Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

The returns for overseas investors in India's ambitious 100-gigawatt solar program are about to get a big leg-up. And no, New Delhi won't be paying the producers much more than the rock-bottom tariff of 4.34 rupees (7 cents) per kilowatt-hour. 

So where will the extra profit come from? Speaking in London Wednesday, Indian Power Minister Piyush Goyal said the government is open to the idea of pricing solar power tariffs in dollars, yen and euro. Bloomberg News had flagged this possibility almost a year ago. The minister's comments suggest that hard-currency pricing plans are coming closer to fruition.

This is just what the Indian solar industry needs to get over jitters caused by the looming bankruptcy of SunEdison Inc. The world's biggest clean-energy company was instrumental in driving down bids at Indian auctions to record lows, but may now be looking to sell 1 gigawatt of unfinished projects. That has given rise to doubts about financial sustainability, with bankers wondering whether bidding wars have gone too far.

With dollar pricing removing currency risk, they can sleep easier. India's central bank governor was anyway taking care of one of the biggest threats to profitability. Raghuram Rajan is making inflation control the primary focus of monetary policy, so it's reasonable to assume that India's cost of borrowing will start converging with the rest of the world.

That's not to say the 10-year risk-free rate of 7.5 percent will turn negative, as it has in parts of Europe and Japan. Besides, getting paid for power -- in full and on time -- isn't something investors can take for granted in emerging markets, regardless of what the contract says. There will also be considerable debt refinancing risk over the life of a 25-year project. Even then, the long-term cost of funds for Indian solar producers should not exceed 5 percent. (It currently averages 6.57 percent, post-tax, for the 50 members of the Nifty Midcap Index.)

Investors can't be equally confident about the rupee, which has weakened by an average 4.6 percent against the dollar over the past 25 years. If the pattern were to repeat over the next quarter century, foreign investors in India's solar program will be left nursing huge losses.

This is where hard-currency contracts come in. If the revenue to the power provider is assured in dollars (or euros and yen, to lure the likes of Fortum Oyj and SoftBank), the exchange risk will be borne by the buyer, typically a government-owned utility. For overseas investors, the rupee's future value will cease to matter. Back-of-the-envelope calculations suggest return on capital could jump spectacularly:

Zero Currency Risk Can Make India Solar Shine
Back-of-the-envelope calculations suggest high returns even if power tariffs remain at rock bottom
Source: Author's calculations, inspired by methodology used by Shivkumar Kalyanaraman of IBM Research - India.

Returns could get a further boost if dirt-cheap solar panels become even more inexpensive. In reality, though, competition will put a limit on just how much money any one power producer can hope to make. After all, the Indian government is being rather courageous by accepting dollar tariffs. If the rupee nosedives, it will need more of them to buy the same amount of electricity. Passing on the cost to domestic consumers won't be easy. Naturally, Power Minister Goyal will want to hedge against that risk by squeezing tariffs even further.

Sunny Days
A glut in the solar panel market has given a big push to clean energy
Source: PVinsights

But as long as bids on hard-currency tariffs don't fall much below 6 cents per kilowatt hour, foreign investors shouldn't fret. With a little luck, they'll have no trouble keeping the lights on in their own offices even as they go on to illuminate India.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Andy Mukherjee in Singapore at

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Matthew Brooker at