ThiscontentisforthesoleuseofSanjayBhallaworkingforInfrastructureLeasingandFinancialServices

Limited.

TariffofRs.5.35.5p.u.requiredtogeneratehealthyIRRs
Ourbasecaseanalysisisforanindependentpowerproducer(IPP)undertakingEPCinhouseandusingimported
modulesgiventhatthisisthemostprevalentmodel.Forouranalysisonprojecteconomics,thefollowingarethekey
assumptionsbasedonourinteractionswithprojectdevelopersandbankers.

Capitalcost:

WehaveassumedacapitalcostofRs.5456millionperMWforaprojectbasedonimportedmodulesassumingan
exchangerateofRs66/USD.Further,wehaveassumedsomeInverteroverhaulchargesinthe13thyearofthe
project.

PlantLoadFactor:

Wehaveassumedaplantloadfactor(PLF)of20percentbasedonallIndiaaveragePLFs.However,PLFscould
varysignificantlyfromlocationtolocationdependingonthelevelofirradiance.AswitnessedunderJNNSMPhase1
(Batch1and2),projectslocatedinRajasthanhaveoperatedatanaveragePLFofashighas21percentin201415,
whilethoseinGujaratoperatedatabout1819percent.

DebttoEquity:

Wehaveassumedadebtequityratioof75:25basedonthetypicalcapitalstructureofprojectsunderoperations.

Foreignborrowingcosts:

Wehaveassumedarateofabout9percent(includinghedgingcosts,with12monthsofmoratorium)assumingthat
foreignfundingwillbeavailedinviewofequipmentlinkedfinancingprovidedbyforeignmodulemanufacturers

Basedontheaboveassumptions,webelievethatalevelisedtariffofRs.5.35.5perunitisnecessaryforequity
internalrateofreturns(IRRs)ofabout16percent.Thisisapplicableforindependentpowerproducers(IPPs)who
generallydonotavailaccelerateddepreciationastheyenjoyatenyearstaxholidayunder80IA.(Accelerated
depreciationbenefitallowsdepreciationof80percentofthecapitalcostinthefirstyearofcommissioning).Incase,
aplayerisavailingaccelerateddepreciation,thetariffrequiredtoearnsimilarequityIRRsof16percentwillreduce
toRs.4.04.3/unit.

SensitivityanalysisofequityIRRtointerestratesandbidtariffs


Source:CRISILResearch

However,ifdomesticfundingisavailed,whichistypically250300bpshigheratabout11.5percent(throughthe
loantenureof12years)tariffrequiredforequityIRRof16percentwouldbeaboutRs.5.85.9perunit.

SensitivityanalysisofequityIRRtoPLFsandbidtariffs

Source:CRISILResearch

Also,a1percentchangeinPLFscanincreaseequityIRRsby150200bps.Consequently,projectslocatedin
RajasthanwhereprojectshavereportedPLFsof21percentwouldenjoyhigherIRRs.

SensitivityanalysisofequityIRRtocapitalcostsandbidtariffs

Source:CRISILResearch

Ifaplayeroptsfordomesticequipment,totalcapitalcostwouldby910percenthigheratRs.5961millionper
MW.Thus,ahighertariffofRs.5.86.0perunitwouldberequiredforsimilarreturnsascanbeobservedfromthe
tableabove.
RECroutenotattractiveduetoincreasedInventoryandreducedRECprices

SolarRPOcomplianceatapanIndialevelhasbeenlowatonlyabout50percent.Thisisbecauseparticipationfrom
statedistributioncompanieshasbeenabysmalasperourinteractionwithindustryplayers.RECswereprimarily
boughtonlybyprivatediscomsaswellasopenaccessandcaptiveusers,mainlyfromstatessuchasKarnataka,
Maharashtra,andAndhraPradesh.Thus,onthepowerexchange,tradevolumeshaveremainedlow.Ofthe2,864,021
RECsissuedtillNovember2015,only19percenthavebeenredeemed.Consequently,priceshavebeentradingat
thefloorpriceofRs.9,300since2012andofRs.3,500(PostdownwardrevisionsinceJanuary2015).

