Weekly Update: Pure-play power producers are losing the solar battle, for now
According to a Crisil research note (refer), pure-play power project developers in India are finding it difficult to compete for solar projects against investors that have entered the segment primarily to avail the tax incentives. An investor with existing profits in India from other businesses can claim accelerated depreciation (AD) of 80 per cent of the capital costs in the first year, making the project more viable for them.
- AD makes sense for companies that have high, taxable profits or are willing to the solar plant as an asset on the balance sheet of the entity making these profits
- The difference between the AD and non-AD tariff offered in the bids was more than INR 1/kWh. Many IPPs hope to get new allocations under the NSM
- The opportunity arising out of the AD-driven market will be in mergers and acquisitions (M&As)
Barring the National Solar Mission (NSM) and Gujarat allocations, where separate tariffs have been offered for projects not availing AD, a majority of the bids received for solar projects in India are from companies that can avail AD. AD makes sense for companies that (a) have a high, taxable profits in the current financial year and (b) are willing to hold the solar plant as an asset on the balance sheet of the entity making these profits.
Due to these tax benefits, such investors are able to offer much more competitive bids. For instance, in a tender issued by the Tamil Nadu government in January, IPPs such as Welspun and Lanco Infratech quoted a tariff of INR 8.60/kWh (USD 0.14/kWh, EUR 0.10/kWh) and INR 8.20/kWh (USD 0.13/kWh, EUR 0.09/kWh) respectively. However, the lowest bid has been submitted by a non-IPP, Mohan Breweries, offered to supply power at INR 5.97/kWh (USD 0.10/kWh, EUR 0.07/kWh). Similarly, for allocations in Rajasthan, Azure Power (an IPP) quoted a tariff of INR 8.20/kWh (USD 0.13/kWh, EUR 0.09/kWh) while Essel Mining (a non-IPP) bid for a tariff of INR 6.45/kWh (USD 0.11/kWh, EUR 0.08/kWh). In the NSM and Gujarat policies, the difference between the AD and non-AD tariff offered was greater than INR 1/kWh. Many IPPs are now hoping for the new allocations under the NSM.
To gauge the importance of the AD benefit to the Indian solar market, one can look at wind power: When AD for wind projects was discontinued, capacity additions almost halved.
The opportunity arising out of the AD-driven market will be in mergers and acquisitions (M&As). As most of the newer renewable focused IPPs are aiming for public listing of their companies, they have targets for asset holdings within the company at the time of the public listing. Acquisitions will be the easiest way for these companies to accumulate these project assets.
Non-IPP players, after availing the AD benefit will often want to sell a project asset as soon as the lock-in period, as determined by the PPA, is over. Selling the asset will also make sense for non-IPP players as they often have access to more lucrative investment opportunities. IPPs will be able to improve the viability of any acquired project assets by refinancing them using new financing sources and more innovative structuring.
If such an ecosystem for transferring of assets from non-IPPs to IPPs can be created, it will incentivize the non-IPPs to keep the eventual buyer in mind and ensure quality oriented implementation of projects. Overall, it might not be a bad proposition for sector for now.
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