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Tariff Cloud Over Solar Projects

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Presentation made by CRISIL at Solar Quater's Event-REIFF, 2017 Mumbai

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Tariff Cloud Over Solar Projects

  1. 1. ©2017CRISILLtd.Allrightsreserved. 1 Tariff cloud over solar projects 4th Renewable Energy Investment and Finance Forum November 10 2017, Mumbai
  2. 2. ©2017CRISILLtd.Allrightsreserved. 2 Rahul Prithiani Director – Industry & Customised Research Energy & Commodities M +91 8879125244 | D +91 22 3342 3574 rahul.prithiani@crisil.com Viraj Vora Regional Manager BD - Customized Research M +91 96 19 008590 | D +91 22 3342 3369 Viraj.Vora@crisil.com Contact details:
  3. 3. ©2017CRISILLtd.Allrightsreserved. 3 Executive Summary  Falling module prices, foray of large foreign players and Indian conglomerates, declining Interest rates, stronger payment security, improving infrastructure and drop in the return expectation of players led to competitive bidding.  Credit quality of competitively bid solar projects to be supported by lower counterparty risk and lower capital costs.  Building a robust network, scheduling of RE power and flexibility in other conventional sources critical to support expansion; further timely execution and implementation, to be key monitorable.  Downward revision of PPA tariffs would adversely impact the returns of solar projects. A 10 paise/unit reduction in tariff impacts equity internal rate of return by by 150-160 bps for solar power.  Contract termination is not legally allowed if there is no delay in project commissioning. Even globally, for instance in Germany, despite, a fall in feed-in-tariff, there has been no instance of such renegotiations on long term contracts.  Further precedence is on contrary as an attempt of reneging ~960 MW of PPA contracts by GUVNL was struck down by APTEL in 2013.
  4. 4. ©2017CRISILLtd.Allrightsreserved. 4 Falling module prices, stiff competition led to sharp fall in tariffs Trend in bid tariffs – 28% CAGR drop over 13-17 Source : DISCOMs Notifications, CRISIL Research Pun–Punjab; Raj–Rajasthan; Kar.–Karnataka; M.P–Madhya Pradesh; T.S–Telangana; A.P–Andhra Pradesh; NSM–National Solar mission; RUMSL–REWA ultra mega solar park Module prices fell at a CAGR of ~18% over FY 12-17 Entry of new foreign & domestic players Lower interest rate & rising tenors Higher project size Return expectati on Risk mitigation measures Factors that have led to drop in bid tariffs 8.9 8.4 8.0 7.3 7.2 6.9 6.9 6.8 6.7 6.7 5.7 5.7 5.4 5.1 4.6 4.4 3.3 3.15 2.62 2.44 2.65 U.P,2013 Pun.,2013 U.P,2015 RJ,2013 Pun.,2015 (250MW) Kar.,2013 Kar.,2014 M.P,2014 A.P,2014 T.S(0.5GW), 2015 T.S(1.8GW), 2015 Pun.,2015 (500MW) M.P,2015 NSM-A.P(150 MW),2015 NSM-A.P(850 MW),2015 NSM-Raj(850 MW),2015 SECI-RUMSL (750MW),2017 250MWKadapa -NVVN,2017 250MWBhadla IV,SECI,2017 500MWBhadla III,SECI,2017 500MWGUVNL, Gujarat (Rs./Unit)
  5. 5. ©2017CRISILLtd.Allrightsreserved. 5 Strong counterparties and payment security mechanism - key driver for low bids Quarter on quarter trend of highest and lowest tariffs(in Rs/unit) and off taker Highest bid Lowest bid UP, 8.6 Punjab, 5.98 Haryana, 5.08 Tel, 5.72 NVVN, 4.8 SECI, 4.43 SECI, 4.3 SECI, 3.3 SECI, 3.15 Gujarat, 2.65 UP, 7.02 MP, 5.05 NVVN, 4.63 NVVN, 4.34 SECI, 4.43 SECI, 2.44 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18
  6. 6. ©2017CRISILLtd.Allrightsreserved. 6 Despite fall in tariffs, DSCR is protected for bids at Rs 3-3.5 / unit Reduction in capital cost and Interest rates to protect DSCR despite aggressive bids at around Rs 3/unit Base case assumptions : Capital cost: ~Rs. 50 mn/MW; Int cost: 10.5%; Tenor: 15 years End case assumptions : Capital cost: ~Rs. 36 mn/MW; Int cost: 9.5% ; Tenor: 18 years 1.23 1.3 0.16 0.49 DSCR for Rs. 4.34/unit Reduction in interest rate and tenor improvement Reduction in capital cost Redcution in tariff to Rs. 3.15/unit DSCR for tariff of Rs. 3.15/unit -0.55
  7. 7. ©2017CRISILLtd.Allrightsreserved. 7 Outcome Bet on capital costs key for projects bid below Rs. 3/unit 23% drop in the lowest solar park bids at Bhadla v/s 3% drop in module prices • Pace of drop in module prices to continue • ~20% DC side overloading – Reduces per MW cost by ~Rs. 2 mn/MW • High PLF of close to 25% driven by better solar irradiance • Reducing financing cost – Foreign funds, partial hedging, buyers credit What led to the bid aggression? • Deceleration in project award activity – 45% drop in Q4 FY 2017, over previous quarter. • Quest to build a portfolio, especially owing to large funds raised • Intensifying competition – SBG, Phelan, Alfanar, Lightsource, EDF • Tariffs rose slightly for GUVNL Bids due to GST, Rise in module prices for tier 1 manufacturers and allocation of projects outside the solar park (without assured land and transmission infrastructure) IPPs betting on • DSCR expected to be 1.18 assuming Capital cost of Rs 32 mn/ MW (assuming 20% DC side overloading), PLF of ~23%, Debt:Equity of 70:30 and Interest rate of ~9.5% Timeline Project Location Winning bid % Change w.r.t previous bid Crystalline module cost Rs./unit $/Watt % decline Feb-17 Rewa Project M.P 3.3 0.35 Apr-17 Kadapa Project A.P 3.15 -5% 0.34 -3% May-17 Bhadla Project Rajasthan 2.44 -23% 0.33 -3% Sep-17 GUVNL Bids Gujarat 2.65 9% 0.32 -3%
