Bhoo says – Few Questions; few answers


Q: How it became possible for Rajasthan to achieve the lowest tariff ever in Solar when they touched the Rs.4.34/unit mark?

A: The size of the project and ground mount is a huge factor in 2 parameters:

a) Reduction of capital cost due to economies of scale.  Module suppliers dramatically lower prices when the volumes are high for a single project.

b) Very HIGH availability of longer tenure low cost capital.  Some of the capital providers are from countries where there is negative rate of interest and some of them are even willing to accept payments back in rupees completely taking the currency risk on themselves.

Such capital costs are not possible for decentralized small scale plants.  Particularly when installed on rooftops, the infrastructure becomes extremely expensive as the engineering design itself is complex.

Small size of finance less than say $25M (150 crores and above) is very expensive at 12%+ interest rates with very high difficulty in getting beyond 7 years, with very few options available at 10 years.  When someone quotes close to Rs. 6.50 or so for such decentralized plants, in reality, very high risk is taken – with the provider absorbing the risk by paying only the bank principal and interest for the first 10 years, and recovering their investment only from 11th to 15th year.  The providers who are quoting for decentralized tariffs will not make any money from the projects for the first 10 years.

Q: Rajasthan has more sunshine than other parts of India.  Can that be the major cause of this low tariff?

A: Rajasthan has a very high sunshine – but that is less of a factor than the above 2 factors.

Q:  The target set by our Government, who will get benefited, large players or small players?

A: Even in the MW scale bids, right at the moment – Our PM Mr. Modi has intelligently given a HUGE target of 100,000 MW, and hence people want to outbid each other even at a loss to make themselves present with the hope that they can make their money in the future projects – once the crowd is pushed out, and only a few good players remain – when the tariffs will stabilize but costs can come down further by value engineering.  That is the strategy by both large scale players and small scale players.

Q: What for a fact makes this feasible, are there any risks in commissioning after winning the bids?

One important factor is also the creditworthiness of the off taker – which is a factor in case of bids – in many cases, the Government is willing to give bank guarantees against payment.  That has also increased the creditworthiness and hence availability of debt at a lower cost.

All the projects that are announced with big headlines do not end with commissioning and operations.  There is a huge % of projects that are announced and hit the headlines but are not built or commissioned or operated.  That is a problem when we operate on a fringe, with thin margins.  Any small risk makes a huge dent in cash flows and the projects are not solvent.

Q:  You say most of the companies operate on fringe margins, but how they are able to bring in more and more money to invest on projects that does not give them good profit margin?

I feel there is a hidden side – may be a conspiracy theory, or may be true – of the whole thing is money-laundering – that is also bringing the costs down.  We hear that many black-money holders put their black money in the projects.  Say 7 crores per MW is the cost . 5 crores per MW is shown in white and 2 crores is paid in black.  Now the 5 crores per MW white earns a legal, tax-free income that cleans their black money – giving legal tax free returns for the black money invested.  I suspect this is also at play.


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