A growing need for energy security and environmentally sustainable power
solutions led the government to conceive the Jawaharlal Nehru National Solar
Mission, which targets deployment of 20,000 MW grid-connected solar capacity by
2022. The mission's ambitious targets have opened up a new vista for solar
developers eyeing India.
Mahindra Solar One, a prominent developer in the domestic solar energy space,
offers solar solutions spanning on-grid solutions, EPC (Engineering,
Procurement, and Construction), and off-grid solutions.
In this interview with Infraline Energy's Shruti Medha Chaturvedi, Mahindra
Solar One CEO Chandan Guha shares his views on the challenges and opportunities
in the solar energy sector.
What was your strategy when you bid for phase 1 batch 1 as well as for phase 1 batch 2 bidding?
Every year it (bid) comes from two sources, the first source is a 'bottoms up' profit, where you sit down with the banker see a tariff where the project financing is possible, with the EPC cost and the other costs that you have.
The second profit is the 'top down'. You look at the market place see what is going around, look at the EPC cost, look at the interest rates, estimate a winning price if you will. You don't want to be the lowest bidder. You want to be sure that you get allocation, at the same time you want to be a little high in the band to get maximum tariff. And then you look at how can I make it happen? Should I target to reduce my scrip --- 37:50 if I use that word, my EPC contractor to come down from 11 crore to 10.5 crore or 10 crore. Should I negotiate harder with banks to get an interest cost of 11.5% instead of 12%? These are the numbers I play with.
Is EPC the only factor wherein variability is possible?
No, it's a wrong notion that EPC is fixed. There are at least 5-6 different factors that influence bid price. All of them have their own strong contributions, module price is just one of them. The most important lever as far as I am concerned is always the cost of debt -- the interest cost. So any play possible there, any combination of Indian and ECB etc, make the bid more viable. That's no. 1.
The second factor which influences tariff most is the capacity utilisation factor. If one EPC contractor gives, let's say, 10 crore price. I am just taking some numbers for ease of explaining, and two million units of generation, and the other takes say 9.9 crore price, but 1.9 million units of generation I think the 10 crore one becomes more viable. The C.U.F is one of the most important characteristics.
The third which also influences is the degradation number. Standard warranties are given for 1% degradation every year. You have to negotiate with the module manufacturer what should be the estimated degradation every year. That number goes into the model. So there are multiple levers, you have to play with all of them to get your IRR expectation as you discover the winning price.
Coming to foreign exchange volatility, the dollar has been ascending and right now it has stabilised at a higher level. So what about your sourcing for PV cells, is it mostly from foreign manufacturers, is it thin-film, or mostly crystalline?
We are still figuring out the right strategy. In case of the first 5 MW project, it was crystalline silicon manufactured in India, but guaranteed by an international supplier. We wanted to be the first to get non-recourse project financing, so we took no chances as far as reputation of the solar manufacturer is concerned. This time we are still finalising the strategy. We just signed a PPA probably within the next one month we will be clear what we want to do.
Note: Non-recourse financing entitles the lender to seek repayment only from the profit of the borrower, not from other assets. Thus, securing such financing indicates the lender's confidence in the future cash flows from the borrower's project.
What are your views on mandatory local sourcing for crystalline cells?
It has two sides to it. One side is-- Yes, as a developer I would love to have the freedom to use anything best and cheapest available in the world. At the same time, if you look at the government's perspective of boosting the ecosystem of solar with large reputed manufacturers in India. Scale becomes a very important part. So there is a merit in what the government has done as well.
But as you were just saying you are rethinking using crystalline alone for your projects...
We don't know, we could be using crystalline, we could be using thin-film. We are still fine-tuning our strategy. The problem with crystalline this time is cells also have to be manufactured in India. So we are looking very closely at the longevity, and guarantee of cells manufactured in India right now.
So vis-à-vis internationally manufactured cells, is the quality of locally made cells consistent?
See, I can't make a judgmental comment. We are still trying to evaluate.
Coming to international cell prices, with Europe rolling back subsidies partially, there may be a scramble to offload inventories by cell manufacturers. So in case of thin-film cells, considering we are not allowed to source crystalline from overseas, do you think cell prices would fall even further and continue the trend of prices being lower than production costs?
I don't think something like that is going to happen. Because especially if you look at Batch 2, most are very established developers and they have their own strategies. Any point in time, negotiating price to get the best deal...the tariffs are tough so everybody would negotiate hard with EPC contractor and the manufacturer. But I don't see dumping taking place, because earlier, with smaller project sizes, you could do balance sheet and equity funding of projects. But as project sizes get bigger it becomes more important to be able to finance a project. So that consideration should govern.
Do you think smaller players will be weeded out as the industry gets more competitive?
I believe there is going to be consolidation. It happens in every industry that it starts with a broader base and then some people get more competitive than the others. So it's not unusual to expect the same thing happening.
Why did you choose the tariff bidding route instead of the REC route?
REC today is just the policy, some states have ratified it. No state till today has really enforced it. We are looking at the day when REC is enforced, we will do REC-based projects (then). We are doing PPA-based projects because that gives comfort to the lender. When REC-based projects give comfort to the lender, we will do that. 70% of the money comes from my lender, for me his comfort is most important, with respect to which policy, and with respect to what technology.
So could you give us a timeline as to when you see the REC mechanism maturing enough to come into its own?
I have no idea, because it all depends on how the regulators enforce Renewable Purchase Obligation. Once the enforcement happens the resultant scaling up of REC projects will also immediately happen. It's (REC mechanism is) like availability-based tariff and penalties ten years ago enforced after the electricity act. Once they were, people started coming up to do such projects.
Do you think the lowest bid, at 7.49 rupees per unit, would set a broad trend for prices? Could give us a per unit price outlook for 2017?
You cannot drop numbers. It all depends on how the raw materials pricing, polysilicon pricing, how EPC pricing is (sic) going to come down. If it continues to drop the way it has, we could look at 7.5 rupees per unit for solar tariff pretty easily. By next year you could see 7.5 rupees as an average price if module prices continue to drop the way they have over the last 12 months. However, if it stabilises and goes up, you may see tariff also going up.
Even if there is large-scale adoption of solar energy, distribution in India leaves much to be desired with transmission losses ranging from 20-35%. This, coupled with the CUF, which is lower in solar than is for conventional may lead to lower energy delivered to the end-user?
I think just the contrary, because there are transmission losses, because distribution is not far-reaching, renewable energy and especially solar, can reach places where the grid hasn't. So solar, to that extent, once the affordability, and I don't want to use the word grid-parity, once it becomes affordable it will perhaps be the best way to do the last mile connectivity, and eliminate chances of transmission losses to the extent possible. Which is why you will see that one-by-one, solar roof-top cities will become viable, and start taking shape. In fact the first roof-top programme of solar has already started. So I think the fact that not all of the conventional energy produced reaches the end user, will create more demand for possible distributed energy generation in the form of wind and solar.
So basically you are saying that off-grid has potential...
Huge potential, yes.
And currently you are pursuing only grid-connected projects?
We are doing off-grid projects, small roof top. We have already done 3-4 roof top projects. We are looking at more innovative solutions like cardboard chargers. We are looking at things like telecom towers to solarise. So we are looking at the entire spectrum.
Chandan Guha, CEO, Mahindra Solar One for sharing his valuable insights with our
readers. The column 'In-Conversation', is a platform to engage
experts from various sectors to share their views on the different
transformations happening in the Indian energy sector.)