CERC reduces solar capital cost benchmark by 12% for FY 2016-17

Central Electricity Regulatory Commission (CERC) passed a final order for determination of benchmark capital cost for solar PV projects for FY 2016-17 last week (refer). It has established the capital cost of solar PV projects including equipment, construction, land, transmission and pre-operative costs at INR 53 million/MW (USD 0.79 million). It is worth noting that the Commission had proposed a benchmark capital cost of INR 50.1 million/MW (USD 0.76 million) in December last year. At that time, BRIDGE TO INDIA had predicted that the benchmark cost would be revised upwards based on industry inputs (refer).

Reduction in benchmark capital cost in the past two years has been 12.5% and 12% respectively
With just two more years of similar cost reduction, solar tariffs in India could be in the range of INR 3.5/kWh – INR 4/kWh
Any industry plea to fix Feed in Tariffs (FiTs) based on regulated benchmarks is likely to fall on deaf ears in a falling cost regime

Based on the industry comments received, the private developers suggested capital cost estimates ranging between INR 58–85 million/MW (USD 0.87 million/MW – 1.2 million/MW). It is standard practice for the industry to provide fairly conservative capital cost estimates.

For FY 2015-16, CERC had pegged the benchmark capital cost at INR 60.6 million (USD 0.92 million). Based on this, the benchmark tariff was fixed at INR 7.04/kWh (INR 6.35/kWh with accelerated depreciation). However, the role of these benchmarks is limited to providing guidance and they do not necessarily reflect the real capital cost or tariffs in the market. The benchmarks merely set an upper cap on tariffs or subsidies offered to a project. Projects allocated by the central government use the CERC benchmarks, whereas projects allocated by the state governments use respective state regulatory benchmarks.

Benchmark capital cost in the past two years has fallen by 12.5% and 12% respectively. But bid tariffs have declined much more sharply in this period. For example, all successful bid tariffs in FY15-16 have come substantially below the benchmark tariff of INR 7.04/kWh. Madhya Pradesh and Telangana allocated solar projects at tariffs between INR 5.05–5.72/kWh in the earlier part of this financial year, whereas recent successful bids have come in the range of INR 4.34 – 5.00/kWh.

The industry has been vociferous in asking for a fixed Feed in Tariff (FiT) regime based on benchmarks fixed by CERC and/or state regulators particularly as the wind sector has been following this structure already. The industry argument is that FiTs will provide more predictability to the developers and accelerate the growth of the sector (refer). However, this demand is likely to fall on deaf ears particularly in a falling cost regime. The government seems firm that bidding is the best way to procure solar power. Also, with other countries such as Germany and France that have traditionally offered FiTs now moving to bidding based tariff discovery, there is little chance of India changing course now.