Solar tariffs may rise to Rs2.6 to Rs2.7 per unit from an all-time low of Rs2 per unit over the next fiscal due to the recent increase in the goods and services tax (GST) on renewable energy equipment and the proposed customs duty on imported solar modules. Further, increased project cost is putting more pressure for higher returns, says ratings agency CRISIL.
The government of India (GoI) has increased the GST on critical components of a solar project such as photovoltaic cells and modules from 5% to 12%, with effect from 1 October 2021. This has increased the total taxation on a solar project from 8-9% to 12-13%. It will more than double to about 30% when customs duty of 40% on imported solar modules kicks in from 1 April 2022.
Additionally, module prices increased to 23-24 cents per watt in the first half of current fiscal from an average of 21 cents per watt (for a mono-crystalline module) last year (Refer chart). This was primarily due to a significant increase in polysilicon prices—a key component used in solar cells—because of disruptions at the manufacturing facilities of Chinese manufacturers.
Ankit Hakhu, director at CRISIL Ratings, says, "High module prices, taxes and duties are likely to result in project cost inflation for solar developers. Compared with fiscal 2021, we expect the project cost to increase by 15-20% or Rs60-Rs70 lakh per MW on average to Rs4.2-Rs4.3 crore per MW next fiscal from Rs3.6-3Rs.7 crore per MW seen during last few fiscals."
"This might make future solar bids expensive at Rs2.6-Rs2.7 per unit compared with the lows of Rs2.0 to Rs2.2 per unit seen during fiscal 2021, for developers to maintain returns of 11-12%. On the other hand, developers of already bid-out projects are expected to pass on the impact of taxes and duties under the change-in-law clause," he added.
The above calculation on tariffs includes an anticipated reduction in prices of solar modules to 20-21 cents per watt next fiscal, with an expectation of smoothening of silicon prices following the ramp-up in operations of the planned and existing capacities. "In the absence of this correction, tariffs might further increase by 15-20 paisa per unit to maintain the said returns."
However, the ratings agency points out that the distribution utilities have been wary of participating in bids above Rs2.5 per unit. For instance, the manufacturing-linked tender of 12 gigawatts (GW) bid-out in January 2020 at Rs2.9 per unit remained unsigned by the distribution utilities. Only recently, in the second quarter (Q2) of FY2021-22, the tender saw partial acceptance by these utilities and at lower tariffs of Rs2.5 per unit.
According to Aditya Jhaver, director at CRISIL Ratings, an increase in tariffs envisaged in future bids may scare away state distribution companies and add to an already large capacity of about 20GW that has been bid-out but have not found a buyer for the electricity.
"On the other hand, if developers resort to aggressive bidding in a competitive market, it will likely increase the credit risk on new projects as the cash flow cushion may be thinner than earlier," he says.
CRISIL says that taking suitable tariff hikes and approvals under the change in law clause remains key drivers for the credit quality of future projects.
"Further, while the customs duty will support the cost competitiveness of domestic module manufacturers vis-à-vis imports, no notable module price correction is envisaged from these players over the medium term as it will take some time for the domestic players to ramp-up the capacities along the entire value chain, and lower their operating cost," the ratings agency concludes.