February 2016

CRISIL Opinion
Bidding aggression set to recoil on solar projects
 CRISIL Opinion

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Background : The government proposes to allocate 3,000 mw of solar photovoltaic projects under National Solar
Mission (NSM) Phase II - Batch II, awarding for which is expected to complete by the end of next fiscal. As of
January this year, bidding for 1,520 mw of projects has already been completed. This includes a 1,000 mw [850
mw under open category and 150 mw under domestic content requirement (DCR)] in Kurnool Solar Park, Andhra
Pradesh; a 420 mw in Bhadla Solar Park, Rajasthan; and, a 100 mw in Uttar Pradesh under non-solar park open
category allocations. Power purchase agreements (PPA) for all these projects would be signed with NTPC Vidhut
Vyapar Nigam Ltd (NVVN), the power trading arm of National Thermal Power Corporation (NTPC). For the salient
features of the scheme, please refer to Annexure I

In this note, CRISIL Research assesses the economics of these bids.

Key conclusions

Foray of large foreign and domestic IPPs with access to cheap foreign funding, lower expectation of returns
and large scale of projects under execution has led to aggressive bidding
Bidding to remain aggressive at Rs.4.0 - 4.5/unit with falling capital costs, improving efficiencies, rising scale
and significant interest from large players
We expect equity IRR to be low at 12-14 per cent; debt servicing unlikely to be an issue
Nevertheless, adequate payment security in PPAs with NVVN, ready land and evacuation infrastructure has
significantly reduced project execution risk, leading to aggressive bidding

For the 1,520 mw of allocations under Phase II Batch II of NSM, several bids were conducted between November
2015 and January 2016.

List of successful bidders in recent NTPC Vidhut Vyapar Nigam Limited (NVVN) biddings

Category of Capacity Tariff

State Player name
projects (mw) (Rs/unit)
Sun Edison Solar B.V. 500 4.63
Open
SBG cleantech Ltd (SoftBank) 350 4.63
Andhra Pradesh
Azure Power India Pvt Ltd 100 5.12
DCR
Prayatna Developers Pvt Ltd (Adani) 50 5.13
Fortum Finsurya 70 4.34
Rising Sun Pvt. Ltd 140 4.35
Rajasthan Open
Solairedirect (Engie) 140 4.35
Yarrow Infrastructure (India bulls) 70 4.36
Prayatna Developers Pvt. Ltd. (Adani Enterprise) 50 4.78
Uttar Pradesh Open
Azure Power India Pvt. Ltd. 50 4.78

Projects in AP and Rajasthan to earn equity IRR of 12-14%; DSCR to be ~1.2

CRISIL Research believes these players have bid aggressively owing to ready availability of land and evacuation
infrastructure in solar parks, which otherwise take ~6 months of project execution time and occupy significant
management bandwidth. Moreover, the PPA is signed with NVVN, which ensures adequate payment security
(Long Term - CRISIL AA+; Short Term - CRISIL A1+) given its healthy credit profile and a Rs 28 billion fund being
setup to avoid any default. These factors also reduce the risk to lenders, and thereby reducing financing costs. In
addition, developers are negotiating for loans of 15-17 year tenure (with a one-year moratorium on principal

Classification: INTERNAL

1 11
 CRISIL Insight

repayment) compared with 10-12 years earlier. In fact, for large IPPs, financing costs would already be lower by
200-250 bps (after adjusting for hedging costs), given availability of foreign funding. In line with this, the
expectation of returns of such players (refer table below) would also be lower to that extent.

Return on equity (RoE) of key foreign companies

RoE RoE RoE
Global installed
Player name
base (MW) (CY 2012) (CY 2013) (CY 2014)
Solairedirect S.A (Engie) ~486 45.60 NA 1.1%
Sun Edison ~2500 (1.9)% (12.5)% (12.2)%
First Solar ~1100 (2.19)% 7.6% 7.8%
Source: Company report, Industry

Developers are also relying on reducing capital costs through significant bargaining with equipment suppliers,
given the relatively large scale of capacities under construction. For instance, large IPPs, such as Sun Edison (2.9
gw global & ~0.8 gw in India), ACME (1.5 gw in India), Azure (~0.3 gw in India), Adani (0.8 gw in India) ReNew (0.5
gw in India), Solaire direct (~60 mw in India), etc have a substantial pipeline of projects, which helps them avail
bulk discounts. Moreover, such players usually forward contract (~6 months) the module capacities. Both these
strategies typically reduce the cost of modules by $0.05-$0.06 per watt. Hence, their landed cost of modules is
usually lower (at ~$0.45-0.48 per watt) than the market price of ~$0.50-0.53 per watt.

