The steep drop in solar module prices came as a shot in the arm for developers who won projects at record low tariffs in 2016. Modules are key components and make up almost half the costs of solar power projects.
According to Mercom Capital Group, a clean energy communications company, crystalline silicon module prices dropped 10% in the last three months and by about 30% over the past year.
This factor, along with softening of interest rates, improved project economics. “Projects with tariffs below Rs5/kWh are suddenly becoming viable due to the decline in module prices, and banks are now finding it comfortable to lend to the solar sector at lower interest rates,” says Mercom. Kilowatt hour or kWh is a unit of energy.
The cost reduction validates developers’ bets on record low tariffs. But it also opens a fresh challenge for developers. Slowdown in capacity additions in major countries like Japan and a strong project pipeline in India means that the local market is set to emerge as a key growth driver for global solar power installations, attracting high competition and exerting downward pressure on tariffs.
Bridge to India, a consultant and information services provider on the Indian renewable market, forecasts the tariffs to fall below the crucial Rs 4/kWh mark even for large-scale projects in 2017. The assumption is based on continuous reduction in solar module prices and domestic interest rates.
Module prices are expected remain soft. But they may not see the kind of drop one saw in 2016. According to Parag Sharma, chief operating officer of ReNew Power Ventures Pvt. Ltd, module prices may stabilize in the short term as global demand is expected to match supply. He expects technological improvements to aid costs, but does not foresee a steep fall in the near term.
“There is very low probability of further reduction of module cost. In fact, with a good pipeline in Q1 and Q2 of this year for module manufacturers, module prices are expected to be stable at the current level for the first half of the year,” adds Sharma.
If indeed module prices stabilize, then the pace of fall in solar tariffs may slow in 2017. One cannot accurately predict the cost and tariff trajectory. But given the execution and power offtake risks (which weigh on project returns), it will be a major challenge for the local developers to win projects at favourable tariffs in the year.
“The challenge for Indian developers will be to bid low enough to win projects in auctions without overly optimistic assumptions. Developers got lucky in 2016, but there is no guarantee 2017 will be the same,” adds Mercom.