SECI’s latest solar auction has discovered a new record low tariff of INR 2.36/ kWh (USD 3.1 cent). The company’s pan India 2,000 MW ISTS tender was oversubscribed 2.3 times. Spain’s Solarpack (300 MW, tariff INR 2.36/ kWh) was the lowest bidder. Other winners included ReNew (400, 2.38), Enel, EDEN (an EDF-Total JV) and IB Vogt (300, 2.37 each), Ayana (300, 2.38) and AMP (100, 2.37). Tata Power, O2 Power, NTPC, Azure and NLC were the unsuccessful bidders.

• Shift to more complex hybrid and manufacturing based schemes has led to strong pent up demand for vanilla solar;
• The new tariff is financially more attractive than in the past but returns remain below cost of capital;
• Tariff outlook is turning soft because of strong investment appetite and low entry barriers;

This was the first vanilla solar auction completed by SECI in the last four months (and second in eight months). Most of the recent auctions have been for complex schemes to support manufacturing (PSU scheme, manufacturing-linked tender) or to procure hybrid, round-the-clock and peak power with restricted participation. Strong pent up demand obviously resulted in oversubscription. Many developers are keen on vanilla projects due to their ease of execution and low tariffs which find higher acceptance with DISCOMs.

The new tariff low has come more than 3 years after tariffs reached INR 2.44/ kWh first time in SECI’s Bhadla solar park auction in May 2017. Market dynamics and bidding parameters have changed enormously in this time. Most input costs have been falling notwithstanding Rupee depreciation and higher GST rates. Module prices have crashed to about USD 0.17/ Wp (down 50% in three years) due to COVID related demand depression worldwide. Improvements in technology (efficiency, form factor) have also led to improvement in power yields as well as savings of about 25% and 20% in land and BOS costs respectively. Total EPC cost has fallen 32% in last three years. Savings have also come through reduction in interest and tax rates. Recent monetary easing has led non-recourse financing rates down to 9.0-9.5% as against 10.5-11.0% a year ago. Meanwhile, corporate tax rate has fallen from 25% to 15% for new businesses. Of course, there have also been some offsetting increases in costs on account of forecasting & scheduling regulations, annual development levy of INR 250,000/ MW by Rajasthan and payment security fund requirement of INR 500,000/ MW by SECI.

Source: BRIDGE TO INDIA research

Adjusted for all these factors, we believe that the new tariff is far more attractive than INR 2.44 back in May 2017. We estimate equity IRR at about 14.0%, still not sufficient in our view, but much better than 8-9% at the time of bidding three years ago. Setbacks in the last few years have instilled more discipline in the industry but with so many new players in the fray, it will not be a surprise to see tariffs sliding down further in the next few months. A wall of capital is flooding the renewable sector with pension funds, sovereign wealth funds and PE funds seeking a transition to clean energy as well as higher yields.

The record low tariff is in line with our prediction earlier this year that tariffs would touch a new low soon. Low entry barriers combined with excess liquidity are likely to maintain downward pressure on tariffs.