Wed, Sep

Solar Park Bhadla III India: Lowest bid of Rs 2.44 per KWh by ACME -Is it a Finance Game only Or, a big game of technology & commercial viability as well?

Industry Insights

On 12-may-2017, 500 MW capacity in Bhadla Phase-III Solar Park of Rajasthan in India was auctioned.


Outcome of auction - winning bid of Rs. 2.44 per unit and 2.45 per unit LCOE by ACME Solar Holdings for 200 MW and Japan's SBG Cleantech for 300 MW respectively

Here we will try to showcase that how the outcome of auction is not only a finance game but a big game of technology and commercial viability as well.

Before that we will get a glimpse of what is LCOE and how LCOE is calculated:-•        

What is LCOE:-

o    The LCOE is the total cost of installing and operating a project expressed in “Rupees per kilowatt-hour”or “Rupees per unit” of electricity generated by the system over its life. It accounts for:

  • Installation costs
  • Financing costs
  • Taxes
  • Operation and maintenance costs
  • Salvage value
  • Incentives
  • Revenue requirements (for utility financing options only)
  • Quantity of electricity the system generates over its life

How LCOE is calculated:-  

o    LCOE or “Levelised Cost of Electricity” is a ratio puts all costs both fixed and variable in the numerator, and divides it by energy yield (Unit or kilowatt-hour) in the denominator. Both numerator and denominator involving financial "discounting" using “Weighted Average Cost of Capital” to bring costs and energy yields from the future value to the present valueNow we shall highlight that how the outcome of auction is not only a finance game but a big game of technology and commercial viability as well.

Why the LCOE drop from Rs 4.63 per unit in November 2015 to Rs. 2.44 per unit in May 12, 2017 can be interpreted as a game of finance? –

We have seen that innovations to reduce capital costs or increase energy yield are the key to bringing solar to coal fired without subsidies.

Also note the important role played by the "Weighted average cost of capital (WACC)", market beta, discount rate and term (N).

We can say that financial engineering innovations have been a big part of solar companies work to make solar affordable to all. For instance in the western countries like US, Japan, Germany, etc., financial innovations have allowed the “cost of capital” to drop significantly, having a huge impact on affordability of solar as we came to know from Financial Model that 25% decrease in “cost of capital” reduces the LCOE by more than 5 %.

We now need to make similar innovations at the technical and financial levels to enhance the solar penetration and also to bring solar affordably to the emerging markets and the poor.

Why the prevalent emphasis is that the LCOE drop from Rs 4.63 per kilowatt-hour to Rs 2.44 per kilowatt-hour is not only a Game of Finance also a Big Game of Technology & Commercial Viability? –

Chinese factor due to which solar PV module, which account for more than 50% of the entire project CAPEX, costs have fallen faster as the “delta decease” is essentially financed by bleeding module makers from China. This Chinese factor has been originated by the temporary overcapacity in China resulting from delayed projects in several key markets.

As with every emerging technology, the prices for solar cells are falling with the increase in series production and technological innovations. Because similar programs to the ones in the USA are also being launched in other countries like Japan, Germany, Spain, Netherlands etc., it can be assumed that the costs for solar power will continue to fall in the coming years.

Moreover, based on the experience curve, it is needless to say that each time the total production quantity has doubled; the prices for solar modules on the world market have fallen by 20 %.

Solar Power Levelised cost of Electricity (LCOE) of INR 2.44 per unit indicate that Solar power has become cheaper than conventional coal fired power plant in spite of the fact that “grid-connected solar PV (photovoltaic) plants use transmission lines only 20% of the time compared to 70% by traditional plants, which makes it 3.5 times(=70%/20%) costlier to wheel solar power”.

Recently formed Solar Energy Corporation of India (SECI), while sitting on the current installed capacity of 10 GW, targeting to reach 100GW by 2022. Solar panels are mostly imported. So in an optimistic way, the silver lining is that solar panels indigenized manufacturing boom is imminent and on the anvil.

With the increasing participation of the solar power, the operation of conventional coal fired plants will have to be ramped down or up to maintain balance between energy supply and energy demand. This would result in lower plant load factor for conventional coal fired power stations, which are expected to drop to 50% levels from current 60%. This in turn would push up the fixed cost component in the average cost of power and push them out of favor with state utilities.




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