Decoding the winning bid strategy in solar projects

We have been observing the solar bids in last decade, and trying to decode the winning bid strategy.. What all goes in the winning bid is analysed by the market pandits and again the preperation start for the next big move.. Prof. Thomas Timings Holme says. “After a business implements a strategy, competitors will react, and the firm’s strategy will need to adapt to meet the new challenges. There is no stopping point and no final battle. The competitive cycle continues on perpetually. Produce and compete or perish” Those companies who were leaders a decade back, are no longer in the game and we find new bidders with probably better vision, better strategies.

We have seen an era of low price bids tumbling as low as Rs. 1.99/kWh. This bid price slide down has come down over the decade from about Rs. 16/kWh in 2010, to close to Rs. 1.99/kWh. The bid price discovery was not only in Indian market but at global scale this was led by the solar auctions in middle east. The price discovery in middle east was as low as 1.35 Cents/kWh in case of he 2-GW Al Dhafra solar project in Abu Dhabi. This pricing point has reached to the stage where the solar energy becomes economically favoured electricity supply option even in Gulf region, where the fuel price is ultra low. The learning curve of solar is about 20%. That means, every time we double the capacity, the price falls by 20%. We will still continue to observe it in upcoming years, despite a bit of price surge of solar panels and other commodities post pandemic.

Here are the four major factors which affect significantly the winning strategy in a solar bid..

Here are the four major factors which affect significantly the winning strategy in a solar bid..

ROI Expectations: A decade back companies had their return on equity expectation of the order of 16-20%, in the solar bids, and now this number has changed to 9-10% as ROI.  A reduction in the ROI expectation has made the companies vulnerable to the project risks. As the investments in solar projects are through pension funds, and considered to be  a safe investment, the return on investments in solar projects by the developers have come down below 10%. What they need is the regulatory and policy stability to ensure these returns. Hence in most of the central govt bids of SECI, the project developers who won the bids had the ROI expectation of the order of sub 10%.

Capacity Utilisation Factor CUF): The CUF in solar projects is highly depends on the solar radiation at the proposed location, and  typically the CUF of 18-19% is considered in a fixed tilt installation. However developers are adopting the engineering optimisation and the use of singly axis tracker in the design considerations is taken to increase the CUF up to 23%. An increased DC/AC ratio is also another approach to achieve higher CUF. Infact the developers consider a combination of technological options with Monoperc module, 1500V string design, higher DC /AC ratio as high as 1.5:1; to take the CUF close to 25%. This makes the returns faster design optimisation is done by tweaking through a combination of these factors.

Interest rates:  The solar project economic viability is heavily dependent on the interest rates. Availability of low cost foreign funding or domestic financing now a days have come down to the tune of 7% p.a as interest rate. Every percent of interest slide down brings tariff down by 15 p/kWh. This is significant. In case of foreign funding the investment is hedged against Rupee Dollar variability .

Capital Cost: Finally the capital cost in a solar project matters a lot in the upfront investment and economic viability. A typical 100 MW solar project has major two cost component, which include the solar module cost generally considered around Rs. 18-20 Rs/Wp (Though the module prices are reaching now close to Rs. 30/Wp). We believe that the module prices will ease out once the supply chain of poly Silicon are normalised. In a typical 100 MW project size a typical project cost of 3-3.5 Cr/MW is a reasonable consideration. Typically the project gestation period is about 24 months, hence the developers consider a module price sliding down in their project cost considerations, and take up a reasonable risk in their project cost estimations.

Finally it is a trade off of multiple factor in the decision making to win a bid. The winner has to expose himself to the market uncertainties. Some time the market uncertainties are in favour of the bidder, and in some of the cases, these uncertainties are against the developer. Every time some of the developers implement his winning strategy, and the market forces correct themselves to align with the winning strategy.. IN solar bid it happens in real time and the others have to match the l1 bidder to take a reasonable share in the bid capacity allotments.