This blog post focusses on the cost of generation (LCOE or levelized cost of electricity) and the optimal bid for small scale solar projects in India (1-5 MW)
For our analyses, solar projects with and without trackers have been considered.

The analyses was done for three scenarios – pessimistic, likely (acceptable) and optimistic

We have not considered the accelerated depreciation benefit for this analysis. The main reason being, a good % of the first time developers putting up small-medium scale solar power plants are first time entrepreneurs, at least they do not have a profitable enough company right now to take advantage of the AD.

HIGHLIGHTS & INFERENCES

LCOE

Not surprisingly, the LCOE and the tariff for good project IRRs, are far more favourable for projects with trackers than for projects without.

The LCOE is the lowest for projects with trackers with reasonably optimistic assumptions. At Rs 4.77/kWh, this probably represents the lowest generation cost of solar power in the country, for solar power plants in the sub 5 MW scale. For projects without trackers, the lowest LCOE is about Rs 5.2/kWh.

The takeaway? Do seriously consider the use of trackers for your solar power plants. Sure, use of trackers increase the extent of maintenance, and as a result the maintenance expenses, but the additional returns more than compensate for the extra costs.

Bids

The lowest bid that fetches a decent IRR (project IRR of about 13%) for developers at sub 5 MW scale is approximately Rs 5.5/kWh for projects with trackers, and about Rs 6/kWh for projects without trackers. But these projects need to be executed with consummate skill so that the optimistic assumptions are satisfied.

For those who wish to play it safe because they are not sure the optimistic assumptions are too optimistic in their cases, can look at the lowest bids of Rs 6.25/kWh (with trackers) and Rs 6.75/kWh (without trackers)

Generation

With trackers, one can expect generation upto 19.3 lac units per annum per MW. Without trackers, one can go upto 16.6 lac units / MW/ year. Some power plants have reported upto 20 lac units / MW/year with trackers.

INTRODUCTION

Most of the limelight for grid connected solar projects has been on large-scale projects.

In fact, the recent SunEdison tariff bid at Rs 4.63/kWh made everyone starting to wonder if such a tariff is indeed competitive, and if yes, has the levelized cost of solar power dropped to really low levels. Well, for Sun Edison to make decent profits at Rs 4.63/kWh, the LCOE needs to be lower than Rs 4/kWh!

Is the cost of generating solar power really low for large solar power plants of sizes 50 MW and above? (Sun Edison’s total size was 500 MW, expected to be implemented in parcels of 50 MW each) Now, that is a question the answer to which is only of academic interest to most of us because rarely will one of us get a chance to put up a 50 MW power plant and above.

What is of interest to most small/medium developers in the country is the answer to the following question:

For solar power plants of size range 1-5 MW, what could be the lowest tariffs that will still fetch a decent return?

This is the question we decided to answer in detail in this post. Fortunately, we have just completed a couple of assignments at Solar Mango in which we guided developers new to solar to put up solar power plants in the range 2-5 MW. We decided to estimate the LCOE (levelized cost of solar power) and the optimal tariffs using real-life data we collected during these recent assignments.

What we found was surprising: Even for a relatively smaller power plant in the scale 1-5 MW, if the developer is able to optimally undertake all activities including financing, the LCOE is in the range 4.8-5.2 Rs/kWh, and the returns (project and equity IRRs) are at acceptable levels at a tariff as low as Rs 5.5/kWh (with trackers) and Rs 6/kWh (without trackers).

You might think this is not a big deal when we are hearing bid numbers like Rs 4.63/kWh, but we at Solar Mango feel it is indeed a revelation, as the bids for small-size (1-5 MW) have usually been upwards of Rs 6/kWh or at least close to Rs 6 if it is sub-6. But our analysis shows that it is just about possible to get a Rs 5.5/kWh bid that returns a reasonable IRR. This, without the benefit of accelerated depreciation!

I am sure you will be eager to know more details – what are our assumptions, and how do the LCOE and optimal tariff vary for optimistic, pessimistic and acceptable scenarios.

Here we go.

The key to achieving these costs and the tariff bids is an optimal design and construct for the solar power plant. What indeed are the components of such an optimal construct?

