The recent bid by SunEdison of Rs 4.63/unit for the 500 MW solar PV block of Andhra Pradesh has set the market talking about how fast the cost of solar is coming down

At the same time, those in the know are asking whether SunEdison is quoting unsustainably low prices and shooting itself in the foot.

Well, it is difficult to the answer the query above without having all the data SunEdison worked with (and which we will never be able to get), but we can certainly do a bit of independent thinking.

Let’s look at the major cost components for solar PV power, almost all of which are upfront, the only major operational expense being the interest and principal payout on loans.

The capital cost of solar PV has indeed come down, and I can say with a good amount of confidence that the cost per MW (AC) is indeed Rs 6 crores or slightly lesser than that. How am I so confident? Because we just completed a detailed evaluation for one of our clients, and analysed quotations from over 10 vendors for the same.

That then brings it to the loan component. At 12-13% interest rates, it is almost impossible to get a generation cost of Rs 4.63/unit or less – it is more like Rs 5.75-6/unit. But at a much lower interest rate, say 6-7%? It starts becoming a bit more possible.

But even at 6% interest rate, you got to be extremely lucky to get a generation cost less than Rs 4.75/unit.

Now, if you were to include accelerated depreciation along with a low interest rate, yes, it would indeed be possible to get the generation cost to somewhere around Rs 4.6/unit levels.

Finally, the number of units generated. Fixed tilt solar farms (the term used for the conventional solar PV farms without trackers), can give up to 16 lakh units per MW (AC) per year. Now, it is possible with ingenious design and good maintenance to increase it by a notch, perhaps up to 16.5 lac units per MW per year.

Now, consider all the above variables, and you will see a picture emerging:

  • Lower your capital costs as much as possible – at 500 MW scale, SunEdison could probably bring down capital costs to a significantly lower number than Rs 6 crores /MW, perhaps 5.6 crores /MW?
  • Much lower interest costs. SunEdison being a global firm is undoubtedly securing financing at rates decisively lower than 12%
  • Accelerated depreciation: I doubt SunEdison can avail of AD benefits as I doubt they are making serious profits right now.
  • # of units generated – Being a global solar PV firm, SunEdison perhaps has a few tricks up its sleeve when it comes to generating high number of units from a solar PV power plant (though, mind you, large companies such as SunEdison rarely design or build these farms themselves, these are outsourced to large EPC companies).

Now, if you factor in that SunEd could be doing really well on three of the four (except AD), one might just about see the cost of generation in the vicinity of Rs 4.63 / unit.

But even then, it has a touch-and-go feeling.

What do you think?

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