The south Indian state of Karnataka opened the financial bids for an allocation of a capacity of 130 MW. Karnataka is expected to issue Letters of Interest (LoIs) to 16 developers for this allocation. The lowest successful bid is of INR 5.51/kWh by Sun Pharma and the highest successful bid is of INR 8.05/kWh by Welspun Solar and Heidelberg. The average bid across all successful bids is INR 7.06/kWh.

• The return on equity for the lowest bid projects will not be attractive enough to justify investment
• The devaluation of rupee has led to an increase in cost for importing modules and an increased cost borrowing from banks
• With only a limited decrease in capital costs, the recently quoted tariff of INR 5.51/kWh in Karnataka and INR 5.78/kWh in Tamil Nadu do not seem workable

We believe that for the lowest bid of INR 5.51, the return on equity for the projects will not be attractive enough to justify the investment. Even if the optional acceleration depreciation (AD) is availed, it can only amount to an equivalent increase of INR 1-1.5 in tariff, which still may not make adequate financial sense for developers. Further, with the devaluation of the Indian Rupee and the possible imposition of the anti-dumping duties, the cost of importing modules and BOS would rise, increasing the overall costs of projects. The devaluation of the rupee has also triggered an increase in the interest rates of banks, which means that the increased cost of borrowing also adds to the overall costs to developers. Moreover, as compared to Rajasthan, where projects have recently been allocated at a tariff of INR 6.45/kWh, most parts of Karnataka receives relatively low levels of irradiation.

Overall, BRIDGE TO INDIA believes that the average tariff for projects in Karnataka turns out to be INR 7.06/kWh, which is workable for most developers.

The recently quoted tariff of INR 5.51/kWh in case of Karnataka and the tariff of INR 5.78/kWh proposed by the Tamil Nadu Electricity Regulatory Commission (TNERC) do not seem to be in tune with a limited decrease in capital costs over the last few months. If we suppose similar tariffs to be quoted under the phase two of the NSM, based on the current draft, wherein the pre-determined tariff offered by the government is assumed to be INR 5-6/kWh, the government would end up paying nothing for the Viability Gap Funding.

This post is an excerpt from this week’s INDIA SOLAR WEEKLY MARKET UPDATE. Sign up to our mailing list to receive these updates every week.

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