TrendinRECsofftakefromexchanges

Source:RECRegistryCRISILResearch

InJanuary2015,CERChasnotifiedthenewfloorpriceofsolarRECasRs.3500/certificate(fromRs
9,300/certificate)andthenewforbearancepriceoneasRs.5800/certificate(Rs13,400/certificate).Onaccountof
sharpreductionincapitalcostofsolarprojectfromRs.100million/MWin201112toRs.62millionin201415,the
tariffforsolarprojectsreducedtoRs.67perunit,henceobligatedentitiesrefrainedthemselvesfrombuyingsolar
RECswhichevenatfloorpricescostsRs.9.3perunit.Consequentlythepriceshavebeenhalvedandtheuntraded
RECshavebeenassignedavintagemultiplierof2.66,(1MWhofelectricitygeneratedbytheRECprojectbefore1st
January2014willearn2.66RECsonexchanges)whichhasresultedinsharpriseinvolumeofsolarRECs.

DespitehighriskofRECsremainingunsold,playerscouldoptforRECrouteinstatessuchasMaharashtra,
KarnatakaandTamilNadu,whereindustrialtariffsareRs.77.5perunit.However,thisisfavourableforplayerswho
consumeatleastpartofthegenerationcaptivelyandavailaccelerateddepreciation,whichbringsdowntheir
generationcosttoRs.55.2perunit.
Overthelongterm,CRISILResearchbelievesthatenforcementofRPOsiscriticalforincreasingtheattractiveness
oftheRECrouteandleadingtohighercapacityadditions.

Capitalcoststodecline,albeitataslowerpace,in201617

Trendinmoduleprices

Source:Industrysources

CapitalcostsdeclinedsharplytoaboutRs.55millionperMWbyDecember2015fromRs.100millionperMWat
endof2011onaccountofsharpfallinmoduleprices(modulesformabout60percentofthetotalcapitalcostsof
settingupasolarpowerplant)ledbysignificantovercapacity,particularlyinChina.

Sharpdeclineinmodulepricesledtoaconsolidationin2012withlesscostcompetitiveplayerseithershuttingshop
orbeingacquiredbylargerentities.Forinstance,about40companieswereforcedtoceaseoperationsintheUSand
Europe.Moreover,risingsolarpowercapacityadditionsin2013and2014,particularlyinChina(~21.1GW)and
Japan(~16.7GW)ledtosignificantdepletionofexcessinventory.Consolidation,coupledwithgradualliquidationof
inventoryreducedthepaceofdeclineinmodulepricesinthesecondhalfof2013.Whilein2014,themoduleprices
declinedgraduallyonaccountofreductioninthemanufacturingcost(reductioninpricesofNonsiliconcomponent
ofmodulesduetoprocessimprovement)andstablepolysiliconprices.

Weexpectcapitalcoststocontinuetodecline,alhtoughataslowerpacein201617.Thisisbecausesolarmodule
pricesareestimatedtodeclinemarginallyto5055centsperwattonthebackofcontinuedsolarpowercapacity
additionsinChinaandJapan.Chinahasa15GWcapacityadditiontargetin2015whileatthesametimeJapan
intendstoexceed8GWperannumin2015.Onthesupplyfront,apartfromliquidationofinventory,Chinaput
restrictionsonsettingupnewsolarmodulecapacitiesinSeptember2013,whichisexpectedtorestrictanyincrease
insupply.Also,costsofbalanceofplantareexpectedtoremainstable.Thisisbecauseofanticipateddropininverter
pricesduetoincreasedcompetition,whichwillbeoffsetbytheriseinlandpricesandEPCcostsonaccountof
increaseinservicetaxto14percent.

Aggressivebiddinginsolarallocationsbythestatetoadverselyaffectthe
projectviability
Therecentallocationsunderthenationalsolarmissionforopencategoryprojectshavewitnessedbidpricesfallingas
lowasRs.4.63/unit(for500MWprojectinAndhraPradesh)fromanaverageofRs.6.8/unit(500MWin
Karnataka,509MWinTelanganaand619MWinAndhraPradesh)bidsplacedinprojectsawardedin201415.
CRISILResearchbelievesthatthereturnsofsuchprojectsarelikelytobelow,asassumingcurrentcapitalcost(Rs
55mn/MW),9percent(includinghedgingcost)financecostand20percentPLF,tariffsof~Rs.5.4/unitwillbe
requiredforaselfsustainableproject.

