Bridge India

India exploring solar bids in dollar terms to bring down tariffs

Based on a recent report (refer), the government seems to be considering to cut solar tariffs in India by offering power purchase agreements through bids in dollar terms. The idea is that the ministry would help create a (real) hedging fund with a corpus of INR 60 billion (approximately USD 1 billion) primarily by charging developers a hedging fee of INR 0.90/kWh (1.5 US cents/kWh). Such a scheme would help developers access international capital and avoid reduce the currently high hedging costs of around 6%.

  • Pooling of hedging costs coupled with government’s support likely to  make solar option attractive to discoms
  • According to BRIDGE TO INDIA, a realistic expectation for solar tariff would be INR 5.8/kWh, around 9% lower than current tariffs
  • We believe that government to focus on increasing the tenor of debt financing from ca. 14 years to 20 years, that alone could reduce solar tariffs by about 7%

The thought behind this is that pooling the hedging costs and putting the government’s weight behind it, will significantly reduce the cost of currency hedging in the market. This would reduce the cost of capital and thereby the cost of solar power, making it more attractive to distribution companies. This is a creative, new idea and shows that the government is thinking out of the box to make its ambitious solar targets real.

The report states that the mechanism could reduce solar tariffs by as much as 40% to bring the down to INR 3.60/kWh (6 US cents/kWh). With the proposed hedging cost of INR 0.90/kWh (1.5 US cents/kWh), effective tariff would be INR 4.50/kWh (7.5 US cents/kWh), very close to the world’s lowest as currently seen in the Gulf region.

BRIDGE TO INDIA’s own calculations show that with an effective interest rate of 5%, the tariff for a 50 MW solar project could be in the range of INR 4.9/kWh (8.3 US cents) to INR 5.5/kWh (9.2 US cents/kWh). This is 14-23% lower than the current tariff/kWh of about INR 6.4 (10.6 US cents/kWh) but considerably higher than the government’s estimate of INR 3.60/kWh (6 US cents/kWh). With the hedging cost of INR 0.90/kWh (1.5 US cents/kWh), a realistic expectation for solar tariff would be INR 5.8/kWh, around 9% lower than current tariffs. To us, therefore, it seems that the numbers indicated by the government are too aggressive.

Another moot point is the level of international lending appetite for Indian solar projects. Our view is that apart from certain multi and bi-lateral financing institutions (for example, IFC, US Exim, KFW), there is actually very little demand for Indian solar projects in the international debt markets.  Hence, irrespective of the proposed cost benefits, any approach that targets hedging costs is unlikely to be a silver bullet solution for reducing the costs of Indian solar projects.

We believe that the government should instead be looking at developing indigenous financing solutions, particularly with a view to increasing the tenor of debt financing from ca. 14 years to 20 years. That alone could reduce solar tariffs by about 7%.


  • I find the tariff of Rs. 5.8 / kWh very confusing. Your tariff estimates seems to be too low.

    The LCoE of Rooftop Solar PV is hovering around Rs. 7.25 / kWh. While utility scale could be less, can it be as low as you indicate? Also, latest tariffs published by Karnataka in 2014 is at Rs. 8.4 / kWh.

    What am I missing here?

  • Normally in any business, the R&D budget is moderate and thereby its Risk on the overall business is accordingly in the affordable range. R&D budget is not formaing the main component of the overall business budget… However, for the present Govt at the Centre is more aggressive on the R&D fronts. Every where and on every fronts it is only thinking of R&D…. the R&D has become the main business now…. thereby the Risk of this country has increased manifold….. I would like to give full credit to the advisers of this Govt who are taking the leadership to the ride without even making the leadership realised of the same……

  • Tobias – I think you are underestimating how powerful this government solar financing / hedging idea is. The global financial markets are totally awash with debt capital and for long dated US$ bonds, the going rate is down around 2% pa. With the government of India involved, the access to foreign debt capital in US$ terms for Indian solar projects could be really huge, like US$100bn or more in a relatively short order of say five years. Add in a margin for Indian sovereign risk and the cost of hedging back into Rupees, and the impact of solar costs in terms of the available Rupee PPA could be as dramatic as Minister Goyal has suggested. Combined with your suggestion of extended maturity debt out say 20 years, and this can rapidly open up a significant market for funding for India’s 100GW of solar target. The global Green Bond market has only really developed in the last two years, but it is doubling in size every year and looking for a more diversified base of issuers. The global capital markets are huge and ready to step up with capital for the right, risk adjusted return profile. The US$ denomination is key – there is no way the global market can bare the Rupee currency risk, as Goyal has realised. Keep up the great work. Tim Buckley, IEEFA

  • I have done extensive modeling with US ExIM financing terms for a 18 year loan. I believe anything less than Rs. 7.5 tariff, projects is unrealistic. Even with currency hedging, initial installation costs for US ExIm based financing are much higher compared to the current assumptions of costs using Chinese or Indian components.