  8. 8. ©2017CRISILLtd.Allrightsreserved. 8 Parameter Expected change Quantum of impact Comment Capital costs Interest cost Debt tenor Plant PLF Competition O&M Costs - Module prices expected to further drop ~9% to US$ 0.29/Watt by Mar 2018. - Large developers banking on discounts of ~$0.02/Wp as well as hard negotiation with EPC and BoP players. - Developers betting on re-financing at lower cost, buyers credit, bond market and low cost funding from multi-lateral agencies . - 100 bps dip in interest rate improves equity IRR by 130-150 bps - Debt tenors to rise to 18-20 years from current levels of 12-15 years - Developers to leverage on technology to improve PLF – Use of 1500 V system, trackers, low loss DC cables. - Every 100 bps rise in PLF improves equity IRR by 200-250 bps - Foray of new players, while existing player cementing their position. - Players quest to build a portfolio is gaining preference over returns - Rise in project size, improvement in system design and auto-cleaning of modules, O&M costs to reduce. - A 10% reduction in O&M cost/MW increases equity IRR by 30-40 bps. Bidding to remain aggressive over the next year led by anticipation of further drop in module prices, funding cost and stiff competition Note: Negative Impact Positive Impact Medium Impact High Impact
  9. 9. ©2017CRISILLtd.Allrightsreserved. 9 5 GW of RE projects are at the high risk of re-negotiation; Solar projects are less impacted as compared to wind 9 • 1.1 GW in A.P • 250 MW in Gujarat • 215 MW in U.P • 900 MW in Karnataka • 1500 MW in T.N • 1.2 GW in Jharkhand • 7 GW of project awarded/tendered at tariffs of Rs. 5-8/unit over FY 2015-17 • Capacities are majorly located in U.P, Telangana, A.P, Karnataka and Punjab • Solar projects awarded at higher tariffs over FY 2010-2014 under various state policies • Lesser capacity under such scheme; Hence impact of discoms limited What led to PPA re-negotiation ? • Steep and rapid decline in solar bid tariffs; Bid tariffs quoted were as low as Rs 2.44/unit for solar power in May 2017, down 45% compared with Rs 4.43/unit in March 2016. • Pressure on discoms to reduce their ACS-ARR gap to minimum under UDAY scheme by FY 2019. Expected Outcome • Projects where PPAs are yet to be signed or approved by the commission and/or project is yet to be commissioned (under construction) are at higher risk. • Commissioned projects are at lower risk as contract termination is not legally allowed • APTEL struck down GUVNLs petition seeking to lower the PPA rates; MNRE and MoP supporting consumers, ruling out the contract re-negotiation route. Difference between Tariffs and APPC Declineintechnologycostover past1year REPenetrationinstate DifferentialbetweenAPPCand bidtariffs ACS–ARRGap Major factors that led to reneging of contracts
  10. 10. ©2017CRISILLtd.Allrightsreserved. 10 10 Notes
  11. 11. ©2017CRISILLtd.Allrightsreserved. 11 Thank you
  12. 12. ©2017CRISILLtd.Allrightsreserved. 12 12 CRISIL Privacy Notice CRISIL respects your privacy. We use your contact information, such as your name, address, and email id, to fulfil your request and service your account and to provide you with additional information from CRISIL and other parts of S&P Global Inc. and its subsidiaries (collectively, the “Company) you may find of interest. For further information, or to let us know your preferences with respect to receiving marketing materials, please visit www.crisil.com/privacy. You can view the Company’s Customer Privacy at https://www.spglobal.com/privacy Last updated: April 2016 Disclaimer CRISIL Research, a division of CRISIL Limited (CRISIL) has taken due care and caution in preparing this Report based on the information obtained by CRISIL from sources which it considers reliable (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. This Report is not a recommendation to invest / disinvest in any company covered in the Report. CRISIL especially states that it has no financial liability whatsoever to the subscribers/ users/ transmitters/ distributors of this Report. CRISIL Research operates independently of, and does not have access to information obtained by CRISIL’s Ratings Division / CRISIL Risk and Infrastructure Solutions Limited (CRIS), which may, in their regular operations, obtain information of a confidential nature. The views expressed in this Report are that of CRISIL Research and not of CRISIL’s Ratings Division / CRIS. No part of this Report may be published / reproduced in any form without CRISIL’s prior written approval.

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