Key aspects of the optimal construct

Not surprisingly, such an optimal construct has to focus on two main aspects:

  • Maximising power generation
  • Minimizing costs

Main drivers to maximise solar power generation

  • Design – Optimal design and implementation of the power plant
  • Trackers – Use of trackers
  • EPC – Ensure you go for the right EPC

Main drivers to minimize costs

  • Minimize capital costs – Simple Bargaining – Bargain well to get the premium brands for each of the components at the best possible price
  • Minimize lending rates – Go for the lowest possible lending rates
  • Minimize O&M expenses – Keep the O&M costs at an optimal level
MAXIMISING POWER GENERATION – DETAILS

Well, two of the aspects mentioned above are well-known: paying attention to every important of power plant design, and choosing the right EPC who will ensure he does not cut corners while cutting costs.

What is not so prevalent in India is the use of trackers. Solar Mango estimates that less than 100 MW of solar power plants in India (of the 4500 MW grid-c0nnected power plants installed as of Dec 2015), that is, only about 2% of solar power plants use trackers, compared to much higher %s in the US and Europe. Well, our analysis clearly shows that the use of trackers has the potential to significantly bring down the LCOE of solar power.

MINIMIZING COSTS – DETAILS

Minimizing capital costs

Capital costs for solar power plants are the hottest topic today, as the LCOE depends hugely on this number. We have seen developers trying to reduce this by indiscriminately compromising on quality. We all know this is a bad idea; what we would suggest is to focus on certain components within capital costs that could be reduced without affecting the overall quality of the power plant infrastructure and without any negative effects on the generation. Bargain hard with the EPC, but bargain sensibly!

Minimize lending rates

This is where a good amount of homework can give you significant returns.

Banks in India are lending in the range 11.5-12.5% for small-scale solar plants in the range 1-5 MW. IREDA, the government’s renewable energy lending agency, starts at 10.8% and even for lower credit rated entities, lends at 11.4%

Do your homework, and it is possible you can get the lending rate to 11.5. If you are able to provide 100% collateral, and if you are able to really convince your bank in a big way, 11.5% might just be possible. 

If you are able to get IREDA lend to you, and do your homework well, a 11% interest rate might just be possible for you.

A 11% interest rate could really make an awesome difference as you will see in the analysis that follows.

Minimize O&M expenses

O&M expenses account for 5-7 lacs/MW/year for small scale solar power plants. This plays a minor role overall, so don’t be too bothered. But if you can save a couple of lacs per MW, why not. But if you feel the O&M quality could be compromised by the EPC if you ask for a lower O&M price, don’t bother trying to reduce it. That would really be penny-wise, pound-foolish.

More details on specific aspects

CUF & Generation

Now, this is obviously one of the key levers.

For solar PV power plants without trackers, if these are installed in regions with good DNI (higher than 5.5 kWh/m2/day), a generation of 15.5-16 lacs/annum (about 18% CUF) in the first year and a 0.5-1% decrease year-on-year until the 25th year are acceptable numbers. Optimistically, one can perhaps go up to 16.5 lacs per annum / MW.

For solar PV power plants with trackers, an optimistic CUF is 21% (some might say even 22%; there are power plants that have achieved upto 22% CUF with trackers, but these still seem to be the outliers in terms of high generation) and an acceptable CUF is 19%, if these are installed in regions with good DNI (higher than 5.5 kWh/m2/day). These correspond to generations of 19 lac units/MW/year optimistic and 18 lac units/W/year acceptable. Similar to the one without trackers, a 0.5-1% decrease year-on-year until the 25th year are acceptable numbers.

Total Capital Cost

With today’s prices, you can get total capital cost of a 1 MW solar power plant with trackers at just above Rs 6.2 crores per MW. We have taken this as Rs 6.2 crores.

Types of Panels Used

We are looking at using panels from tier 1 solar module makers, such as Trina, JA Solar etc.

Inverters

We are looking at using inverters from top tier makers such as ABB.

O&M Costs

We have considered annual O&M costs to be around Rs 7 lacs / MW for O&M of tracker based solar power plants. For those without trackers, the O&M costs could be much lower, perhaps about Rs 4-5 lacs/MW/year

Transformers, Cables and other Electricals

All these are from prominent and reputed makes/brands

Trackers / Mounting Structures

Again, we are considering trackers from prominent Indian tracker + mounting structure makers. The mounting structure/tracker market is indeed relatively unorganized compared to inverter and panel markers, and hence getting standard prices for these is not easy. However, we are basing our data based on the real time work we had done in the past few months and actual quotations received.

