The recent brouhaha over Sun Edison’s record low bid of selling solar power at Rs. 4.63 per kWh has shaken up the entire solar universe (which just 3 GW in size… by the way) in India. On November 9th an article in the Business Standard mentioned that”there is nervousness among investors in the segment and the supply chain. Experts say leading project developers are putting aggressive bids for 50-200 Mw projects, to be relevant in the market“I am personally quite surprised at the record low rates that have been achieved. It is easy to appreciate that there has been very little (if any) progress with the financial institutions lending to this sector. Banks don’t bat an eye lid when asking for an arm, a leg and your dog’s kennel as collateral or putting deals through committee after committee while the project owner suffers. There was a brief ray of hope for investors when panel prices dropped below 50 cents per watt but a rapidly devaluing rupee nuked the opportunity created and the panel prices remain firm on a rupee level.So when the reverse bidding prices for the sale solar output start touching record lows without much changing on the input sides – it intrigued me to further investigate how these projects made financial sense for investors.Instead of assuming a certain project cost and then getting an IRR based on the bidding done by Sun Edison I decided to and was encouraged to (by a senior executive at a leading EPC) to reverse calculate the project cost by using the tariff as the final product and taking CERC or market accepted levels of return for such projects to find out the truth for myself.First I refurbished a worksheet that I found online on www.IndianPowerIndustry.com and utilised by the website for “Calculation of Solar Power Tariff”. The sheet is quite comprehensive but I found a few errors both clerical & logical that I corrected and figured that for a bid of Rs. 4.63 to make sense the project cost would have to be about Rs. 4.40 crore per MW (all inclusive).The assumptions made were (all figures are in lakhs of rupees) :Project CapacityMW500Return on Equity for 1-10 yearsPer Annum18%Annual Energy ProductionLac Kwh8322return on Equity for 11-25 yearsPer Annum22%Total Project CostRs. Lac440Depreciation till loan repayment5.83%Project lifeYears25.00Depreciation after loan repayment1.54%Equity to be InvestedRs. Lac66000Total O&M expenses for 1st year4000Loan ComponentRs. Lac 1,54,000Escalation in O&M Expenses5.72%Loan repayment periodYears 15Discount Rate9.88%Please note: The discount rates input of “Return on Equity” was 16% (post-tax) as per CERC guidelines. So the final calculation was (70% x 11% x (1-33.99%) + (30% x 16%) = 0.0988The final calculations were (all figures are in lakhs of rupees):Year123 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25Energy Sold (degrading by 0.84% per year)8322 8,252.10 8,182.78 8,114.04 8,045.88 7,978.30 7,911.28 7,844.83 7,778.93 7,713.59 7,648.79 7,584.54 7,520.83 7,457.66 7,395.01 7,332.90 7,271.30 7,210.22 7,149.65 7,089.60 7,030.04 6,970.99 6,912.44 6,854.37 6,796.79O&M Expenses (includes OPEX)4000.04228.84470.74726.44996.85282.65584.75904.26241.96598.96976.47375.57797.38243.38714.99213.39740.310297.510886.511509.212167.512863.513599.314377.215199.6Principal Repayment10266.710266.710266.710266.710266.710266.710266.710266.710266.710266.710266.710266.710266.710266.710266.70.00.00.00.00.00.00.00.00.00.0Interest on Term Loan16422.415293.114163.713034.411905.110775.79646.48517.17387.76258.45129.13999.72870.41741.1611.70.00.00.00.00.00.00.00.00.00.0Return on Equity (Pre-Tax)11880.011880.011880.011880.011880.011880.011880.011880.011880.011880.014520.014520.014520.014520.014520.014520.014520.014520.014520.014520.014520.014520.014520.014520.014520.0Total Outflow42569.141668.540781.139907.539048.538205.037377.836567.935776.335004.036892.136161.835454.434771.134113.223733.324260.324817.525406.526029.226687.527383.528119.328897.229719.6Cost per Unit of