WhyRs.45isthenewnormalforsolartariffsManyintheIndiansolarindustryareshockedatthelowtariffsthathaveemergedaswinningbidsrecentlyandsomeareevencallingthemunviable.SinceNovlastyearsbidof4.63bySunEdisonandsameinDecbySBGCleantech,anewlowof4.34wastouchedinJan2016.FinnishcompanyFortumFinnsuryaEnergybaggedaPPAfor70-MWunderNTPCsBhadlaSolarParktenderatthisrate.Theotherwinnerswereat4.35-4.36butatotalof9biddershadbidbelowtheearlierlowof4.63from1-2monthsbefore!Thereissomethingcookingthatmanymightnotbesmellingyet.LetusanalyzehoweachfactorbelowcanlowerthesolartariffquotedbyprojectdevelopersinIndia-

1. Debtfinancing:Lowcostofforeignfundingisahugeadvantagealmostallthebidwinnersenjoy.IncountrieslikeFinlandandJapanwhereinterestratesareevenbelow1%lately,sovereignandpensionfundscanlendoutmoneyat7-8%includingtheFXhedgingcostsinthelongertermversus11-12%availableinthedomesticmarket.SimilarlowratescouldbeattainedbydevelopersfromDevelopmentBankslikeADB.Andifnot,thenthereisapossibilityofrefinancingatcheaperthanprevailingratesin1-5yearsaftercommissioning(onceconstructionrisksareoutoftheequation)drivingupthereturns.

2. Upfrontprojectcosts:Panel,structureandotherequipmentcostsaretobeincurredonly10-14monthsafterbiddate,thusthereisaverygoodpossibilityofimportedequipment/materialpricesloweringdowndueto1)rupeeappreciationintheshorttermand2)latesttechnologiessuchaslowcost&technologicaladvancedsolarmodules,trackersetc.Newstructuralinnovationsindesignlikeshieldingeffect(asperCFDanalysis,windforceonboundariesarehigher)andinnovationinmaterialslikeGalvalumcandecreasestructurecosts.Allthisleadstolowerprojectcosts.Thecurrentdropinequipmentpricesthoughcouldbeashorttermtrenddueto1)lowercommoditypricesand2)chinesedumping.Globalrenewableenergyconsultant,GTMResearchestimatespanelpricesof36centsby2017,Inverterpricesto5-7cents(from9,now)andbalanceofsystemto25-30cents.

3. Landacquisition&transmissioninfrastructure-Inthesolarparkthecostsarehigherforleasingandparkdevelopmentchargescomparedtoprocuringlandoutsidethesolarpark.Butbeinginsideasolarparksignificantlyreducesthebureaucraticriskswithdelaysinprocurementoflandandpermissionsfortransmissioninfrastructure.ThecostofdevelopmentreducesevenmoreindesertandaridareaslikeBhadla.

4. Offtakerrisk:NTPCandSECIhaveabetterofftakerprofilesolowerrisksofpaymentsaswellaspossiblycheaperdebtfunding.Thisisincontrastwithstatedistributioncompaniesasofftakerswhichcanposegreaterevacuationissuesandpaymentdelays.

5. Irradiation:Canbedifferentindistrictsinsidesamestateandindeedplaysanimportantfactor.BhadlainJodhpurdistricthasoneofthehighestsolarradiationinthecountry.

6. Economiesofscale:10MWversus70MWversus300MWshouldhavecheapersourcingofmaterialsrespectively.

Thuswebelievelowtariffslike4.34arenotatallunviableifthecostsandrisksareappropriatelyjudgedpertainingtoeachtenderandthedeveloperbidding.ThatiswhyothertendersliketheKarnatakastatebidfor1200MWshouldhavesignificantlyhighertariffsthantherecentbids.