Gujarat sets the ball rolling

The Gujarat Electricity Regulation Commission (GERC) recently issued a draft document to outline the process they used to determine feed-in tariffs (FiT). This is for developers who wish to put up solar power plants (both PV & CSP) under the state solar policy for megawatt and kilowatt scale projects. The document also issued basic guidelines regarding the distribution and transmission of the generated power. Gujarat is the only state which has not adopted MNRE’s reverse-bidding mechanism to determine feed-in tariffs. Instead, they decided to opt for a process that fixes a return to the equity investor, at 14%, and work backwards to determine the appropriate FiT. The advantage of this mechanism is that it is investor-centric in that, return to the investor is the fixed value around which the tariffs are determined. It must be mentioned that the success of the German fixed-IRR system might have been an influencing factor behind the decision to use this approach.

The accuracy of the financial model, built to determine appropriate tariffs, is heavily dependent upon the assumptions made and the inputs provided. Capital costs, interest rates, depreciation rate, capacity utilization factor, for example, are some parameters that make a big difference to investor returns. Taking a look at the values they have used and comparing them to current industry prices and trends would be a good starting point in our examination of this document.

Solar PV

Let’s start with megawatt scale Solar PV. Some key points are analyzed below:

• Capital costs are assumed to be Rs 11 Cr/ MW as against Rs 16.90 Cr/MW which was the figure used in the Central Electricity Regulation Commission’s document released sometime in 2010. This is a 35% price drop in, arguably, the biggest roadblock to putting up a solar PV power plant. This could be attributed to:
  • Free-falling module prices (which account for more than 50% of the capital costs), which have declined by over 30% in the last year or so alone.
  • Falling inverter and balance of system costs (the two next biggest capital cost components)
  • A capacity utilization factor (CUF) of 18.5% has been used by the GERC. This parameter is, to an extent, dependent on the plant design and installation apart from irradiation in the region in question. While 18.5% isn’t a gross overestimation, it seems to be a bit higher than the average CUF for a plant in the region. Other notable differences in input variables are discussed later in this article.

CSP

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Coming to Concentrated Solar Power (CSP):

• The assumed capital cost is Rs 14.5 Cr/MW. The lack of information (there are no running CSP power plants in India at the moment) on CSP plant dynamics has resulted in inconsistent capital cost figures for different states (it’s Rs 13 Cr/MW for Karnataka and Rs 15.3 Cr/MW for Maharashtra in late 2010).
• The same can be said about operational and maintenance costs (1.5% for Gujarat, 1% for Karnataka & 0.92% for Maharashtra) which are significantly high for CSP plants. Other noteworthy differences in input variables are discussed in the following paragraphs.

Financial Variables

1. 1.       Depreciation

The rate of depreciation often plays a crucial role in the economic viability of a solar project. The solar policies in India, both at the central and state level, typically allow project developers to choose between two kinds of depreciation, accelerated & straight line method. Gujarat gives the developer the option of choosing between:

• Accelerated Method: Accelerated depreciation lets the developer depreciate his assets by 80% in the first year thus providing tax relief.
• Custom depreciation cycle: The asset depreciates by 6% for the first 10 years (the loan tenure) of the project and 2% for the following 15 years.

Consequently feed-in tariffs for those using accelerated depreciation are lower than the feed-in tariffs for those that use the custom depreciation method.

1. 2.       Interest Rate

The second crucial financial variable that often makes the difference between project viability and non-viability is the interest rate at which the debt is issued. Rising interest rates (key rates have been raised several times this year by the RBI) make the cost of borrowing expensive. Usually 70% of the capital requirement for a solar project is funded by debt resulting in a massive outflow of cash in the form of interest payments. The interest rate used by the GERC is 12% which is a significant increase from the 10% that was used by CERC last year. This might well make project returns unattractive and create a big stumbling block for the growth of solar power projects.

Economies of scale make megawatt scale projects much cheaper than kilowatt scale projects. This makes intuitive sense and is reflected in the GERC’s figures. Kilowatt scale Solar PV projects involve a capital cost of Rs 1.3 Lacs/KW and it doesn’t make economic sense to put up small scale CSP projects (cost/unit is too high). Consequently, the FiTs for kilowatt scale projects are higher.

A brief overview of the fixed tariffs is provided in the table below: