An analysis of recent GUVNL solar bid and assessment of financial viability through LCOE

In this article, we evaluate some of the recent solar bids and discovered a tariff of Rs. 2.30 in the GUVNL Solar bid. We also compare the discovered bid tariff with LCOE to assess the financial viability. There are three factors that affect the financial viability of a solar project. These factors include the Project cost, Interest rate, and the CUF (Capacity Utilisation Factor). During the last year, we have observed the solar tariffs varying from Rs. 2/kWh-Rs. 2.3/kWh. It is important the factors that are considered by the solar developers while reaching these winning tariffs.

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 components, which include the solar module cost generally considered around Rs. 18-20 Rs/Wp (Though the module prices are now reaching close to Rs. 30/Wp). We believe that the module prices will ease out once the supply chain of poly Silicon is normalized. 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.

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

Capacity Utilisation Factor CUF): The CUF in solar projects is highly dependent 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 engineering optimization and the use of a single-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 achieving higher CUF. In fact, the developers consider a combination of technological options with Monoperc module, 1500V string design, and higher DC /AC ratio as high as 1.5:1; to take the CUF close to 25%. This makes the returns faster design optimization is done by tweaking through a combination of these factors.

While evaluating the LCOE (Levelised Cost of Electricity); the return of equity (ROE) also plays an important role, hence we have considered a base case scenario of 16% ROE, while in other cases the ROE has been changed. The LCOE represents the net present value of the unit cost of electricity generation from the solar plant over the lifetime of the solar asset. If we fix the ROE and evaluate the LCOE, it provides a reasonable comparison to estimate whether the bid value will fetch reasonable returns in the project or not.

While evaluating the recent solar tariffs, we have created scenarios in our financial modeling. These scenarios include the following:

1. Base case scenario: A typical project cost of 3.5 Cr/MW, which includes the PV module cost of 2.5 Cr/MW; and BoS cost of Rs. 1 Cr/MW); The interest rates are 8.5%, CUF 19%; ROE Expectation of 16%
2. Low ROE Scenario: A typical project cost of 3.5 Cr/MW, which includes the PV module cost of 2.5 Cr/MW; and BoS cost of Rs. 1 Cr/MW); The interest rates are 8.5%, CUF 19%; ROE Expectation of 10%
3. Reduced Module price while implementing the project: A typical project cost of 3.0 Cr/MW, which includes the PV module cost of 2.0 Cr/MW; and BoS cost of Rs. 1 Cr/MW); The interest rates are 8.5%, CUF 19%; ROE Expectation of 10%
4. Reduced Module price while implementing the project to the same levels while it was a year back to the level of Rs. 1.5 Cr/MW: A typical project cost of 2.5 Cr/MW, which includes the PV module cost of 1.5 Cr/MW; and BoS cost of Rs. 1 Cr/MW); The interest rates are 8.5%, CUF 19%; ROE Expectation of 10%
5. Reduced Module price while implementing the project to the same levels while it was a year back to the level of Rs. 1.5 Cr/MW; and project optimization through single-axis trackers and taking the CUF to 23%: A typical project cost of 2.7 Cr/MW, which includes the PV module cost of 1.5 Cr/MW; and BoS cost of Rs. 1.2 Cr/MW); The interest rates are 8.5%, CUF 23%; ROE Expectation of 10%
6. Reduced Module price while implementing the project to the same levels while it was a year back to the level of Rs. 1.5 Cr/MW; and project optimization through single-axis trackers and taking the CUF to 23%; also securing a low-interest loan of about 7% interest rates.: A typical project cost of 2.7 Cr/MW, which includes the PV module cost of 1.5 Cr/MW; and BoS cost of Rs. 1.2 Cr/MW); The interest rates are 7.0%, CUF 23%; ROE Expectation of 10%
7. Reduced Module price while implementing the project to the same levels while it was a year back to the level of Rs. 1.5 Cr/MW; and project optimization through single-axis trackers and higher DC/AC ratio, taking the CUF to 25%; also securing a low-interest loan of about 7% interest rates.: A typical project cost of 2.7 Cr/MW, which includes the PV module cost of 1.5 Cr/MW; and BoS cost of Rs. 1.2 Cr/MW); The interest rates are 7.0%, CUF 23%; ROE Expectation of 10%.

The results highlight that, finally it is a trade-off of multiple factors in the decision-making to win a bid.

1. While the discovered tariff is Rs. 2.30/kWh, in the base case scenario, this tariff is not workable. With high-interest rates considered as 10% in the base case, a return on equity expectation of 16%, and a project cost of about Rs. 3.5 Cr/MW leads to a tariff which is about 3.34 Rs/kWh. This tariff is unsustainable. All the subsequent cases have been done on the step-by-step based optimization of the project parameters which affect the final tariff.
2. In the case of scenario 2, if the developers reduce their return on equity expectation to 10%, the LCOE is reduced to 2.90 Rs/ kWh. The reduced ROE expectations alone can not take you to the winning number.
3. In the case 3 scenario, we have considered that the developer is able to do its cost optimization, considering it as a 100 MW + capacity installation, it is possible to reduce the project cost from Rs. 3.5 Cr/MW to Rs. 3 Cr/MW. The cost optimization can be done through better tie-ups with the module manufacturers and optimization of BOS prices which in the base case are considered as Rs. 1Cr/MW. The Bos cost can be brought down to Rs. 0.6 Cr/MW considering the large project size. IN this scenario the developer can achieve the LCOE of Rs. 2.57/kWh. Which is still higher as compared to the discovered bid price.
4. In the fourth scenario, if the developers are able to reach a lower module price over the period of their construction of 24 months, to the level of about Rs. 23/Wp, which is a reasonable expectation to overcome the recent module price spikes due to shortages of Polysilicon in the global supply chain, the LCOE can reach close to the discovered price. The LCOE in this scenario is about Rs. 2.36/kWh.
5. In the Fifth case, we analyze the scenario, where the developers are able to optimize the project cost as well as the energy yield per MW of the project or higher CUF. This can be achieved through the installation of single-axis trackers with high-capacity mono crystalline PV modules. In this case, the LCOE can be achieved as low as Rs. 2.05/kWh. This is the level at which the developers were quoting the tariffs about a year ago in the solar bids.
6. In case 6, scenario, we consider that the developers are able to achieve financial closure through low-cost interest rates and achieve interest rates of about 7% in the project. With this reduced interest, rates reduced ROE expectation, and higher CUF, the developers can achieve the LCOE to about 1.89 /kWh. This is quite an ambitious scenario and can be achieved in near future.
7. 7. IN case 7, we propose a further optimization and achieve further higher CUF of the order of 25%, through higher DC/AC ratio, as well as trackers in the project. A combination of low-interest rates, higher CUF, and lower ROE expectations can reach an LCOE of Rs. 1.81/kWh.

Finally, The winner has to expose himself to the market uncertainties. Sometimes the market uncertainties are in favor of the bidder, and in some cases, these uncertainties are against the developer. Every time some developers implement their winning strategy, the market forces correct themselves to align with the winning strategy. In the 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.