The Indian Electricity Sector Transformation continues to build momentum with every week. When SunEdison (US) signed a $US500 million contract to supply solar at a price 8 per cent lower than ever seen before in India, the markets talked of irrational activity.
However, when SkyPower bid the same record low price in the subsequent tender in AP in December 2015, the market signal was clear – solar deflation is far more significant than anticipated and solar momentum in India is building very rapidly, with prices dropping over 20 per cent in the past 12 months alone.
A review of solar tender activity in the last month by the Institute for Energy Economics and Financial Analysis (IEEFA), points to a major step-change downwards in solar pricing to a level already below imported coal fired power generation rates. Further reductions in solar tariffs are forecast to run at 5-8 per cent annually over the next decade, which will leave solar below wholesale grid parity even against mine-mouth domestic coal.
In November 2015 SunEdison won the entire $US500 million, 500MW solar auction in the southern Indian state of Andhra Pradesh. The winning tariff was Rs4.63/kWh (US7.1c), 10 per cent below a previous record low of Rs5.17/kWh bid three months earlier in the 2GW tender completed by the state of Telangana.
SunEdison stands confident on this tender win, stating that the counter party risk of NTPC Ltd as the electricity offtake principal is minimal, materially lowering the cost of debt finance. Further, the state government has taken on the land acquisition and grid access process and costs, derisking the project.[i]
NTPC Ltd aims to bundle the solar electricity with domestic coal-fired power generation at sell the combined electricity for a very competitive Rs3.50/kWh. Another factor supporting this record low tender result was that the underbidder in the tender process came in also at Rs4.63/kWh, but the tender process awards the first bidder at each price.
This record low tender result was further vindicated by the $US350 million, 350MW solar auction win on 15 December 2015 at the same Rs4.63/kWh by SBG Cleantech – the powerful SoftBank (Japan), Foxconn (Taiwan) and Bharti Enterprises joint venture.[ii] Another factor supporting this record low tender result was that the underbidder in the tender process came in only fractionally higher than SunEdison at Rs4.64/kWh.
A further 500MW tender completed on 3 December 2015 in the state of Punjab[iii] saw a record low Rs5.09/kWh from the lowest bid where the requirement was for domestic solar panel use. In this tender, the solar project developer was required to also take on the land and electricity transmission offtake risks, key distinguishing factors in solar pricing comparisons.
The zero price indexation for solar power purchase agreements also means a potential 5 per cent annual real price decline is contractually in place for the next 25 years, a significant long tail advantage of renewable energy. Fossil fuels by comparison offer prohibitive price variability and currency devaluation risks.
India currently has over 4.4GW of installed utility solar capacity, and solar consultancy Bridge to India estimates another 16GW of tenders have been allocated or are in the process of tendering,[iv] much which we expect to be operational by 2017 at the latest. Rooftop solar is also on a steep upward trajectory in 2016.
After only 1GW of solar installs in each of 2013/14 and 2014/15, IEEFA estimates 2015/16 installs will more than double to 2.5GW, double again in 2016/17 to 5-6GW and then 9GW by 2017/18. By 2021/22, we forecast cumulative installs of solar to exceed 80GW – close to the Indian Government’s target of 100GW set one year ago.
Also in December 2015, Suzlon Energy was reported to have signed a 4GW renewable energy agreement (covering both solar and wind) with Axis Energy Limited of India for the state of Andhra Pradesh.[v]
IEEFA in November 2015 released its “Indian Electricity Sector Transformation – Global Capacity Building” report, detailing the significant operational and financial capacity being assembled, with well over $US100 billion of renewable energy commitments in India announced this past few months alone.
Grid efficiency, energy efficiency, expanded utilisation of existing gas-fired power generation capacity plus solar, wind and hydro capacity expansion combine to drive a rapid diversification of the Indian electricity sector, strengthening national energy security and underpinning sustainable economic growth.
Tim Buckley is the Director of Energy Finance Studies, Australasia for IEEFA. He has 25 years of financial markets experience, including 17 years with Citigroup culminating in his role as Managing Director, Head of Australasian Equity Research.
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