Solar EPC business undergoing a churn

NTPC completed EPC auction for 3 x 245 MW solar projects based in its Nokh solar park in Rajasthan last week. The tender attracted strong interest from a mix of existing (L&T, Sterling & Wilson, BHEL, Jakson) and new players (Amar Raja, Premier Energies, Rays Power Infra, Axis Energy, BVG and NTPC GE Power, an NTPC-GE JV). L&T, Amar Raja and Jakson have emerged as the three winners. Interestingly, NTPC excluded modules from EPC bid scope for the first time in this tender, which otherwise includes complete project design, engineering, procurement, construction and O&M for a period of three years.

NTPC is following large private developers in pruning EPC scope in a bid to keep costs low and maintain control on execution timelines and quality;
Most leading EPCs have struggled to earn profits in the face of static business volumes and spiralling execution costs;
The market remains fiercely competitive with many new players in the fray;

Facing significant delays and cost uncertainty on many under construction projects, NTPC is trying out a mix of alternate procurement approaches (only BOS-EPC, land plus BOS-EPC, individual BOS procurement). It is slowly but surely following large private developers (examples, ReNew, Adani, Azure, Avaada), who rely mainly on self-EPC in a bid to keep costs low and maintain strict control on execution timelines and quality. In any case, commoditised nature of services and severe commercial pressure mean that even where project developers outsource EPC, they leave little margin on the table.

With business volumes largely static and execution costs shooting up, the solar EPC business is undergoing a transformation. Profit margins, 2-3% in the best of times, have disappeared. Sterling & Wilson Solar, a leading solar EPC contractor both in India and worldwide, reported net loss of INR 3.6 billion (USD 48 million) in H1/ FY 2022 (see table). As per the company’s press release, “Gross margins (were) impacted significantly on account of unprecedented increase in execution costs and increase in modules, commodities and freight costs.” The company also had bank guarantees equivalent to INR 4 billion (USD 54 million) encashed by three customers because of execution delays.

Table: Financial results of Sterling & Wilson Solar, INR million

Source: Sterling & Wilson Solar investor presentations

Amid all the market turmoil, some established players have exited the EPC business (Mahindra, Juwi), while others have become more selective. But as the NTPC bid results show, new players continue to be attracted by high growth prospects. KEC (a transmission and electrical services contractor) and Ashoka Buildcon (roads and civil construction EPC) are two other prominent names eyeing an entry.

Figure: Market share of EPC contractors, Jan 2020-Sep 2021 (total 7,597 MW)