Hardening in the PV module price to moderate the returns for the projects awarded over the last six to nine-month period: ICRA

Hardening in the PV module price to moderate the returns for the projects awarded over the last six to nine-month period: ICRA

The increase in imported photovoltaic (PV) solar module Cost level by Roughly 15-20% Within the past 4-5 Weeks, to  Around 22-23 cents/watt according to date, is very likely to affect returns of solar energy project developers. This price increase has been largely driven by a sharp gain in the purchase price of polysilicon, an integral input for cell & module producers. According to an ICRA note, given the import dependence for PV modules to get the vast majority of the solar power installations in India, such hardening in the purchase price of PV modules, even if continued, stays a near-term headwind. This risk is particularly important because of its capacity won by developers throughout the bidding route throughout the previous six to nine months (amounting to 4-GW1 ) in tariffs ranging mostly between Rs. 2.00 per unit and 2.25 per unit; and scheduled to be commissioned during the upcoming 12-15-month period. This apart, the current surge in metal costs can be resulting in up pressure on the total capital cost for solar energy projects.

Commenting further, Mr. Girishkumar Kadam, Senior Vice President & Co-Group Head- Corporate ratings, ICRA, stated,"Given that the PV module part comprises about 50-55% of the total project price, such gain in the module cost level by roughly 4-5 cents/watt if sustained, is very likely to average the debt service coverage metrics to the job developers by roughly 12-14 basis points. Alternately, the tariff increase needed to cancel such a module cost increase is projected at about 20-22 paise/unit. This, together with the effect of the basic customs duty (BCD) on imported PV modules, is more very likely to lead in the general bid tariff to increase by roughly 55-60 paise/unit for its coming auctions. Nevertheless, the solar bid tariff, after factoring in this double effect, is still likely to stay below Rs. 3/unit."

Since the BCD notification for cells and modules is effective from April 2022 onwards, there still remains an opportunity to get a surge in demand for imported modules, especially in the fourth quarter of the current financial consequently, supporting the increased cost levels for PV modules. Within this circumstance, both the module cost behavior and honouring of distribution contracts by module OEMs out of China in the long run continue to remain crucial monitorables for its solar energy developers.

Further, the registration of module manufactures outside India, at the Approved List of Models and Manufacturers (ALMM) issued from the Ministry of both New and Renewable Energy (MNRE), Government of India at March 2021, stayed affected on account of the lockdown limitations and procedural requirements thus far according to industry sources. According to the notification issued from the MNRE, the jobs bid out beneath the standard-bidding guidelines, article April 10, 2021, have to secure modules in the authorized list. This then could pose near-term challenges for the Indian developers for planning the procurement of imported PV modules, particularly given the potential constraints for domestic manufacturers. 

Mr. Vikram V, Vice President & Sector Head - Corporate Ratings, ICRA, adds,"As a consequence, the doubt about the timelines for addition of module suppliers from China from the ALMM list can impact the incremental bidding action in the solar energy industry. Nevertheless, accumulative solar project awards as on date stays powerful at ~28 GW (excluding the capacity impending for signing of PSA/PPAs and such as hybrid projects), which gives you a wholesome visibility on the potential addition within the medium term."

Regardless of the near-term headwind Linked to module cost levels, the credit outlook about the solar power Sector remains steady, given that the enhanced tariff competitiveness, encouraging regulatory framework through must run status for all these crops, resulting in satisfactory working track record, in addition to accessibility of liquidity buffer (which is mixture of debt service reserve accounts and availability of working capital limits) for the issuers rated.