Prices of solar modules expected to stabilise over medium term

($ per watt)
1.0

0.9
Avg. Prices for FY
0.8 2014-15 is US $ 0.62 Avg. Prices for FY Gradual decline of
per watt 2016-17 (E) is US prices
0.7 $ 0.48-0.53 per watt

0.6

0.5

0.4 Avg. Prices for FY

2015-16 (E) is US $
0.56 per watt
0.3

0.2 Large bidders can get

upto US$ 0.05 per
watt of discount
0.1

0.0
Apr-14 Apr-15 Apr-16 Apr-17
(E)
Crystalline module prices

Source: PV Insights, Industry; CRISIL Research

In Rajasthan, in particular, players are banking on higher plant load factors (PLFs) owing to higher irradiation
which is one of the highest in India at 6.35 (kWh/sqm/day) compared with 5.81 (kWh/sqm/day) in Andhra Pradesh.
In fact, projects set up under NSM Phase I in Rajasthan have reported PLF of 20-21% over the last 2-3 years.

2 2
Average PLFs of plants under NSM (Batch 2)

30%
23% 23%
25% 22% 22%
20% 21% 21%
20% 20% 19% 20%
20%

15%

10%

5%

0%

Q4 FY 14
Q2 FY 13

Q3 FY 13

Q4 FY 13

Q1 FY 14

Q2 FY 14

Q3 FY 14

Q1 FY 15

Q2 FY 15

Q3 FY 15

Q4 FY 15
Avg PLF (Batch 2) - 350 MW

Source: MNRE; CRISIL Research

Taking all this into consideration, we believe equity IRR is expected to be 12-14% for 1,000 mw awarded in Andhra
Pradesh and 420 mw in Rajasthan.

For this analysis, our assumptions include:

Capital costs: For players not availing accelerated depreciation under open category, we have assumed a
capital cost of Rs 51 million per mw. For projects awarded under the DCR category, the cost would be ~10%
higher compared with those awarded under the open category, mainly because of higher cost of domestically
manufactured modules and relatively lower scale of project.
Debt to equity ratio: 70:30
Cost of foreign funding: 10% (including hedging costs)
PLF (Andhra Pradesh): 19%; PLF (Rajasthan): 20%
O&M cost: Rs 0.5 million per mw

PLFs and interest rates vary from project to project. Hence, we have provided sensitivity of these parameters to
equity IRR in the table below.

Sensitivity analysis of equity IRR to PLFs and bid tariffs (Interest rate: 10 per cent)

Tariffs
Equity IRR
4.3 4.6 4.9 5.2
16% 2.0% 4.3% 6.8% 9.5%
17% 4.1% 6.7% 9.5% 12.4%
PLFs

18% 6.2% 9.2% 12.3% 15.0%

19% 8.6% 11.9% 14.8% 17.4%
20% 11.1% 14.3% 17.1% 19.9%
21% 13.4% 16.5% 19.4% 22.4%

Classification: INTERNAL

3 33
 CRISIL Insight

Sensitivity analysis of equity IRR to Interest rates and bid tariffs (PLF: 19 per cent)

Equity Tariffs
IRR 4.3 4.6 4.9 5.2
8% 11.3% 14.3% 17.0% 19.7%
Interest rates

9% 9.9% 13.1% 15.9% 18.6%

10% 8.6% 11.9% 14.8% 17.4%
11% 7.4% 10.6% 13.6% 16.4%
12% 6.3% 9.3% 12.4% 15.3%
13% 5.4% 8.2% 11.2% 14.1%

While returns are expected to be low, we believe debt repayment is not expected to be an issue. As per our
analysis, at a tariff of Rs 4.63 per unit, and with rescheduling of principal repayment for the project, we believe that
the project cash flows will be better aligned with the debt to be serviced.