Webelievethefollowingcouldbesomeofthereasons:

Givenrelativelylargescaleofprojects,playersarebankingonbargainingonmodulepricesaswellasbalance
ofplant(BoP).Forinstance,SunEdisonwithaprojectpipelineof~2.8GWglobally(with28percentbeing
executedintheAsiaPacificregion)wouldbebankingonreducingthecapitalcostthrougheconomiesofscale.
Foreignplayers,inparticular,arerelyingonreducingfinancecostsgiveneasyavailabilityoflowcostfunding
inglobalmarkets.Asperouranalysis,a100bpsfallinfinancingcostimprovesequityIRRsby110120bps.
Moreover,forsuchplayers,expectationofreturnsmayalsobelower(lesserthan16percentequityIRR)given
lowerfundingcostsbutinlinewiththeirreturnsinotherglobalmarkets.
Thesebidsareplacedforprojectstobesetupinsolarparks,whichreducestheconstructionlifecycleof
projectsby68months(timetakenforlandacquisitionandevacuationinfrastructure)andtherebyallowing
developerstotakeadvantageoffallingmoduleprices.Weexpectsolarmodule(~60percentoftotalproject
cost)pricestofallfurtherby~10percentin2016mainlyledbyimprovingefficiencies.
ThePPAsfortheseprojectswillbesignedbetweenthedeveloperandNVVN,whichincreasesthepayment
securitytherebyreducingtheprojectriskconsiderablyandmakingitmorebankable.NVVNhasnotdefaulted
onpaymentstoanydeveloperandhaveanexcellentpaymenttrackrecord.Asperourprimaryinteractions,the
invoicesgetclearedinlessthan45days,whicheliminatesthepaymentrisktothedeveloper.

Goingforward,weexpectthebidpricesfornewerallocations(underCentrallevelallocationinsolarparks)to
remainlessthanRs.5/unitinthenearterm,onaccountofthefollowing:

Continuouslyfallingmodulepricescoupledwithimprovementinefficiency.Ashighlightedearlier,module
pricesareestimatedtodropby10percentin2016andefficiencieshaveimprovedonanaverageby~0.5
percentannuallyoverthelast34years.

Increaseinprojectsize:Withtheavailabilityoflandundersolarparks,andavailabilityofgridinfrastructure,
theaveragesizeforallotmentofprojectshaveincreasedfrom~15MWunderNSMPhaseIIBatchI,to50
MWinBatchIITrancheI.Withincreaseinprojectssizethecapabilityofdevelopertobargainwithsuppliers
andEPCplayersincreasesleadingtodecreaseinperMWcostofproject.

Availabilityofforeignfunds:SolarmarketisestablishedinIndia,with~4.5GWofinstalledsolarcapacities
providingsatisfactoryPLFs,whichhasgivencomforttofundingagenciesforsanctioningloanstonew
capacities.Furthermanylargeconglomerateswithstrongpromoterbackinghaveenteredthissegment,which
hasledtofallinthecostofcapitalfornewcapacities.Henceweexpectthatlowerbidpriceswillprevailinthe
nearterm.

Newerplayersenteringthemarket:FewplayerssuchasSkyPower,SBGCleantech(AJVofSoftbank,Bharti
enterpriseLtdandFoxconn),YarrowInfrastructure(ASPVofIndiabulls),EnelGreenetcarebidding
aggressivelytoestablishtheirpresenceinthesolarpowermarket.Hencelowbidsareplacedbysuchplayersto
enhancetheirchancestobaglargecapacitiesandestablishthemselvesinthesolarmarket.

However,withfewplayersbuildingasizeableportfolioandnearingtheirtargetedadditionsinthesolarsector
coupledwithstabilizationofmoduleprices,theaggressioninthebidswouldbelesseroverthemediumterm.

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