Solar tariffs reaching grid parity was considered the holy grail of Indian Renewable Energy (RE) sector. Starting out in 2010 at ₹ 12.76 for a unit of solar energy when the grid prices were around ₹ 3.5/kWh (although Pooled Cost of Power Purchase or APPC was around ₹ 2.5/kWh which in a way is not the best measure for grid parity). Industry experts at that point predicted the tariff would breach grid parity in all probability by 2019. Come 2017, the bid for Rewa solar park in Madhya Pradesh reached a record low of ₹ 2.97/kWh which is expected to be operational by end of 2018. The average APPC on the other side is already around of ₹ 3.5/kWh in 2017.
The bid results were expected to be low, but the final price has come as a shocker even to industry experts. The trend however predicted such a result. A closer look at bids from 2014 when a significant number of large scale projects (>500MW) were tendered the winning bid range has continuously narrowed. The gap between the highest and the least winning bids have been dwindling.
So, the argument that one company out-bid the rest is a blind one. It was of course true prior to 2014 or even for the matter in 2011 when SolaireDirect won a bid for ₹ 7.49/kWh when the highest successful bidder was at ₹ 9.39/kWh. The next wave of scepticism came about when Sun Edison won the bid at a flat-out ₹ 4.63/kWh in Nov’15. Their bankruptcy never helped the reasoning later. The next low bid of ₹ 4.34/kWh again raised eyebrows but then again the highest winning bid was ₹ 4.36/kWh which demonstrated that companies have a similar strategy in submitting winning bids.
So is the Rewa solar bid sustainable?
The Rewa solar bid is unique in its propositions and cannot be compared to the recent past or the immediate future because of varied reasons. In addition to the standard claims that it has a ₹ 0.05/kWh escalation for the first 15 years, payment guarantees from the government and economies of scale it has a little more reasoning. The project completion timeline is 18 months from signing of Power Purchase Agreement (PPA) which could see the project being commissioned in Q3 of 2018. The module prices in 2015 were around 43$cents and with the decline set to continue price forecast for 2018 could be well below 30$cents (although few experts claim it unsustainable at the manufacturer’s end).
The second key part is the cost of funding; the power minister in his tweet attributed this bid result to the low cost of funding. Although it is speculative on what the actual cost of fund to the developer is and if the developer takes the hedging risk, we can certainly say the cost of capital is well below the CERC benchmark of 12.76% for 2016. Why is this significant? Because the levelised cost of tariff for the project duration of 25 years is estimated on this number.
The Rewa bid is widely claimed to have a levelised cost of ₹ 3.3/kWh which assumes the cost of capital at 12.76%. Is that real?
Although, I still believe the CERC calculation of levelised tariff for solar PV is not the ideal way but even this approach clearly shows the actual levelised cost is well above the projected ₹ 3.3/kWh depending on the cost of capital.
Overall, the Rewa solar bid and the previous low bids have demonstrated one key trend; there are no outliers in the industry anymore. The industry is in it together with similar strategy (and similar risk appetite?). Sun Edison, Fortum or a Skypower never offered a record low tariff again; there are other companies who are doing the honours. In fact, no one would have predicted an Indian company, Mahindra or Acme to breach the record this time.
All said and done, as an industry professional I would be more interested to see the quality of procurement; installation and performance down the years rather than having the plant just build at a record price!