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Soaring input costs to hit 5 GW of solar power projects in India

On Wednesday, May 25, 2022 at 05:31 IST

A sharp increase in input costs is likely to erode the return on equity (ROE) of nearly 5 GW of solar power generation capacity in India and hence discourage investment in this sector at least temporarily.

A Crisil report finds that soaring prices of solar modules and commodities such as steel, together with rising freight rates will pull down the ROE of nearly a fifth of the 25 GW (excluding 5 GW projects of central PSU scheme and 3-4 GW projects in open access/roof-top mode) private sector capacity. These projects accumulating around 5 GW of capacity were mostly bid out between October 2020 and December 2021 and are currently under implementation. These projects may see their ROE falling by as much as 1.4-1.8 percent to around 7 percent.

Private bidders had bid for these projects at a low tariff of less than Rs 2.35 per kilowatt-hour (kWh), at a time when module prices were softening and commodity prices benign.

Movement in the cost structure of a typical solar power project


Contribution to project cost (%)

Increase between Jan ’21 and Mar’22 (%)

Key drivers of the increase

Solar modules



Raw material prices (polysilicon and power and production disruption in China




Raw material prices and overall increased demand

Balance of plant (electrical and land)



Raw material prices and high freight rates

Soft and financing cost


Marginal reduction






Source: Crisil Research

“The remaining around 80 percent of projects under implementation (around 20 GW) will also be hit, but their comparatively higher tariffs and partial cover on cost of modules will limit the impact to 60-80 basis points (0.6-0.8 percent). Most of these projects are in advanced stages of implementation and have imported or tied up a significant proportion of modules at prices below the current level,” said Manish Gupta, Senior Director, Crisil Ratings.

According to the Crisil report, the landed cost of solar modules has risen unabated by around 40 percent since January 2021, driven by higher commodity prices, primarily polysilicon, and supply chain issues such as shortage of shipping containers.

For instance, mono-crystalline modules were priced at around US$0.21/kWh in January-February 2021 and were then expected to remain stable or decline marginally. However, by April this fiscal, spot prices had increased to US$0.28/kWh and could remain at this level throughout this year due to strong global demand and continued supply disruptions in China following extended lockdowns amid a resurgence of Covid-19 cases.

Ankit Hakhu, Director of Crisil Ratings, highlighted three factors that may partially offset the loss on returns viz better module efficiency, new realization streams from carbon credit certificate, and lower cost of debt.

According to Hakhu, the newer technologies of bi-facial and mono-perc modules can lead to a higher generation per unit of the cost compared to the poly- or multi-crystalline modules that were predominant two years ago. This may increase P50 plant load factors (PLFs) by around 1.5 percent, thereby cushioning returns by 1.3-1.5 percent.

Additionally, the environmental, social, and governance (ESG) focus for corporates – predominantly mining, oil, and energy companies in Europe, North America, and Australia – has given rise to a merchant market for carbon credits.

Buoyed by the rising ESG focus, the recent contracts for carbon credits have been signed at US$6-7 per credit. This is generally shared between the developers and counterparties to the power purchase agreements. Even on a conservative basis, US$2 per carbon credit for project life would translate to the overall revenue of around Rs 0.8-1 crore per MW (before 50 percent sharing), supporting cash flow. This, in turn, will contribute to 1 percent of returns.

Also, interest rates for solar developers have fallen significantly since the start of fiscal 2021. Even after factoring recent interest rate hike of 40-50 bps and further similar hikes expected, the benefit of reduction in net interest cost is estimated to be about 1 percent over project life as compared to expectations at the time of bidding. This can contribute to around 1.2 percent of returns.

Hence, the return on equity estimates in solar energy generation capacity remains sensitive to further rise in module and commodity prices on account of geopolitical issues or supply chain disruptions.


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