Attn : Shri Sumant Sinha
Dear Shri Sinha ,
I write with reference to your interview in today’s Eco Times ( Renewable Energy to See Consolidation ) , where
you made following points :
·
Clean Energy business is capital intensive and not everyone
can raise that kind of capital in the long run
·
Entire game is about the ASSUMPTIONS
you make for the future and whether you are able to deliver on those
assumptions
·
The few issues are… GST / proposed Safeguard Duty
·
The expectations on RETURNS
has gone down due to a steep FALL in renewable
energy TARIFFS
…. But , they MUST RISE , to make the business more sustainable
All of these are VERY VALID / IMPORTANT issues
In my following blog ( sent as email to all Policy Makers ) , I have
tried to show a way out of this “ not so sunny “ scenario
With Regards,
hemen
parekh / Mumbai
(
M ) +91 - 98,67,55,08,08
Saturday,
27 January 2018
Solar Power : Internal
Rate of Return
Indian
Express ( 26 Jan ) carries following news :
“
Govt estimates 9 – 11 per cent IRR for renewable projects “
The
Ministry of New and Renewable Energy ( MNRE ), has proposed Internal Rate of
Return ( IRR ) of major renewable energy projects to be in the range of 9 – 11 %
While
computing IRR for “ Utility scale Solar “ projects , following have been
assumed :
=================================
ASSUMPTIONS :
· Zero government incentives
· No subsidy
· No market Risks ( Payment delays /
curtailment )
· Capacity Utilization = 20 %
· Capital Cost ( Rs Cr / MW ) = 4.10
· Average Tariff ( Rs / kwh )
= 3.0
· Weighted Average Cost of Capital
= 10.5 %
· Corporate Income Tax rate = 34.61 %
=================================
MY OWN INPUTS :
· Target for
Solar
= 100 GW by 2022
· Achieved till Dec
2017 =
15 GW
· Remaining by Dec 2022
= 85 GW ( app. 1.5
GW per month for each of next 60 months )
· Capital cost /
GW
= Rs 4,100 Cr ( @
Rs 4.1 cr / MW assumed in MNRE study )
· Capital needed per month =
Rs 6.150 Cr ( for 1.5 GW per month )
· Current maximum installation of solar PV
ground mount projects done in a year is 3700 MW
QUESTIONS :
Given
the following “ Negative Factors “ , are Private Indian businesses likely to
come forward with investment of Rs 6,150 Cr , every month , month after month ,
for next 60 months ?
· Solar tariff have already hit Rs 2.4 /
kwh and continue to drop year after year @ 15 %
· Will any bank come forward to lend huge
amounts to Solar projects whose IRR is only 10 % - and might further go down as Solar Tariff drop ?
· How will IRR work out when DISCOMS back
out of legally binding PPA ?
· What happens if proposed “ Safe-Guard Duty “ ( of 70 % ) on imported Chinese PV panels , push up
the Capital Costs ? or , when projects are constrained to buy locally
manufactured panels at much higher prices ?
· What would it do to demand situation if
Roof Top Solar become a cheaper alternative to the consumers ( as compared to
Utility Solar Projects ) , since there is no “ Transmission Costs “
involved and there is possibility to sell the surplus power to DISCOM under “
Reverse Metering “ ?
Despite
these “ Negative Factors “ , is there some way , by which Private Sector can be
motivated to come forward to invest Rs 6,100 cr / month , month after month ,
for next 60 months ?
I
believe , there is !
If
the IRR , instead of hovering around 10 %
, can be raised to 50 % , then we can expect Private Sector to
put up 1.5 GW projects, EVERY WEEK , instead of every month !
Now
, calculating IRR is a bit lengthy / trial-and-error process , employing
formulas comprising “ variables “ such as :
· Weighted Average Cost of Capital,
adjusted with the long-period consumer price index for the past 20 years to
arrive at the real discount rate. ( Taken at 10.5 % by MNRE study )
· Corporate Income Tax rate ( taken
at 34.61 % by MNRE study )
· Initial Amount of Capital
· Potential Opportunity Costs
· Initial Cash Flow
· Subsequent Period-wise Cash Flows (
Future stream of benefits )
QUESTIONS :
How
would the IRR look if ,
· Weighted Ave Cost of Capital was
“ 0 % ( Zero per cent ) “
instead of 10.5 % ?
· Corporate Income Tax rate was “ 0 % ( Zero per cent ) “ instead of 34.61 % ?
In
such a case , could IRR
become 50 % ? ( MNRE study does not
provide enough data for figuring out )
But
if IRR does really turn out to be somewhere near 50 % , will Private Sector rush in to
set up 1.5 GW of Solar projects EVERY
WEEK ?
And
, would they be bothered even if Solar Tariff drops to ONE RUPEE per kwh ?
This
is NOT a fantasy !
Masdar and EDF Energies consortium recently placed the
lowest-ever bids for a solar PV project. The consortium placed
a bid of 1.78¢ / Kwh for a 300 megawatt project in Saudi Arabia. ( ie :
approx. Rs 1.17 / kwh )
One
of the reasons , is :
The lending rate in Saudi Arabia has remained constant
at 2% since 2009 !
Chile recently awarded 2.2 GW in renewables tenders at
an average LCOE of $ 32.5/MWh ( approx. Rs 2.11 / kwh )
HOW CAN WE GET “ RISK-FREE “ CAPITAL AT “ 0 % “
INTEREST RATE ?
Besides showing “ how “ , in my following blog / email
, I also suggested that the Govt approved Solar Power Project SPVs , be exempted from payment
of Corporate Income Tax for 10 years :
I hope , Shri Dipesh Pherwani, Scientist-B, Ministry
of New and Renewable Energy (Email: dipesh.mnre@gov.in) , gets to read my suggestion
28 Jan 2018
