Duty, taxes to lift solar tariffs to ~Rs 2.6 per unit next fiscal : CRISIL
Renewable energy equipment's GST has recently increased, and the anticipated customs duty on imported solar modules has led to an increase in the price of solar modules to Rs 2.6-2.7 per unit (from an all-time low of Rs 2 per unit) over the next fiscal year.
With effect from October 1, 2021, the Indian government has raised the GST on solar project components including photovoltaic cells and modules from 5% to 12%. The entire tax burden on a solar plant has risen from 8% to 13% as a result. When customs duties of 40% on imported solar modules come into effect on April 1, 2022, that percentage will more than quadruple to 30%.
The cost of a mono-crystalline module has climbed from an average of 21 cents per watt last fiscal to 23-24 cents per watt in the first half of the current fiscal (Refer chart). Polysilicon costs, a critical component in solar cells, had risen significantly as a result of disruptions at Chinese manufacturers' manufacturing facilities, according to the report.
According to CRISIL Ratings Director Ankit Hakhu, "High module prices, taxes and tariffs are likely to result in project cost inflation for solar developers. On average, we predict project costs to rise by 15-20 percent (Rs 60-70 lakh per MW) next fiscal from Rs 3.6-3.7 crore per MW in the previous ones to Rs 4.2-4.3 crore per MW in fiscal 2021, compared to fiscal 2021. If future solar bids are priced at Rs 2.6-2.7 per unit instead of the lows of Rs 2.0-2.2 per unit observed in fiscal 2021, developers will be unable to maintain 11-12 percent returns. However, under the change-in-law provision, developers of previously bid-out projects are required to pass on the impact of new taxes and charges.
Solar module prices are expected to fall to 20-21 cents per watt next fiscal, with silicon prices expected to smooth out when the ramp-up in operations of the planned and existing capacities is completed. This tariff calculation takes this into account. Tariffs may need to rise by 15-20 paisa per unit if the current return rate is to be maintained.
When bids went above Rs 2.5 per unit, distribution utilities were reluctant to participate. For example, the distribution utilities failed to sign the manufacturing-linked contract of 12 GW in January 2020 at Rs 2.9 per unit. These utilities very recently, in the second quarter of fiscal 2022, partially accepted the tender, and at a reduced per-unit tariff of Rs 2.5.
It's been reported that CRISIL Ratings' Aditya Jhaver is concerned that future price increases could scare away state distribution businesses, increasing the already considerable capacity of 20 GW that has been bid-out but has not yet found a customer for the electricity. But if developers use aggressive bidding in a competitive market, it will certainly increase the credit risk of new projects, as the cash flow cushion may be narrower than earlier. "
As a result, future project credit quality will be driven by the ability to implement appropriate tariff increases and approvals under the change in law clause.
Custom duty will help domestic modules manufacturers compete on price with imports, but no significant module price correction is expected from these players in the medium term because it will take some time for domestic players to ramp-up their capacities and reduce their operating costs throughout the whole value chain.