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Low-tariff solar projects in jeopardy

Solar photovoltaic modules (panels) and cell prices have increased by over 40% over the past eighteen months.

According to Icra, only 12% of the awarded 4.4 GW projects were under implementation.

India may miss the ambitious target to install 300 giga watt (GW) of solar power by 2030 due to a cost push and complexities in acquiring land.

Solar photovoltaic modules (panels) and cell prices have increased by over 40% over the past eighteen months. This has been driven by an increase in polysilicon prices. Cost pressure is significant for projects aggregating 4.4 GW awarded over the last one and half years, wherein tariffs are below Rs 2.2 per unit.

Rise in interest rates is another key cost head for solar IPPs, with estimates that 150 basis points increase in interest rates would lead to an increase of up to 20 paise in the bid tariff, Icra’s vice president and sector head for corporate ratings, Vikram V, said.

Besides, land ceiling laws and delays in environmental clearances from local authorities like panchayats are a huge impediment in starting project work. Delays in land acquisition causes cost overrun, which often make projects unviable, opines Varchasvi Gagal, chief executive officer and managing director of Delhi-based Datta Infra, a land aggregator. The company has so far acquired 7,000 acres for housing 1.4 GW of solar projects and has total a land bank of 45,400 acres across the country.

But Gyanesh Chaudhary, vice chairman and managing director of Vikram Solar, said the cost push owing to increased price of solar panels was largely temporary because of the disrupted global supply chain. The market for developers would soon stabilise despite increased bank rates but bid tariff at Rs 2.2 per unit was never sustainable in the past nor it would be sustainable in the future. This could make a number of projects unviable, he said.

According to Icra, only 12% of the awarded 4.4 GW projects were under implementation. Datta Infra’s Gagal points out that unsystematic maintenance of land records creates a major obstruction in land acquisition since identification of the right land owners leads to a delay in implementing solar energy projects.

According to Gagal, lower ceiling of land ownership makes the acquisition process more complex. As for compensation, land in Rajasthan would cost an average of Rs 24,000 and Rs 25,000 per acre per year on lease. But buying price at present would be five to seven times the circle rate for land that is cultivable.

While the Centre does not favour buying private land because of its high cost, solar developers are forced to acquire private land to get an appropriate plot despite the government encouraging allocation of government land in accordance with the 2019 solar energy policy. Sellers typically receive 4-7 times market value as compensation though the Rehablitation and Resettlement Act of 2013 mandates compensation of up to twice the market value in rural area and an additional 100% solatium, based on the price paid for the property. In small villages, this translates to up to four times the market value for landowners with no set price for land across states.

The cost of land accounts for 5-7% of the total project cost but the threshold for the total project cost was directly related to transmission line distance, unit losses, and soil quality. The cost of PV modules and structures were the only price variables, otherwise the fixed costs were always volatile, Gagal said. Chaudhury finds Centre’s solar park policy as a solution to this problem to some extent and the government’s renewed thrust would expedite capacity addition.

Vikram V said the fixed and single part tariff under PPAs for solar power projects remain a challenge for developers given the uptrend in interest rates putting upward pressure on the bid tariffs. “Nonetheless, despite the cost headwinds, tariff rates for solar power projects are likely to remain highly competitive from the perspective of state distribution utilities in relation to the marginal cost of procurement from thermal stations that are at the 25% of the merit order dispatch. The variable cost of procurement therein is more than Rs 3 per unit across key states,” he said.

Transmission line losses, cost per tower, total perimeter, depth per pile, fencing costs, water resource availability, and accessibility to the land are just a few of the factors that play a role in determining the cost of land versus project cost. “Investment would be at an average of Rs 38 lakh per MW, including outright purchase of the land, chain-link fencing, and a 220 kV transmission line from a solar project to substation. But instead of land purchase the leasing model has been seen as a preference because of the cost factor,” Gagal said, adding land closer to transmission and distribution substation were beneficial to investors since it would facilitate easy power evacuation from the project.

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