India is set to become the 4th largest solar market globally in 2016 behind only to China, USA and Japan thanks to the government’s thrust on significantly enhancing the installed solar capacity to 100 GW by 2022, says the latest analysis from CARE Ratings.
India has witnessed record capacity addition of around 3 GW in FY16, 1 GW in Q1FY17 and bids of around 6 GW awarded over the last 6 months or so. The sector is witnessing increased participation from large overseas investors as well as developers. Furthermore, major Indian business houses have also laid down ambitious plans for solar capacity addition, including inorganic route opportunities.
The recent M&A activity is also reflective of the growing confidence of bigger players in the sector.
In line with the ambitious plan to scale up the solar capacity to 100 GW (including 40 GW solar rooftop capacity) by 2022, the GoI has also increased the solar Renewable Purchase Obligation (RPO) trajectory upwards from 3 percent to 8 percent by FY22. With this, CARE expects capacity addition of around 5.2 GW in FY17 and around 8 GW in FY18.
Decline in solar PV project costs and entry of various players has led to significant increase in competition which has led to significant decline in solar tariffs as visible from the trends in the completed bids over the last 9-12 months.
The recent decline in the module prices though is expected to provide some respite for competitively bid projects. Weighted average tariff for the bids which came up during FY16 stood at Rs.5.26/unit (excluding DCR projects, and including VGF bids), which may decline further to around Rs.4.5-4.8/unit in FY17, with increased competitive intensity and decline in costs. The ability to manage cost efficiently, secure longer tenure and cheaper debt are the key factors which will have bearing on the bids, returns and viability of the projects.
The capital cost for setting up solar PV project has been coming down over the years. CERC’s benchmark project solar PV cost has come down from Rs.6.1 crore/MW for FY16 to Rs.5.3 crore/MW for FY17, with cost of modules declining marginally while civil and other costs have witnessed higher fall. Over the years, apart from module costs, cost of balance of systems (BoS) and other ancillary costs have witnessed a sharp decline as well. (See table below).
Solar sector in India has also witnessed sharp decline in tariffs. During FY16, for the solar bids of slightly more than 7.3 GW, weighted average tariff stood at around Rs.5.26/unit. More recently, the weighted average tariff has come down further to around Rs.4.91/unit as visible from the bids completed in YTD FY17. Decline in tariffs has been primarily due to reduction in project costs led by decline in module and BoS costs, larger size of projects leading to economies of scale, as well as projects bid with lower returns to gain entry into Indian market/expand market share. (See table below)
Since significant amount of capacity has been bid out/will be bid out under various state schemes, the counterparty credit risks would come more into play given the weak financial risk profiles of number of Discoms. Structural reforms for the discoms including improvement in operating efficiencies, impact of UDAY scheme on the various Discom’s financial health are crucial for the sector.
The credit rating agency has also identified key credit risk assessment factors as below:
Source: CARE Rating