A sharp increase in the prices of solar modules and commodities such as steel, together with rising freight costs, will pull down the return on equity (ROE) of nearly a fifth of the 25 GW (gigawatt) private solar capacity, according to a recent study by research and ratings agency CRISIL. This capacity of almost 5 GW, was mostly bid out between October 2020 and December 2021 and currently under implementation. These projects may see their ROE falling by as much as 140-180 basis points to around 7% .
It added that these projects, totalling nearly 5 GW, were bid at relatively low tariffs of less than Rs 2.35 per kilowatt hour (kWh), at a time when module prices were softening and commodity prices benign.
According to Manish Gupta, Senior Director, CRISIL Ratings, “The remaining ~80% of projects under implementation (~20 GW) will also be hit, but their comparatively higher tariffs and partial cover on cost of modules will limit the impact to 60 - 80 basis points. Most of these projects are in advanced stages of implementation and have imported or tied up some proportion of modules at prices below the current level.”
As can be seen from the Table 1, the landed cost of solar modules, has risen unabated by ~40% since January 2021, driven by higher commodity prices, primarily of polysilicon and supply chain issues such as shortage of shipping containers. For instance, mono-crystalline modules which cost approximately $0.21/kWh in January-February 2021 and were then expected to remain stable or decline marginally.
However, by April this fiscal, spot prices had increased to $0.28/ kWh and could remain at this level throughout the year due to strong global demand and continued supply disruptions in China following extended lockdowns amid a resurgence of Covid-19 cases.
“However, there are three factors that are likely to partially offset the loss on returns - these include better module efficiency, and new revenue streams from carbon credit certificate revenue and lower cost of debt,”said Ankit Hakhu, Director, CRISIL Ratings,
Firstly, the newer technologies of bi-facial and mono-perc modules can lead to higher generation per unit of cost compared to the poly- or multi-crystalline modules that were predominant two years back. This may increase P50 plant load factors (PLFs) by nearly 1.5%, thereby cushioning returns by 130 – 150 basis points.
Secondly, the Environmental, Social and Governance (ESG) focus for corporates — predominantly mining, oil and energy companies in Europe, North America and Australia — has given rise to a merchant market for carbon credits.
Recent contracts for carbon credits have been executed at $6-7 per credit, buoyed by the rising ESG focus. This is generally shared between the developers and counterparties to the power purchase agreements. Even on a conservative basis, $2 per carbon credit for project life would translate to overall revenue of nearly Rs 0.8- 1 crore per MW (before 50% sharing), supporting cash flow. This in turn, will contribute to 100 basis points of returns.
Lastly, interest rates for solar developers have fallen significantly since the start of fiscal 2021. Even after factoring recent interest rate hike of 40-50 bps and further such hikes expected, the benefit on reduction in net interest cost is estimated to be about 100 bps over project life as compared to expectations at the time of bidding.
This can contribute to about 120 basis points of returns. That said, the RoE estimates remain sensitive to further rise in module and commodity prices on account of geopolitical issues or supply chain disruptions.