THERE IS A WAY TO REACH RS 1 / KWH

Solar  Power :  Internal Rate of Return

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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 :

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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  %

·         For details, read : http://mnre.gov.in/file-manager/UserFiles/Draft-Report-Study-on-ERR-for-RETs.pdf

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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 ?

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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 )

https://www.thenational.ae/business/energy/world-s-cheapest-prices-submitted-for-saudi-arabia-s-first-solar-project-1.663842

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 :

Solar Power at Rs 1 per Kwh ?  [  29  Jan  2017  ]

https://myblogepage.blogspot.in/2017/01/solar-power-at-rs-1-per-kwh.html

 

 

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

www.hemenparekh.in / blogs