CHENNAI : Many solar power projects that signed low-tariff agreements with distributors over the past year are likely to face the squeeze over the next few quarters due to a reversal in solar module price trends. While solar module prices, which generally account for over 50 per cent of project cost, had been trending lower over the five years leading up to March 2020, this trajectory has changed since the beginning of this year. If sustained, this price rise is also likely to result in an increase in solar power tariffs that had fallen to record lows last year.
According to industry executives and experts, module prices are on the up because the value of critical raw materials used in their manufacture have spiked sharply since the beginning of this year, driven by a mix of both supply and demand factors. Key materials such as polysilicon, aluminum, and copper, form more than 50 per cent of module costs, and the prices of all three have spiked in 2021. For polysilicon in particular, used heavily in the solar module and electronics industries, prices have risen from around $11 per kilogram in January 2021 to over $28 currently.
Solar modules have, in turn, risen around 10 per cent in value over the past six months. For the developers of over 12 Giga Watt (GW) worth of solar projects signed since March 2020, with tariff obligations of below `2.5 per unit, this is set to significantly reduce returns. “These projects had factored in the price trend of solar modules which had fallen by more than 10 per cent compounded on-year over the 5 year period ending March 2020,” Crisil said in a note earlier this week. “However, since these projects are nearing the module procurement phase, a reverse price trend is visible with module prices spiking to $0.24/watt in June 2021-a good 10 per cent increase since January 2021”.
Ankit Hakhu, Director, Crisil, noted that the landed cost of solar modules will likely be higher by over 10 per cent in rupee terms, and project costs by 6-7 per cent in 2021. “This will ultimately squeeze equity returns by 200 bps, down from a typical range of 10-12 per cent for bid out solar projects having lower tariffs,” he said. The nature of solar project development also puts developers at risk, since modules are usually bought almost a year after the bids are won.
Ratings agency ICRA had made a similar warning earlier this month, noting that the sharp increase in raw materials would affect the debt servicing of project developers. “If sustained, (the price rise) is likely to moderate the debt service coverage metrics for the project developers by about 12-14 basis points,” said Girishkumar Kadam, senior vice-president and co-group head- corporate ratings. And if module prices remain high, future solar bids are also likely to become relatively expensive. “Tariffs could jump by 10-15 paise per unit in order to factor higher module costs and to maintain returns of 10-12 per cent,” warned Varun Marwaha, Associate Director, Crisil.