an outlier bid; b) At least one other bidder - Yarrow Infrastructure Limited - put in a similar bid; c) Softbank's bid of Rs 4.79 per unit was not too far from the winning bid; d) The top 10 bidders included familiar names such as Reliance ClearGen, ReNew Solar and Fortum Finnsurya e) The project is in a solar park, so it is substantially de-risked on two key hurdles for developers - land and grid infrastructure.

There are economies of scale to be tapped when building such a large plant. The bid probably factors in aggressive financing assumptions as well as a further decline in the cost of panels. Typically, panels account for about half of the project cost.

The record of the lowest winning bid prior to this was held by Canada's SkyPower, which secured a 150-megawatt project at Rs 5.05 per unit in July 2015.

Quite apart from tariffs, there are a few key trends that one can see for solar power in India. Wind companies such as Suzlon and ReNew are seeking exposure to the solar sector. The latter was one of the bidders for the 500 Mw tender in Andhra Pradesh. Mytrah Energy is another company expanding into the solar sector. Spain's Gamesa is also looking at opportunities in India's solar market.

Large state-owned companies are carving out ambitious solar plans. Coal India plans to set up 1,000 megawatts of solar power. Indian Railways is looking at expanding the use of solar power to reduce its energy bill, and is also mulling an issue of green bonds.

It will be a busy tendering season over the next few months. According to the Ministry of New and Renewable Energy, over four gigawatts are set to be auctioned by March 2016. To put that number in context, India's total solar capacity commissioned was 4.6 gigawatts (as on October 30, 2015). Some of the new capacity will be reserved for domestically produced panels.

Bloomberg New Energy Finance expects India to close 2015 with 2.3 gigawatts of new grid-connected solar photovoltaic capacity, making it the fifth-largest solar market in the world after China, Japan, the US and the UK. The capacity addition in 2016 is projected at 4.1 gigawatts.

Globally, a record 54-58 gigawatts of solar capacity will come online this year, moving to another record in 2016 of 66-69 gigawatts. We expect solar installations thereafter to maintain a lead over wind installations every year. By 2040, we expect annual solar installations at over 200 gigawatts against about 80 gigawatts per year for wind.

The sealing of a global climate pact in Paris would translate into a further upside for renewables, but a lot depends on what is committed, and what is actually implemented.

The author is editor, Global Policy, for Bloomberg New Energy Finance; vgombar@bloomberg.net