DSCR to be just over 1.0x, equity returns to be low at Rs 4.63 per unit tariff

(Rs. Mn) CDSCR

7 2.0
1.7
1.6 1.8
6 1.5 1.5 1.6
1.4
1.3
5 1.2 1.4
1.2
1.1
1.0 1.1 1.2
4 0.9 1.0
0.9 0.9
1.0
3
0.8

2 0.6

0.4
1
0.2

0 0.0
Year 10

Year 11

Year 14
Year 12

Year 13

Year 15
Year 3

Year 4

Year 6

Year 7
Year 1

Year 2

Year 5

Year 8

Year 9

Project Cash flows Debt Serviced DSCR

UP projects face greater execution risk, which could hamper returns

Bidding for 10 blocks of 10 mw each in Uttar Pradesh was conducted by NTPC under non-solar park - open
category in January 2016. Under these allocations, a company (Parent group along with subsidiaries) can be
awarded only 50 mw (5 blocks of 10 mw each) capacity. The entire 100 mw capacity was won by two Indian
conglomerates (5 blocks of 10 mw each), Azure power and Adani power at tariffs of Rs 4.78/unit. Also, tying up the
necessary land and suitable grid evacuation infrastructure is the responsibility of the developer.

Suitable land becomes critical in Uttar Pradesh as only few parts of the state, i.e., Bundelkhand and parts of
western Uttar Pradesh, have reasonable level of solar radiation (though still less than Andhra Pradesh and
Rajasthan), and higher solar days. In fact, so far, only ~140 mw out of the ~400 mw tendered in Uttar Pradesh
since 2011 has been commissioned due to land acquisition and clearance issues.

We estimate equity IRRs for these projects at 13-14%. However, they could face execution risk as witnessed in the
past in solar projects in Uttar Pradesh, which could pull down IRRs.

4 4
Aggressive bidding to keep prices at Rs 4-4.50 per unit in near term
Going forward, we expect the bid prices for newer allocations (under Central level allocation in solar parks) to
remain less at Rs 4-4.50 per unit in the near term on account of:

Plunging module prices, improving efficiency: As highlighted earlier, module prices are estimated to drop
10% in 2016. Efficiencies have improved by on average ~0.5% annually over the last 3-4 years and would
continue to improve at a similar pace over the medium term.
Increase in project size: With the availability of land under solar parks, and availability of grid infrastructure,
the average size of projects has increased from ~15 mw under NSM Phase II Batch I to 50 mw in Batch II
Tranche I. This boosts the developers ability to bargain with suppliers and engineering, procurement and
construction (EPC) players, leading to decrease in per MW cost of project.
Availability of foreign funds: The solar market in India is well entrenched, with ~4.5 gw of installed solar
capacities providing satisfactory PLFs, which has given comfort to funding agencies for sanctioning loans to
new capacities. Further, many large conglomerates with strong promoter backing have entered this segment,
which has led to a fall in the cost of capital for new capacities. Therefore, we expect lower bid prices to prevail
in the near term.
New entrants: A few players, including Sky Power, SBG Cleantech (a joint venture of Softbank, Bharti
Enterprise Ltd and Foxconn), Yarrow Infrastructure (a special purpose vehicle of Indiabulls) and Enel Green,
are bidding aggressively to establish their presence in the solar power market.

However, over the medium term, bids are expected to get less aggressive as few players build up sizeable
portfolios and near their targeted capacity additions in the sector, and as module prices stabilise.

Classification: INTERNAL

5 55
 CRISIL Insight

Annexure I

Salient features of NSM Phase II - Batch II:

1. Projects would be awarded on international competitive bidding and PPAs would be signed with the
winners at fixed, levelised tariffs for 25 years.
2. Under the solar park scheme, the host state should provide land for setting up the projects, ensure project
connectivity and purchase the major portion of the bundled solar power.
3. PPAs will be signed by NVVN/NTPC, which will, in turn, sell the bundled power to state utilities that host
the solar parks. Under this scheme, 3,000 mw solar power will be bundled with 1,500 mw of unallocated
power from NTPC thermal power plants.
4. The developer will have the option of scaling up the capacity of the plant, However any excess generation
beyond the capacity utilisation factor range laid down in the PPA will be purchased at a notional support
price of Rs 3 per unit.
5. In order to ensure the payment security for projects awarded under Tranche I, NTPC will create a payment
security/ working capital fund with an estimated corpus of Rs 28 billion. This will be sufficient to cover three
months payments for the bundled capacity of 4.5 gw (3 gw solar + 1.5 gw thermal power) awarded under
the scheme.

