The recently concluded bidding for solar PV project allotment under the second round of JNNSM phase I and the results from the bidding has shown signs of solar becoming genuinely cost competitive with grid power. While sub 10 bids were obviously expected, the bid price falling below 8 was indeed a stunner for many.
The Rs 10.59/kWh bid during the first round of bidding during the previous year, resulted in serious debate and discussion over whether the developers are trying to pull wool over the eyes of the general public and more importantly the lender community. It might be surprising to know that the percentage of discount offered in this highly debatable winning bid is equal to the percentage of discount offered by the bid that just made it to the list as the lowest discount provider.
Similar to the previous year results, the new numbers that were out yesterday too has resulted in a lot of debate. With severe penalty clauses in the second round this year and considerable learning during the last year, the discount that could be offered was never expected to cross 50% but all the assumptions and predictions are here to be bulldozed in the solar PV industry. Though the numbers might seem unreasonable at first sight, if one gives a proper thought over it, we would understand that these developers had every reason to submit such lower quotes.
Let me start my analysis with the French company Solaire Direct who created shock and awe in the industry with an unimaginable Rs7.49/kWh which was just close to grid parity.
Solairedirect is not a small time joker but is the second largest solar power company in France. The company has quoted the so called ‘rock bottom’ price possibly as a part of market entry strategy as they have big plans of entering and growing in the Indian market. The latest report on photovoltaic support schemes released by the French government has caused haywire in the industry since the government threatens to severely curtail incentives including a potential annual cap of 500 MW. The French company has a pressing need to expand their market presence and India being one of the most promising market, the company had shown serious interest in the country with an anticipated target of 25 MW in the year 2011-2012.
The company isn’t building castles in the air. Their market entry strategy is suitably backed by Rs 300 crore finance raised by the company. The company is already in talks with various banks in France such as Rabobank apart from a few private equity players to participate in the fund raising activity. The company has plans to excecute projects by signing PPAs directly with different state governments, private companies and through joint development approach with customers who already have PPA’s under different schemes. The company has an integrated business model involving construction, operation and financing of projects which is bound to get traction in the Indian market.
Thierry Lepercq, chairman of Solairedirect has already reported that the company is able to reach a levellised cost of energy (LCOE) of Rs 9 per unit on projects in France and the company has already sorted out the technology and industrial roadmap to cut this cost to Rs 6 per unit within two years. The 7.49/kWh project would come online only during the year 2013 and the company is confident about bringing down the LCoE to levels that would make their project a viable case even with such a low FiT.
Also, the company has now saved loads of money which they would otherwise have spent on marketing. They have managed to hit all the headlines and gained extremely significant visibility in the country and all without any phenomenal marketing investments. All the revenues saved could come handy when they implement and operate the historic Rs 7.49/kWh project. The calculative risk and the low bid price is all a part of the market entry strategy.
Welspun Solar, with three different bid prices emerged second only to Solairedirect. Three different price levels and a 50MW clean sweep – and there is definitely some serious thought process behind their high discount bids. For Welspun, solar is of strategic importance and they are well on their way to become the bid daddy of Solar PV power generation sector in India. Project allotments in the first round of JNNSM phase I and projects from Gujarat state policy would have given them very good learning’s and confidence to go all out to secure 50MW and do not forget, they are on the fray to get projects allotted in Karnataka policy too. With past experience (something which is a rarity in the niche solar PV sector in India), the company definitely would have working relationships with EPC companies, module makers, inverter and other BoS manufacturers, lenders etc. The company could very well leverage their strengths to have projects commissioned to with LCoE’s low enough to make business viable at all the three high discount FiT’s offered by them. The past experiences and associations comes in handy not only for Welspun, but a similar situation exist for a few other renowned solar PV developers like Azure Power, Mahindra Solar, Kiran Energy, Sai Sudhir Energy, Sun Edison India, Green Infra and Sun Borne Energy. All these companies have made the early mover advantage to their fullest benefit and managed to get projects allotted by quoting competitive yet viable prices.
There can be a dozen arguments to justify the low bid prices, but the one big question that would still remain after all the rationalization is “What about financial closure? Who’z going to bet their dollars on these low FiT projects?” – Well., I don’t think all the victorious developers have a solid answer for this (may be they would go with a 100% equity since most of the winners are deep pocket developers), but I’m sure Inderpreet Wadhwa might have an answer especially considering the fact that Azure power has shown strong associations with Exim Bank in their previous projects where they used First Solar module. Exim bank has already expressed their willingness to back all the projects who use American modules.
Export-Import Bank of America, OPIC will be one of the sought after destinations for many of the victorious developers other than Azure Power. It is however surprising to know that two other well known developers – Punj Lloyd and Acme Solar who were EXIM bank beneficiaries in their previous projects, did not quote competitive prices to emerge victorious.
Deadline for achieving financial closure in the second round of JNNSM phase I has been raised to 210 days (7 months) from the earlier 180 days (6 months). The timeline for the commissioning of the project is also extended by a month – to 13 months from the date of signing PPA from 12 months earlier in batch I. With one more month of additional time coming in as a cushion for the victorious developers, one would have to wait and watch the actions that are to unfold in the days to come.
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Interesting analysis, Hari…glad you could spend time and efforts to do this.
A couple of questions:
==>You mentioned: “Thierry Lepercq, chairman of Solairedirect has already reported that the company is able to reach a levelised cost of energy (LCOE) of Rs 9 per unit on projects in France and the company has already sorted out the technology and industrial road map to cut this cost to Rs 6 per unit within two years.”
Any idea what goes into this “sorted out” blueprint? Is it just the falling costs of solar panels, or is there something more in this costing strategy that makes him comfortable with predicting a sub-6 LCOE in 2 years?
==> You mentioned: “Also, the company has now saved loads of money which they would otherwise have spent on marketing.”
Why does a power production company need marketing? Remember, it is a commodity that has an almost infinite demand, which could become more pressing if RPOs are strictly implemented.
Financing costs? They are different in France vs. India… ? Any numbers to support?
Let me start off by saying this analysis is not a solo effort, Badri was heavily involved in this.
Solaire direct is primarily an EPC. So they need marketing to get customers. With such aggressive bids, it is only likely the market is going to explode, and they would definitely like to be in the mix with Indian giants such as L&T who have already got a stronghold in the market.
With regards to the cost cutting, it was posted on their website that they would achieve this sooner than later. I believe it is a combination of cratering of module prices along with a huge inventory backlog that makes them feel confident.
Of course it is a clever market strategy with lower rate quoted due to French Government incentive policy and pressing need to expand market , hope it will not affect Indian companies especially small players [first generation entrepreneurs ] who are hoping for a better in their solar power project dream.
It is a interesting and cautious’es analysis for investors, by Mr.Hari
Nice analysis Hari!!
Just few thoughts
1. Since the Solar Developers have gone so low in the bid, it seems that PE financing would be out of question for them now. Also, the Indian banks were not happy with previous bid rates, i assume they’ll be completely disinteresed in the sector after this. So what do you think is going to happen to their financial closure???
2. Is this ‘Chinese impact’ ( their mass production have made solar panels dirt cheap) or true realization of growing Indian economy or both?? your thoughts??
3. I totally realize attaining grid parity is a great achievement but don’t you guys think the rates have come down very steeply in a short period of time?? what about quality issues???
No mention of Moser Baer – no luck in either batch… Will they focus on manufacturing?
Will the EPC market shake out into a few key players with a strong track record: L&T, Mahindra, TataBP, Lanco? Sriram?