Energy

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 sun's energy is free, but the capital required to harness it must earn a fair return. Try telling that to the gung-ho bidders for India's utility-scale solar power projects.

Cheaper All the Time
Falling panel costs have seen Indian solar producers slash tariffs
Source: PVInsights

Auction prices will fall below 4 rupees (6 U.S. cents) per kilowatt-hour this year, Bloomberg News reports. The record low 2016 bid was 4.34 rupees.

A 60 percent drop since 2010 is partly a result of overcapacity in Chinese-made panels. But according to some industry insiders, at 6 cents per kilowatt-hour, the Indian solar market is showing signs of being unnecessarily competitive.

Sunny Days
Solar power tariffs in India have dropped in auctions by 60 percent since 2010
Source: Bloomberg New Energy Finance

Start with panels. Multi-crystalline silicon modules will sell for around 32 U.S. cents per watt this year, according to Jenny Chase, the chief solar analyst at Bloomberg New Energy Finance. For the financial year ending in March, India's energy regulator had assumed a price of about 47 cents.

Those 15 cents can make a big difference. An Indian power producer able to raise capital at 10 percent could, in theory, earn a 40 percent pretax profit margin even after committing to supply power at 6 cents, according to Gadfly calculations.

So far, so good. But overoptimism is rife. The biggest leap of faith might be in assuming a stable exchange rate. This matters to foreign investors, because revenue from supplying the grid is in rupees, while their capital costs are mostly in dollars. Margins would slide to 14 percent if the dollar strengthened by even 3 percent a year against the rupee during the 25-year life of the power-supply agreement.

Hedging that risk won't come cheap. Over the past 25 years, the greenback has appreciated at a 5 percent annual pace against the Indian currency. Who's to say there won't be a repeat?

Maybe India will wring inflation dry and power producers will find it viable to finance projects with local-currency borrowing. The cost of rupee debt for solar projects is 12 percent. If the average for the next 25 years were just half as much (matching the current cost of Chinese solar companies to borrow in yuan), a decent 20 percent margin would still be possible. That's before tax. Assuming lower tax rates in the future, double-digit returns on equity might be in the bag.

These are upbeat assumptions, however. The Indian government toyed with the idea of letting power producers bid for dollar-denominated tariffs, letting the taxpayer take the rupee depreciation risk. But why bother taking on a risk others would happily carry for free?

At some point, capital markets will enforce pricing discipline. North American companies like SunEdison Inc. and SkyPower Ltd. came to the country with brand heft and headline-grabbing low tariffs. Now, Greenko Energies Pvt. has bought bankrupt SunEdison's 1.7 gigawatt Indian capacity for just $500 million or so. At that price, the once-aggressive tariffs make complete sense.

The sun is shining on India. Let consumers bask for now. Investors who land solar projects for a song in future insolvency proceedings will make hay.

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

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net