Solar power cheaper, but will the companies survive?

The results from the bidding for the Bhadla solar power project in Rajasthan, where solar power tariffs plummeted to Rs 2.62 per kWh(unit), will change the dynamics of India’s power sector. Industry watchers have been apprehensive about the sharp fall in renewable energy tariffs after the bidding from the Rewa ultra mega solar park auction (750 MW) in February, and the first wind power auction (1000 MW) posted record lows of Rs 3.3/kWh and Rs 3.46/kWh.

In April, the solar project in Kadapa in Andhra Pradesh saw the successful bid fall to Rs 3.15/kWh. These are lower than the Rs 3.2/unit charged by NTPC for coal-fired plants, mirroring the trend in other countries. Not surprisingly, banks are unwilling to bankroll thermal power projects and coal mining. In 2014, Prime Minister Narendra Modi’s ambitious plan to generate 175 GW of renewable energy by 2022, was met with scepticism. In mid-2014, India’s grid-connected solar power capacity was only 2,632 MW, but the cost of power generation had declined from Rs18/kWh (unit) in 2011 to Rs 7.5/kWh in 2014, providing an inkling of what lay ahead.

The NDA government’s first budget provided incentives like reduced customs and excise duties. Subsequently, the cost of solar modules have fallen from 58-60 cents/watt in 2014 to just 36 cents in 2017. The modules account for nearly 60 per cent of a solar power project’s total cost and the decline in their prices along with fierce bidding, mostly by foreign companies, can be attributed to these record bids.

However, this raises the question whether such low bids are sustainable in terms of returns on investment. Already, state discoms are wary of executing power purchase agreements for past auctions when tariffs were higher. The central and state governments must allay these fears of solar companies and ensure timely payments.