The recent bid by SunEdison of Rs 4.63/unit for the 500 MW solar PV block of Andhra Pradesh has set the market talking about how fast the cost of solar is coming down
At the same time, those in the know are asking whether SunEdison is quoting unsustainably low prices and shooting itself in the foot.
Well, it is difficult to the answer the query above without having all the data SunEdison worked with (and which we will never be able to get), but we can certainly do a bit of independent thinking.
Let’s look at the major cost components for solar PV power, almost all of which are upfront, the only major operational expense being the interest and principal payout on loans.
The capital cost of solar PV has indeed come down, and I can say with a good amount of confidence that the cost per MW (AC) is indeed Rs 6 crores or slightly lesser than that. How am I so confident? Because we just completed a detailed evaluation for one of our clients, and analysed quotations from over 10 vendors for the same.
That then brings it to the loan component. At 12-13% interest rates, it is almost impossible to get a generation cost of Rs 4.63/unit or less – it is more like Rs 5.75-6/unit. But at a much lower interest rate, say 6-7%? It starts becoming a bit more possible.
But even at 6% interest rate, you got to be extremely lucky to get a generation cost less than Rs 4.75/unit.
Now, if you were to include accelerated depreciation along with a low interest rate, yes, it would indeed be possible to get the generation cost to somewhere around Rs 4.6/unit levels.
Finally, the number of units generated. Fixed tilt solar farms (the term used for the conventional solar PV farms without trackers), can give up to 16 lakh units per MW (AC) per year. Now, it is possible with ingenious design and good maintenance to increase it by a notch, perhaps up to 16.5 lac units per MW per year.
Now, consider all the above variables, and you will see a picture emerging:
- Lower your capital costs as much as possible – at 500 MW scale, SunEdison could probably bring down capital costs to a significantly lower number than Rs 6 crores /MW, perhaps 5.6 crores /MW?
- Much lower interest costs. SunEdison being a global firm is undoubtedly securing financing at rates decisively lower than 12%
- Accelerated depreciation: I doubt SunEdison can avail of AD benefits as I doubt they are making serious profits right now.
- # of units generated – Being a global solar PV firm, SunEdison perhaps has a few tricks up its sleeve when it comes to generating high number of units from a solar PV power plant (though, mind you, large companies such as SunEdison rarely design or build these farms themselves, these are outsourced to large EPC companies).
Now, if you factor in that SunEd could be doing really well on three of the four (except AD), one might just about see the cost of generation in the vicinity of Rs 4.63 / unit.
But even then, it has a touch-and-go feeling.
What do you think?
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Dear Sir,
A good articulation of the Analysis indeed! I would like to know few things:
1. Since it is a Solar Park, the land is most likely been provided by the Central/State Government. How much is that responsible for lowering the Capital Cost?
2. These are Dollar Denominated Bidding. Is it necessary that Sun Edison has taken loans only from the US banks at low interest rates (compared to India)? 6% interest rate, as you state is almost 50% lower than those prevailing in India.
3. For Solar Parks, O&M has to be entirely born by the company or a part of it shall be born by government agencies as well?
Regards,
Ankur Kumar
SolarWaale
Hi Ankur
Many thanks for the queries.
1. Not sure about the cost of land or who actually bears it, but in any case it is unlikely to have played a major role in bringing down the cost of power @ Rs 20 lacs as the total cost of land per MW (this could be much lower for such a large scale). At best, removing cost of land could have decreased total cost of generation by 5-10 paise at best
2. Yes, the cost of debt could have played a very significant role here. I am not sure what the % they got is, I was just hypothetically stating a 6% figure. If they are getting it from Indian banks, it is almost impossible for them to get it below 10%. but through dollar loans, and with optimal allocations for risks, perhaps 8%…even this reduction of 2-3% from the Indian lending rate could make a big difference to the cost, perhaps to the tune of 25-30 paise per kWh on an LCOE basis
3. The O&M query you had posted is an interesting one. I seriously doubt the cost of O&M will be borne by the government agencies. The Levelised cost of electricity (LCOE) based on which the developers give the quote usually includes O&M costs.
I think we are all puzzled by how the number of Rs 4.63 makes sense, without the aid of incentives such as the ITC available in the US, or in the absence of Accelerated Depreciation (which I doubt SE can avail).
But if this is indeed the true cost, we all can say with utmost confidence that solar has arrived!
What do you say?
One question here. Is the land and evacuation cost going to be borne by NTPC or the developer?
If these costs are going to be borne by NTPC, this may account for 20ps to 25 ps.
In such a case the actual bid cost goes to 4.83 to 4.88.
With low cost funds hovering around 6% or less, this figure is perfectly achievable.