Annexure II

List of bidders for 850 mw (under open category) Kurnool Solar Park, Andhra Pradesh

Sr. Bid price Allotted project capacity Bid project capacity

Bidder
No. (Rs/kWh) (MW) (MW)
1 Sun Edison Solar BV 4.63 500 500
2 SBG cleantech Ltd (SoftBank) 4.63 350 350
3 Yarrow Infrastructure Ltd 4.63 500
4 Fotowatio Renewable Ventures (FRV) BV 4.77 50
5 SBG 4.79 500
6 Reliance Clean Gen Ltd 4.8 500
7 ReNew Solar Power Pvt Ltd 4.85 250
8 Briona Power Pvt Ltd 4.87 50
9 ACME Solar Holdings Pvt Ltd 4.89 150
10 Orange Renewable Power Pvt Ltd 4.9 200
11 Fortum Finnsurya Energy Pvt Ltd 5.05 100
12 Solairedirect Energy India Pvt Ltd 5.05 100
13 Shapoorji Pallonji Infrastructure Capital Company Pvt Ltd 5.06 200
14 Mira Zavas Pvt Ltd 5.07 100
15 Tata Power Renewable Energy Ltd 5.07 200
16 Essel Green Energy Pvt Ltd 5.12 100
17 Aditya Birla Nuvo Ltd 5.2 100
18 Prayatna Developers Pvt Ltd 5.2 500
19 Marikal Solar Parks Pvt Ltd 5.25 100
20 Hero Solar Energy Pvt Ltd 5.25 100
21 Enel Green Power Development BV 5.33 50
22 Energon Soleq India Power Resources Pvt Ltd 5.36 500
23 JSW Energy Ltd 5.55 50
24 Azure Power India Pvt Ltd 5.68 200
25 Greenko Energies Pvt Ltd 5.69 50

6 6
Sr. Bid price Allotted project capacity Bid project capacity
Bidder
No. (Rs/kWh) (MW) (MW)
26 Amity Solar Power Park Pvt Ltd 5.75 50
27 Welspun Renewable Energy Pvt Ltd 5.9 50
28 AMPL Cleantech Pvt Ltd 5.93 50
29 Sky Power Southeast Asia Holdings Ltd 5.94 100
30 Azure Power India Pvt Ltd 4.76

List of bidders for 150 mw (under DCR category) Kurnool Solar Park, Andhra Pradesh

Sr. Bid price Allotted project Bid project

Bidder
No. (Rs/kWh) capacity (mw capacity (mw)
1 Azure Power India Pvt Ltd 5.12 100 100
2 Prayatna Developers Pvt Ltd (Adani) 5.13 50 150
3 Yarrow Infrastructure Ltd (IndiaBulls) 5.14 50
4 Mira Zavas Pvt Ltd(Chinas-Trina Solar) 5.18
5 Hero Solar Energy Pvt Ltd 5.25 100
6 ACME Solar Holding Pvt Ltd 5.36 50
7 Tata Power Renewable Energy Ltd 5.41 150
8 NEEPCO Ltd 5.7 50
9 Greenko Energies Pvt Ltd 5.79 50
10 ReNew Solar Power Pvt Ltd 5.99 50
11 Sky Power South East Asia Holdings 2 Ltd 6.62 100

Annexure III

List of bidders for 420 MW Bhadla Solar Park, Rajasthan

Sr. Bid price Allotted project

Bidder
No. (Rs/kWh) capacity (MW)
1 Fortum Finsurya 4.34 70
2 Rising Sun Pvt. Ltd 4.35 140
3 Solairedirect (Engie) 4.35 140
4 Indiabulls 4.36 70
5 Suraksha Realty 4.89
6 ACME Solar 4.4
7 Hero Future Energy 4.44
8 Energon Soleq India power Resources
9 Reliance CleanGen
10 NEEPCO

Note: 13 of the 22 bidders quoted tariffs less than Rs.5/kWh.

Classification: INTERNAL

7 77
 CRISIL Insight

Annexure IV

List of bidders for 100 mw NTPC allocations in Uttar Pradesh

Sr. Bid price Allotted project
Bidder
No. (Rs/kWh) capacity (mw)
1 Prayatna Developers Pvt Ltd 4.78 50
2 Azure Power India Pvt Ltd 4.78 50
3 Acme Solar Holdings Pvt Ltd v 4.79
4 OPG Power Generation Pvt Ltd 4.81
5 Orange Renewable Power Pvt Ltd 5.21
6 Raga Renewable Energy Pvt Ltd 5.41
7 ReNew Solar Power Pvt Ltd 5.78

Analytical Contacts:
Rahul Prithiani Pranav Master
Director, Industry Research, CRISIL Limited Associate Director, CRISIL Limited
Email: rahul.prithiani@crisil.com Email: pranav.master@crisil.com

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