Loan & Interest Rate

This is a critical factor. Today, many conventional banks (nationalised and private) are willing to give loans to 2-5 MW scale solar power plants at about 12%.

Agencies such as IREDA are willing to give these at 11.5% and less too, though they are keen on lending for scales above 5 MW – that should however not deter you, as IREDA is willing to consider sub 5 MW solar power plants too.

It is however becoming increasingly possible for financing rates to be sub-12%, with the overall decreases in base rates from the RBI, as banks get more comfortable with solar, and with the government really pushing banks to give a better deal to solar power developers.

For small-medium solar power plants (1-10 MW), you can optimistically expect 11% if you are really lucky, 12% in most cases, and in the pessimistic scenario, 12.5%.

We have considered the debt:equity to be 75:25, this is again something many banks today are willing to give.

Loan Term & Moratorium

Loan term

We have taken the loan term to be 12 years, including a year of moratorium. Note that banks are today willing to give up to 15 years tenure.

Moratorium

We have taken a moratorium of 1 year.

Taxes

We have considered a tax holiday for the first ten years, during which only the minimum alternative tax is applicable. Beyond the 10th year (years 11-25), we have taken the corporate tax rate of 35%

All the other cost considerations have been taken as well, including

  • Approval and liaison costs
  • Service room
  • Interest costs during construction
  • Working capital in the beginning stages, equal to 2 months’ revenues
  • Suitable boundary wall
  • Lighting for the entire power plant
  • Roads inside the power plant
  • Grid extension and substation bay extension

Things not considered

  • We have considered normal depreciation with the WDV method, and NOT accelerated depreciation
  • Cost (if any) for securing right of way from solar power plant to substation

Let us look at what we are getting with all the above data, inputs and assumptions

Let’s look at the estimates for the following, with the above data and assumptions.

  • Equity IRR (EIRR)
  • Project IRR (PIRR)
  • DCSR

We have done the above estimates for the following sets of circumstances

  1. With and Without Tracking
  2. For three different sets of assumptions – Optimistic, Acceptable, Pessimistic

Solar Mango can provide expert assistance in putting up small and medium scale MW solar Power Plants. Click here to know more or send a note to ramya@solarmango.com

WITH SOLAR TRACKERS

PESSIMISTIC ASSUMPTIONS

  • Capital Cost: 7 crores/MW (all inclusive)
  • Generation: 20% CUF (approx 17.5 lac units/annum/MW)
  • Interest rate: 13%
  • Generation Loss: 4%
  • Accelerated Depreciation Benefit Applicable?: No

LCOE: Rs 5.97/kWh

Tariff EIRR PIRR DSCR
6 9.8 10.8 0.98
6.25 11.2 11.4  1.02
6.5 12.6 12.04 1.07
6.75 14.7 12.1 1.11
7 15.7 13.3 1.16
7.25 17.4 13.9 1.20
7.5 19.1 14.5 1.25
7.75 20.9 15.1 1.29
8 22.7 15.7 1.34
8.25 24.6 16.3 1.38

ACCEPTABLE ASSUMPTIONS

  • Capital Cost: 6.75 crores/MW (all inclusive)
  • Generation: 21% CUF (approx 18.4 lac units/annum/MW)
  • Interest rate: 12
  • Generation Loss: 3%
  • Accelerated Depreciation Benefit Applicable?: No

LCOE: Rs 5.33/kWh

Tariff EIRR PIRR DSCR
5.3 (LCOE) 9.8 10.3 0.99
5.5 11.1 10.8 1.03
5.75 12.7 11.5 1.08
6 14.5 12.2 1.13
6.25 16.3 12.9 1.19
6.5 18.1 13.6 1.24
6.75 20.1 14.3 1.29
7 22.1 14.9 1.34

OPTIMISTIC ASSUMPTIONS

  • Capital Cost: 6.5 crores/MW (all inclusive)
  • Generation: 22% CUF (approx 19.3 lac units/annum/MW)
  • Interest rate: 11%
  • Generation Loss: 2%
  • Accelerated Depreciation Benefit Applicable?: No

LCOE: Rs 4.77/kWh

Tariff EIRR (%) PIRR (%) DSCR
4.75  10.3  10  1.02
5  12.2 10.8  1.08
5.25  14.1  11.5  1.13
5.5  16.1  12.5  1.2
5.75  18.2  13  1.25
6  20.4  13.8  1.31
6.25  22.7  14.5  1.37
6.5  25  15.7  1.43

WITHOUT SOLAR TRACKERS

Now, let’s do the same calculations as above, but this time, without trackers. Thus, an overall cost of Rs 5.75 crores/MW is acceptable, and a generation of about 16 lac units is acceptable.

