PV Pricing: Hardening in PV module price levels poses near-term headwinds for IPPs

Hardening in PV module price levels poses near-term headwinds for IPPs

Sabyasachi Majumdar, Senior Vice President & Group Head, Corporate Ratings, ICRA Limited
Girishkumar Kadam, Senior Vice President & Co-Group Head, Corporate Ratings, ICRA Limited

The imported photovoltaic (PV) solar module price level has shown an increasing trend over the last 8 to 10 month period, with a rise in price level from about 19-20 cents/watt in November – December 2020 to 23-24 cents/watt in June – July 2021 which has further increased to about 27-28 cents/watt[1] in October 2021, based on industry sources. This has been on account of a sharp increase in the price of polysilicon material, a key input for cell and module manufacturers, internationally. Further, the disruption in manufacturing output for PV module manufacturers in China with the prevailing power cuts has also led to an elevated price level for cells and modules recently.

With the high dependency on imported PV cells and modules for solar installations in the country, such hardening in the price of PV modules, remains a near term execution and cost headwind. This is especially the case for the domestic IPPs or developers that have won projects through bidding route over the last one year and their power purchase agreements (PPAs) are signed with expected commissioning over the next 6 to 12 month period. Given that the PV module component contributes to about 50-55% of the overall project cost, any increase in the module price level by about 2 cents/watt is likely to moderate the debt service coverage metrics for the project developers by about 5-6 basis points. From the viability perspective for renewable energy developers, the capital cost (which is a function of module price level in case of solar PV project), plant load factor expectations and cost of debt funding, thus, remain the key monitorable factors. Nonetheless, the softening in the interest rate environment over the last 15-18 month period remains a positive, given the fixed part nature of PPA tariffs for IPPs.

Further, the approved list of module manufacturers (ALMM) issued by the Ministry of New and Renewable Energy in March 2021 includes the names of domestic OEMs as of now. The registration of vendors or OEMs outside India has remained affected due to lockdown restrictions and procedural requirements so far, according to industry sources. As a result, the PV cell or module price behaviour, availability of imported cells/wafers for domestic module manufacturers (depending on their backward integration in the value chain) as well as honouring of supply contracts by cell and module OEMs from China in the near term would continue to remain key monitorables.

With the prevailing cost headwinds and the fact that basic custom duty is effective with effect from April 2022, utility-solar bid tariffs remain under an upward pressure in the near term. This is also reflected from the fact that average bid tariff discovery in recent solar auctions has gone up by about 20% over the lowest level of Rs. 2/unit discovered in November 2020. However, the extent of increase in the bid tariff discovery remains lower than the expected level due to high level of competitive intensity in the bidding environment. As a result, the bid tariffs continue to remain significantly well below Rs. 3/unit. From the perspective of ultimate off-takers i.e. state discoms, such renewable energy tariffs also remain cost competitive given that marginal variable cost of power purchase (bottom 25% in merit order) for them across the key states remains well above Rs. 3/unit.

Investment prospects in the renewable energy sector remain solid, aided by solid policy support by Government of India as also evident from the cumulative policy target of 175 GW by 2022 and 450 GW by 2030. Over the last 3 to 5 year period, the renewable energy sector has also seen significant utility-scale project awards through bid route by the central intermediaries, Solar Energy Corporation of India Ltd and NTPC Ltd, besides the state nodal agencies. Regulatory framework for renewable energy is also highly supportive, given the must run status for renewable energy assets and applicability of renewable purchase obligation (RPO) norms for the obligated entities (mainly distribution utilities and open access consumers). Within the renewable energy segment, solar segment will continue to occupy a dominant share, given the relatively larger execution challenges persisting in wind energy segment and concentration of wind energy resource only in few states.

From the regulatory standpoint, the resolution with respect to tariff renegotiation matter for the affected wind and solar IPPs in the state of Andhra Pradesh remains awaited. More importantly, the financial position of state discoms still remains weak in majority of the states on account of higher level of technical and commercial (AT&C) losses compared to regulatory norms, inadequate tariffs in relation to their cost of supply and inadequate subsidy support from the respective state governments. Hence, the proactive focus and timely implementation of the reform linked measures for discoms (with a key focus on AT&C loss reduction) as also outlined by the Government of India in its recently launched capex-oriented scheme, remains extremely critical.


[1] For Mono perc PV modules