Believing in India’s solar mission takes a leap of faith

The sun’s energy is free, but the capital required to harness it must earn a fair return. Try telling that to the gung-ho bidders for India’s utility-scale solar power projects.

Auction prices will fall below Rs4 per kilowatt-hour this year, Bloomberg News reports. The record low 2016 bid was Rs4.34.

A 60% drop since 2010 is partly a result of overcapacity in Chinese-made panels. But according to some industry insiders, at 6 cents per kilowatt-hour, the Indian solar market is showing signs of being unnecessarily competitive.

Start with panels. Multi-crystalline silicon modules will sell for around 32 US cents per watt this year, according to Jenny Chase, the chief solar analyst at Bloomberg New Energy Finance. For the financial year ending in March, India’s energy regulator had assumed a price of about 47 cents.

Those 15 cents can make a big difference. An Indian power producer able to raise capital at 10% could, in theory, earn a 40% pretax profit margin even after committing to supply power at 6 cents, according to Gadfly calculations.

So far, so good. But overoptimism is rife. The biggest leap of faith might be in assuming a stable exchange rate. This matters to foreign investors, because revenue from supplying the grid is in rupees, while their capital costs are mostly in dollars. Margins would slide to 14% if the dollar strengthened by even 3% a year against the rupee during the 25-year life of the power-supply agreement. Read more…