PESSIMISTIC ASSUMPTIONS

  • Capital Cost: 6.6 crores/MW (all inclusive)
  • Generation: 17% CUF (approx 14.9 lac units/annum/MW)
  • Interest rate: 13%
  • Generation Loss: 4%
  • Accelerated Depreciation Benefit Applicable?: No

LCOE: Rs 6.62/kWh

Tariff EIRR PIRR DSCR
6.6 9.3 10.5 0.97
6.75 10.1 10.9 0.99
7 11.4 11.5 1.03
7.25 12.7 12 1.07
7.5 14.0 12.6 1.11
 8  17  13.7  1.19

ACCEPTABLE ASSUMPTIONS

  • Capital Cost: 6.35 crores/MW (all inclusive)
  • Generation: 18% CUF (approx 15.8 lac units/annum/MW)
  • Interest rate: 12%
  • Generation Loss: 3%
  • Accelerated Depreciation Benefit Applicable?: No

LCOE: Rs 6.08/kWh

Tariff EIRR PIRR DSCR
6.1 11.3 10.9 1.04
6.25 12.2 11.3 1.06
6.5 13.7 11.9 1.11
6.75 15.4 12.5 1.16
7 17.0 13.2 1.21
7.25 18.8 13.8 1.25
 5.2  20.6  14.4  1.3

OPTIMISTIC ASSUMPTIONS

  • Capital Cost: 6.1 crores/MW (all inclusive)
  • Generation: 19% CUF (approx 16.6 lac units/annum/MW)
  • Interest rate: 11%
  • Generation Loss: 2%
  • Accelerated Depreciation Benefit Applicable?: No

LCOE: Rs 5.18/kWh

Tariff EIRR PIRR DSCR
5.2 10.4 10 1.02
5.5 12.4 10.8 1.08
5.75 14.2 11.5 1.14
6 16.1 12.2 1.19
6.25 18 12.9 1.25
6.5 20 13.6 1.3

SUMMARY for SMALL SCALE MW SCALE POWER PLANTS

All data in Rs/kWh

  With Trackers Without Trackers
LCOE Optimal Tariff for Project IRR of about 13% and DSCR of 1.30 LCOE Optimal Tariff for Project IRR of 13-13% and DSCR of 1.30
Pessimistic Assumptions 5.97 6.75-7 6.62 7.5-7.75
Acceptable  Assumptions 5.33 6.25-6.5 6.08 6.75-7
Optimistic  Assumptions 4.77 5.5-5.75 5.18 6-6.25
HIGHLIGHTS & INFERENCES – REPEATED FOR EASE OF READING!

LCOE

Not surprisingly, the LCOE and the tariff for good project IRRs, are far more favourable for projects with trackers than for projects without.

The LCOE is the lowest for projects with trackers with reasonably optimistic assumptions. At Rs 4.77/kWh, this probably represents the lowest generation cost of solar power in the country, for solar power plants in the sub 5 MW scale. For projects without trackers, the lowest LCOE is about Rs 5.2/kWh.

The takeaway? Do seriously consider the use of trackers for your solar power plants. Sure, use of trackers increase the extent of maintenance, and as a result the maintenance expenses, but the additional returns more than compensate for the extra costs.

Bids

The lowest bid that fetches a decent IRR (project IRR of about 13%) for developers at sub 5 MW scale is approximately Rs 5.5/kWh for projects with trackers, and about Rs 6/kWh for projects without trackers. But these projects need to be executed with consummate skill so that the optimistic assumptions are satisfied.

For those who wish to play it safe because they are not sure the optimistic assumptions are too optimistic in their cases, can look at the lowest bids of Rs 6.25/kWh (with trackers) and Rs 6.75/kWh (without trackers)

Generation

With trackers, one can expect generation upto 19.3 lac units per annum per MW. Without trackers, one can go upto 16.6 lac units / MW/ year. Some power plants have reported upto 20 lac units / MW/year with trackers.

Solar Mango can provide expert assistance in putting up small and medium scale MW solar Power Plants. Click here to know more or send a note to ramya@solarmango.com