Added on to this when this project can be dumped into the yieldco who may be expecting a ROI of <5%; it all makes sense
Dear Radhakrishnan
Many thanks for your insights
Yes, if land and evacuation together are taken care by the government, it could result in about 15-20 paise /kWh, but this is not a decisive enough reduction
Yes, if indeed they have been able to get lending rates below 8%, it could have resulted in another 30-40 paise reduction
I am not sure about the Yieldco part as Yieldcos are not yet a reality in India. Plus, their Yieldcos in the US are giving SunEd such a pasting, they are gonna be a bit cautious about doing it in India.
But yes, if they are able to digest a sub-5% RoI, and with all the above incentives/reductions, you start seeing a number that is approaching sub-Rs 5/kWh
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I read your comment on the assumed workings. There are two major elements other then mentioned. The first one is the Inflation in a developing economy like us. The same will be appx. 5.5 times on 7%. The other is the hedging cost in case of debt from outside. What it looks the bidding by the companies have been done with different objectives. This company have lost 75% of its market capitalization as mention in some news items.
Am copy-pasting some comments I received on LinkedIn to this post :
##Indrasen Bollampally
I would like to know their estimation process. It is scary on one side and confusing on the other. But we got to buckle up and take it head on.
##Kartik Arun
Incredible!
##Nithya Susan Varghese
Almost seems like charity. Been walking in circles and driving chartered accountants crazy trying to figure out how any MW plant is profitable below 5.5 Rs per unit. This must be some abnormally generating plant. Wonder how the next bid will go
##Narasimhan Santhanam
I have indeed been v generous in my blog post when I said it was touch and go. In fact, I feel that without AD, it might be near impossible to get a generation cost of less than Rs 5kWh. But then, SunEdison perhaps knows many things u and I don’t?
##Narasimhan Santhanam
@Indrasen Bollampally – can’t agree more. Whether we are convinced or not, this is reality 🙂
##Nithya Susan Varghese
@Narasimhan Santhanam-Yes they surely know more. But such a low tariff bid, is going to make future bids aggressive with medium/upcoming solar developers struggling to stay relevant.
##Chandan Rastogi
It’s a pure play financing and to a limited extent economics of scale play. Ironically, technology would have the least role in these bids.
##BALAAJI CS
Possible reasons could be 1 . Lot of inventory available and to make use of it,instead of keeping it idle as there is no market .2 . It’s the time value of the idle solar cells which plays a crucial role for such aggressive bidding. 3.Poor tariff realisation in developed countries 4 . availability of funds at an attractive rate thru EXAM route etc..by which better utilisation and realisation is ensured
##Chandan Rastogi
There were six or seven other bidders in the same range. I will be surprised if there’s any other reason apart from financing and trophy projects
##Anupam Sharma
A business strategist would understand thes dynamics better than any techies…no rocket science there!!
##DWIJAL MAMTORA
Chandan Rastogi yes its only financing and a bit of economics of scale play.
##Shirin Chandak
I found only reason that a good amount finance is available with low rate of interest & the same has been going to park in Indian market to get / continue with leadership…
##M V Radhakrishna
One question here. Is whether the land and evacuation cost going to be borne by NTPC or the developer? If these costs are going to be borne by NTPC, this may account for 20ps to 25 ps. In such a case the actual bid cost goes to 4.83 to 4.88. With low cost funds hovering around 6% or less, this figure is perfectly achievable. Added on to this when this project can be dumped into the yieldco who may be expecting a ROI of <5%; it all makes sense
##Surendar Kashyap
NTPC's prompt payments than discoms could also be a small reason, SE could have reduced contingency funds.
##Prasanna Iyer
Interest rate risk is potentially high even when there is the good to have component of accelerated depreciation.
##Ashok Toshniwal
Too many possibilities to make or break the project!N too many IFFs, yes IFFs, and buts. Conviction appears to be stronger than strong!! Time will finally tell if the bubble is over inflated or is a reality
##Lawrence Sanjay
Its easily doable , I feel sun Edison is on a role.
##Nithyanandam Yuvaraj Dinesh Babu
Glad to see the solar tariff tumbling but there should tracking of progress of implementation and operational status of such low tariff power plants and how transparent is the analysis. If the land cost (lease value or purchase value), rest of the cost could be easily estimated. Secondly, access to low cost funds also results in low tariff. In sum, a close monitoring of such plants are required. The benchmark shouldn't be linked to these remote cases as solar projects have difference performance parameters across the country
##BALAAJI CS
Such lower tariff is a clear indicator that catering our own demand with indigenously manufactured solar cells /panels is a remote possibility . The major demand wil be met thru the piled up inventory of solar cells available across the globe
##Raveendra Kamat K S
They are in a position to bring in low cost finance and equipment, and also avail carbon credit + AD, why they can not make good money, sustainably !
##Radhakrishna Maiya
we have to wait and see.........?.