Electricity5.15.05.04.94.94.84.74.74.64.54.84.84.74.74.63.23.33.43.63.73.83.94.14.24.4Discount Rate for Net present Value0.099Discount Factor1.00.90.80.80.70.60.60.50.50.40.40.40.30.30.30.20.20.20.20.20.20.10.10.10.1NPV of Cost per Unit4.65Therefore Tariff (Rs./Kwh)4.65I also devised an alternate sheet of my own which wasn’t as comprehensive as the one created by IndianPowerIndustry.com but was based on IRR versus NPV. In this approach I estimated the investment cost by charting out the net cash-flow at the project level and hitting a target IRR (14% post tax) at the project level.Year12345678910111213141516171819202122232425Generation8760868686138541846983988328825881888120805179847917785077847719765475907526746374007338727672157155Tariff₹ 4.63₹ 4.63₹ 4.63₹ 4.63₹ 4.63₹ 4.63₹ 4.63₹ 4.63₹ 4.63₹ 4.63₹ 4.63₹ 4.63₹ 4.63₹ 4.63₹ 4.63₹ 4.63₹ 4.63₹ 4.63₹ 4.63₹ 4.63₹ 4.63₹ 4.63₹ 4.63₹ 4.63₹ 4.63Revenues₹ 40,559₹ 40,218₹ 39,880₹ 39,545₹ 39,213₹ 38,884₹ 38,557₹ 38,233₹ 37,912₹ 37,594₹ 37,278₹ 36,965₹ 36,654₹ 36,346₹ 36,041₹ 35,738₹ 35,438₹ 35,140₹ 34,845₹ 34,552₹ 34,262₹ 33,974₹ 33,689₹ 33,406₹ 33,125O&M-₹ 3,000-₹ 3,172-₹ 3,353-₹ 3,545-₹ 3,748-₹ 3,962-₹ 4,189-₹ 4,428-₹ 4,681-₹ 4,949-₹ 5,232-₹ 5,532-₹ 5,848-₹ 6,183-₹ 6,536-₹ 6,910-₹ 7,305-₹ 7,723-₹ 8,165-₹ 8,632-₹ 9,126-₹ 9,648-₹ 10,199-₹ 10,783-₹ 11,400OPEX-₹ 1,000-₹ 1,057-₹ 1,118-₹ 1,182-₹ 1,249-₹ 1,321-₹ 1,396-₹ 1,476-₹ 1,560-₹ 1,650-₹ 1,744-₹ 1,844-₹ 1,949-₹ 2,061-₹ 2,179-₹ 2,303-₹ 2,435-₹ 2,574-₹ 2,722-₹ 2,877-₹ 3,042-₹ 3,216-₹ 3,400-₹ 3,594-₹ 3,800Cash Before Tax₹ 36,559₹ 35,989₹ 35,410₹ 34,819₹ 34,216₹ 33,601₹ 32,972₹ 32,329₹ 31,670₹ 30,995₹ 30,301₹ 29,589₹ 28,857₹ 28,103₹ 27,326₹ 26,525₹ 25,698₹ 24,843₹ 23,959₹ 23,043₹ 22,095₹ 21,111₹ 20,090₹ 19,029₹ 17,926Effective Tax Rate10%10%10%10%10%10%10%10%10%10%10%10%10%10%10%10%10%10%10%10%10%10%10%10%10%Tax₹ 3,656₹ 3,599₹ 3,541₹ 3,482₹ 3,422₹ 3,360₹ 3,297₹ 3,233₹ 3,167₹ 3,099₹ 3,030₹ 2,959₹ 2,886₹ 2,810₹ 2,733₹ 2,652₹ 2,570₹ 2,484₹ 2,396₹ 2,304₹ 2,209₹ 2,111₹ 2,009₹ 1,903₹ 1,793Net Cash Flow(s)-₹ 2,00,000₹ 32,903₹ 32,390₹ 31,869₹ 31,337₹ 30,795₹ 30,241₹ 29,675₹ 29,096₹ 28,503₹ 27,895₹ 27,271₹ 26,630₹ 25,971₹ 25,293₹ 24,593₹ 23,872₹ 23,128₹ 22,359₹ 21,563₹ 20,739₹ 19,885₹ 19,000₹ 18,081₹ 17,126₹ 16,133IRR14.14%In both models the total project cost I arrived at is between Rs. 4 – 4.40 crore per MW. Now comes the really important part… is that cost realistic or attainable?So the few things that are constant in such projects are:Interest free Performance Guarantee DepositRs. 10 lakh per MWOne-Time Solar Park Development ExpensesRs. 42 lakh per MWService Tax & Other Taxes which I will estimate at 5% of project costRs. 20 lakh per MWPanel investment*Rs. 297 lakh per MWInverterRs. 20 lakh per MWTotal= 389 lakhs or 3.89 crore per MW*Panel costs (this is the tricky piece) for a project of this size should be quite low.. Below market quoted prices for sure. I estimated them to be $0.42-0.44 per watt. However with 30% of the capacity under the DCR category it is my estimation that the average per watt procurement cost will be $0.45 per watt. You can argue that the panel prices may/will fall 10% in 12 months i.e. when they are needed. I would say that the rupee will most like devalue 10% by that time as well negating the gains made in panel procurement cost. Lastly one should also note that a significant percentage of these modules are to be sourced from Indian Panel manufacturers who charge a premium to international rates.Even if I take the average of the “derived project cost” I get 4.20 crore per MW as my project cost.. Deducting the break-up above I get a balance of 31 lakhs per MW to cover the remainder of my expenses which are:
- Balance of Plant Investment
- Transmission Investment
- Labour Costs
- EPC Margin (this goes to Sun Edison if they do their own EPC)
- Project Monitoring Costs
- Legal Costs
- Equipment transportation
- Financing costs like:
- Processing fees
- DSRA
- IDC
- Bank Guarantees
- EMD Costs
- Stamp Duties & other taxes
Do you think that 31 lakhs can cover all this?
