A seemingly small development that took place last week sent shock waves across the energy business community, got many corporate planners into a nervous huddle and practically re-drew the rules of the game. Such was the gravity of the development that even those who had been expecting something like this were taken by surprise by its magnitude.
SunEdison, an American renewable energy company, won the rights to sell electricity from 500 MW of solar power plants it would put up to NTPC for the next 25 years, at a tariff of ₹4.63 a kWhr.
Solar power at a fixed price of ₹4.63 for the next quarter century is, for the buyer, a steal. What they call a ‘bloody good rate’. Why, if NTPC puts up a coal-fired power project today — something it is known for doing — it can scarcely generate power at this rate.
New benchmark
SunEdison’s quote has set a new benchmark. Solar power buyers will now cite this in their negotiations. Suppose a company — say, ABC Solar Ltd — offers to sell power at ₹5.50 a kWhr, the buyer will bang his fist on the table and say, “SunEdison is able to sell solar electricity at ₹4.63. Chalo, I’ll give you ten paise extra, but no more.” ABC Solar will have to rework its costing with a target price of ₹4.73 a unit.
So, while the power buyers, and the government, are delighted, solar companies and entities that build solar plants for others (called ‘engineering, procurement, construction’, or EPC companies) are under tremendous pressure to prune costs and profits. Naturally, they are unhappy.
Many of them have commented that ‘solar is going the e-commerce way’, meaning that solar companies, such as SunEdison, have begun to recklessly expand business, disregarding economic viability, in the hope that they will be able to sell the business later to gullible investors and vamoose.
Tangible assets
Well, while not taking sides in the debate, neutral observers like you and me should just take note of one thing. Unlike in the case of e-commerce, there are tangible assets built here, that are going to be around for a number of years, generating cheap, clean electricity. Who makes profits or losses in the bargain is not central to our interests.
Perhaps SunEdison, an integrated company which makes everything right from silicon to cells, has an inherent ability to make profits at ₹4.63; perhaps its ability to quote low comes from scale (the company is building some 2,000 MW of solar in India); perhaps its lenders have committed to giving funds cheap because the buyer of the power, NTPC, is a profit-making, government company — who knows the real reason?
As far as we are concerned there is only one point worthy of note. Solar energy prices have fallen so low that it is cheaper than even the modern coal and hydro power, which have long been the cheapest sources of electricity in India.
And what more…solar prices will come down further. Note, that I’m not saying ‘could’, but ‘will’. My confidence is based on two factors.
One, respectable global analyst companies such as a GTM Research have said that module prices will fall. (Modules are the panels that stand facing the sun; they produce electricity when light strikes them.) Today, you get modules at 45-50 cents a watt; GTM Research is confident that by 2017, they will be selling at 36 cents. The expected fall has to do with many things, such as global capacities versus the demand and technological advances.
Eliminating currency risk
Second, the Indian government is coming up with a mechanism for bringing costs down, called the ‘dollar-linked tariff’. In essence, the idea is to take ‘currency risk’ out of the costs, by getting NTPC to create a fund that takes care of the effect of the rupee moving against the dollar.
Freed of currency risk, solar companies can borrow from abroad for 6 per cent. They may have to pay into NTPC’s fund around 12 paise per kWhr, but the net effect is that solar energy prices will drop to below ₹4. And that is something to be proud of.
Five years back, solar power used to cost ₹18. If the same rate of decline were to be applied to a BMW 5 Series car, you could get one for ₹10 lakh in five years!
Furthermore, the tariff of ₹4.63 has caused the world to sit up and take notice. India aims to create 100,000 MW of solar by 2022 — a very tall order. Today, we have a little over 4,000 MW. When the government announced the target last year, everybody laughed. But with tariffs falling so low, the sun is within reach.