##Ramya Emandi
I think its sustainable and I expect grid parity to be a reality in near future looking at the trend. There were 9 bidders who quoted below Rs 5/ unit, but such low rates are only possible for ultra large solar projects. Quality of these projects may be at stake, hence frequent periodical monitoring is a must
Answering a comment @ LinkedIn pasted earlier:
##Comment by – Chandan Rastogi
Comment – It’s a pure play financing and to a limited extent economics of scale play. Ironically, technology would have the least role in these bids.
Response: Chandan, I think I will have to agree, as I cannot see either any other main factor at play, The big question of course is what was the rate of interest considered…I guess a number like 4.63 Rs is possible only at very low interest rates, say about 5%, even at high economies of scale. What do you think?
Answering a comment @ LinkedIn pasted earlier:
##Comment by – ##BALAAJI CS
Comment – Such lower tariff is a clear indicator that catering our own demand with indigenously manufactured solar cells /panels is a remote possibility . The major demand wil be met thru the piled up inventory of solar cells available across the globe
Response: Balaaji, right on dot you are. At current prices, Indian modules cost almost Rs3-4 Rs/W more than those of good quality Chinese panels. Such a difference alone could lead to 10-20 paise higher LCOE, I think the Indian module sector will start focussing more on rooftop and small scale ground mounted solar power plants, which is something they are already doing.
Answering a comment @ LinkedIn pasted earlier:
##Comment by –##BALAAJI CS
Comment: Possible reasons could be 1 . Lot of inventory available and to make use of it,instead of keeping it idle as there is no market .2 . It’s the time value of the idle solar cells which plays a crucial role for such aggressive bidding. 3.Poor tariff realisation in developed countries 4 . availability of funds at an attractive rate thru EXAM route etc..by which better utilisation and realisation is ensured
Response: All the reasons you have said make a lot of sense. Not so sure about surplus inventory as I dont have much data on that, but poor tariff realization elsewhere could be a good reason indeed – check out the post I made here on how the realizations have been low all around the world this year – http://www.solarmango.com/blog/2015/11/07/super-low-solar-prices-bid-worldwide-in-2015-lowest-at-3-87-centskwh/ and http://www.solarmango.com/blog/2015/11/07/in-chile-utility-solar-cheaper-than-fossil-fuels-65-centskwh-vs-8-5-centskwh/
Answering a comment @ LinkedIn pasted earlier:
##Comment by ##Chandan Rastogi
There were six or seven other bidders in the same range. I will be surprised if there’s any other reason apart from financing and trophy projects
Response: Chandan, financing, I agree. Trophy projects, unlikely, SunEdison has already won enough projects in India for it to consider this a trophy. The argument could have held good for Softbank though had it won.
Answering a comment @ LinkedIn pasted earlier:
##Comment by ##Surendar Kashyap
Comment – NTPC’s prompt payments than discoms could also be a small reason, SE could have reduced contingency funds.
Response: Small reason? Yes, it could be. But so far, I have not heard of payment delays by discoms in the solar sector, though it has been a serious concern for wind farms in Tamil Nadu
Answering a comment @ LinkedIn pasted earlier:
##Comment by ##Raveendra Kamat K S
Comment: They are in a position to bring in low cost finance and equipment, and also avail carbon credit + AD, why they can not make good money, sustainably !
Response: I doubt carbon credit plays any role any more, with CER prices at about 50 euro cents. On AD, I am not entirely sure if SunEdison can avail AD benefits as it operates this out of SPVs, which are not profit making entities – plus anyway, there is a 10 year tax holiday for solar power plants! But if AD is applicable, 4.63 suddenly becomes far more feasible than otherwise
Answering a comment @ LinkedIn pasted earlier:
##Comment by ##Nithyanandam Yuvaraj Dinesh Babu
Comment: The benchmark shouldn’t be linked to these remote cases as solar projects have difference performance parameters across the country
Response: A really sane statement, but this is the real concern, that all others in the country will latch on to this price and demand that every developer meets this really low price.
Answering a comment @ LinkedIn pasted earlier:
##Comment by ##Ramya Emandi
Comment: I think its sustainable and I expect grid parity to be a reality in near future looking at the trend. There were 9 bidders who quoted below Rs 5/ unit, but such low rates are only possible for ultra large solar projects. Quality of these projects may be at stake, hence frequent periodical monitoring is a must
Response: I agree Ramya. This benchmark should be maintained for ultra mega size project such as these and not for smaller projects. But of course, even at 500 MW, whether this is a sustainable price is a real question…
Should Accelerated Depreciation should at all be considered as a benefit when we have to address issues of Deferred Taxation ? Provision for taxation is definitely a cost.
Cost of funding at 6% is not fair as we have to consider foreign exchange fluctuations and hedging cost in the financial model. Is this considered in the working ?
Are REC’s considered in the working ?
Can you please send me statewise pricing of Solar power in various states on “cchincholkar@hotmail.com” ?
Are there any Indian manufacturers who can provide Solar Power generating Equipments at less than Rs. 5 Crs / MW ?
Rgds ,
Chandra Chincholkar
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