Financial feasibility of utility scale solar photovoltaic (PV) power plants in India
Student name: Ms Arshpreet Kalsi
Guide: Mr Amit Kumar
Year of completion: 2016
Host Organisation: Mercados Energy Markets India Pvt. Ltd., New Delhi
Supervisor (Host Organisation): Mr Rachit Agarwal
Abstract: An obvious disparity between the benchmark tariffs determined by the CERC and the SERC’s and those discovered under the competitive bidding mechanism under JNNSM and state government sponsored tenders has been observed. The tariff of ₹ 4.34 per unit quoted under the JNNSM in January 2016, a bolt out of the blue of sorts, is the lowest tariff quoted by any bidder till date under the competitive bidding mechanism [1]. This tariff was 38 % lower than the CERC determined benchmark tariff for the same financial year [2]. Thus, there arises a need to understand the potential modalities that are responsible for driving down the generation cost of solar energy and whether the financial viability of such projects would impact the attractiveness of this burgeoning sector as a whole. Although these lower tariffs may seem attractive for the buyer, but the implications of the lower tariffs on the returns of the investor as well as on the long term financial viability of the projects is yet to be seen.
The study titled, ‘Financial feasibility of utility scale solar PV projects in India’, is an attempt to study the current solar market scenario in India. The study approaches the financial feasibility of the solar tariffs being quoted in the recent rounds of reverse bidding mechanism under the present market scenario. It is observed that the project cost and the cost of finance are the two most impactful parameters on the expected returns of the project for an investor and also the factors with the most potential for driving down the cost of generation of the electricity generated by solar PV power plants.
It is observed that under the current market scenario, the returns on the project for investors at lower tariffs are not attractive as an economically feasible, business investment. The low returns do not compensate enough for the risk undertaken. Thus, in order to sustain lower cost of generation from solar PV plants, availability of lower finance options and opportunities to reduce the cost of the project are of paramount importance. The key project parameters are governed by a number of macro and micro-economic factors. A variation in these parameters has a significant impact on the equity IRR. As the gap between the determined benchmark tariffs and those observed via competitive bidding widens, it’s important to maintain the interplay between profitable and attractive business in mind so that the market does not adversely suffer.
Keywords: Solar Photovoltaic, Internal Rate of Return, Capacity Utilization Factor, Interest on Loan, CAPEX
