The solar power system tariff has further dropped from Rs 2.36 per unit to less than Rs 2 in the past five months alone. This sharp decline, notwithstanding the import restrictions on Chinese equipment, can largely be attributed to a drop in solar equipment prices and greater participation of foreign and private equity-backed firms on account of easy access to cheap foreign capital. The decline in prices of solar equipment like single-axis trackers and bifacial modules, which help generate electricity from solar power much more efficiently as compared to their conventional counterparts, has further reduced the costs accruing to developers, thus enabling them to quote lower tariffs. Moreover, considering that the commissioning timeline for tenders is 18 months, developers can explore the option of importing cheaper solar modules from China once the safeguard duty restrictions imposed on solar imports are lifted in July next year.
Even at a tariff as low as Rs 2 per unit, solar panel costs are financially viable for big developers who have access to cheaper capital and are eyeing big projects of at least 200 MW that offer the advantage of economies of scale. Smaller developers, on the other hand, will be hard-pressed to match the aggressive bids witnessed in recent auctions. At the same time, solar developers quoting ultra-low rates are taking a considerable risk, and their move could backfire if the projected decline in costs defies recent trends. In such an eventuality, many firms might be forced to terminate their contracts or delay their projects in the hope of price corrections that work in their favor through market interventions.
While it is a win-win situation for consumers with increasing efficiencies of solar PV likely to bring down prices further, making electricity even more affordable, fund-starved state electricity distribution companies find themselves in a spot of bother. They are reluctant to sign contracts with intermediary procurers like the Solar Energy Corporation of India for low-price bids. Their unwillingness to sign power agreements for projects that have recorded aggressively low tariffs is all too evident.
The problem is compounded by the fact that debt financing for renewable energy projects is drying up with big Indian banks refusing to fund projects under which power is to be sold at less than Rs 3 per unit. Banks are now extra cautious when it comes to extending loans to developers as they are no longer confident about the financial viability of projects being undertaken at such extremely low tariffs.
For India to meet its solar energy targets, the tariffs need to be kept low to push demand in the long run. Cost-competitiveness holds the key to capacity additions. Instead of simply expecting the equipment prices to fall in line with the current trends, our policymakers should make cheaper finance available to solar developers who also want to join the race. After all, financing costs account for nearly 50 percent of the solar tariffs. The government should intervene as and when required to mitigate the associated risks through favorable policy measures.