"This will be driven by a decline in capital costs -- solar modules and other balance of plant equipment, an increase in efficiency, a shift towards large solar photovoltaic projects leading to the economies of scale and lower return expectations by developers," Ind-Ra said.
According to International Renewable Energy Agency, solar photovoltaic prices have fallen nearly 80% since 2008. Additionally, solar module efficiency has witnessed an annual increase of 3.5%-4.5%. The increasing size of projects to 10MW and above from 5MW earlier also leads to the economies of scale in component procurement and better absorption of fixed costs. Moreover, the return expectation of developers is likely to moderate as the market matures, leading to a reduction in overall tariffs.
The recent solar bids conducted by MP Power Management Company with per unit prices reaching as low as Rs 5.05 per unit are suggestive of the above trends. Globally in a recent bid, NV Energy, a Nevada utility, agreed to purchase 100MW solar power under a fixed-price 20-year power purchase agreement at 3.87cents per unit - about Rs 2.43 per unit.
Ind-Ra said it expects a strong pick-up in solar power installations over the next four-five years, driven both by the government impetus of 100GW of solar power by FY22 -- 60GW through grid connected solar projects and a decline in solar power generation costs. These factors will increase the affordability of solar power for distribution companies and eliminate the requirement of government support by way of subsidies or viability gap funding.
Ind-Ra said it sees a limited possibility of support by way of viability gap funding, greater focus on infrastructure creation for the evacuation of solar power and higher possibility of distribution companies meeting their renewable purchase obligation.
The solar space has already seen a significant decline in tariffs. Solar tariffs declined to Rs 7.49 per unit to Rs 9.44 per unit in Jawaharlal Nehru National Solar Mission phase I, Batch II during FY12, from Rs 10.95 per unit to Rs 12.76 per unit during FY11. In phase II, Batch I, the concept of viability gap funding was introduced and the tariffs declined to Rs 5.45 per unit.
However, the current tariffs are even lower than those offered through viability gap funding. The recent coal-based bids for the purchase of thermal power by Andhra Pradesh saw tariffs in the range of Rs 4.27 per unit - Rs 4.98 per unit, only 1%-14% lower than the solar tariff of Rs 5.05 per unit bid recently in the MP Power Management Company power purchase tender.
The feed-in-tariffs (FITs), outlined by respective state electricity regulatory commissions based on the cost-plus return on equity model, have also seen a significant decline. FIT for solar energy in Gujarat was lowered to Rs 8.03 per unit in FY15 from Rs 12.54 per unit in 2010. FIT for solar energy in Rajasthan has declined to Rs 6.74 per unit for FY16 from Rs 15.32 per unit in FY11.
(This news story is from The Economic Times)