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CERC benchmark solar PV capital costs fall by more than 25% in 2 years

Last week, Central Electricity Regulatory Commission (CERC) passed an order for determination of benchmark capital cost for solar PV projects for the financial year 2016-17 (refer). The order estimates capital cost including cost of equipment, construction, land, transmission and pre-operative expenses of solar PV projects for the upcoming financial year at INR 50.1 million/MW (USD 0.76 million). Based on inputs from the industry due by 10th January 2016, final benchmark capital cost and solar tariff is expected to be notified on 31st March 2016.

  • CERC order shows a capital cost reduction of 17% over the benchmark number for FY 2015-16 (last year decline was 12%)
  • The industry may ask for an upward revision and a separate benchmark for projects with domestic content requirement
  • Rapid decline in capital cost shows how difficult it is for the Indian government to move away from bidding and towards fixed feed-in-tariffs

For current year (FY 2015-16), CERC had pegged the benchmark capital cost at INR 58.7 million/MW (USD 0.87 million), subsequently revised to INR 60.6 million (USD 0.92 million) after industry feedback. We believe that an increase based on industry inputs is likely this year as well. Further, the industry is also likely to seek a separate benchmark capital cost for projects using domestic cells and modules because of the substantial cost difference between imported modules and domestically manufactured modules.

Combined with cost reduction of 12% for the current year, the new benchmark amounts to a total reduction of 28% over 2 years.  This may seem a bit drastic but is consistent with the trend observed in bid tariffs over this period. During FY 2014-15, the average tariffs discovered through bids in Andhra Pradesh (500 MW), Telangana (500 MW) and Karnataka (500 MW) were in the range of INR 6.50 – 7.00/kWh. About one and a half years later, new bids are now expected in the range of INR 4.75 – 5.00/kWh.

The drastic cost reduction comes on the back of significant PV capacity addition in China and sharp fall in polysilicon prices. While most experts have been predicting gradual price reduction of 5-7% per annum over the next few years, some industry observers feel that we will continue to see double digit decline in capital cost in the coming year. A decline of this magnitude in capital cost raises two important implications for the sector. First, it is commercially not viable for the Indian government or any other power offtakers to offer fixed feed-in-tariffs. Second, what is the significance of CERC benchmarks? Based on benchmark capital cost for the current year, CERC has defined the solar power tariff at INR 7.01/kWh. But average bid tariffs during the year have come in sharply lower at rates significantly below INR 6/kWh for all allocations since May 2015.

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