Indian Express ( 26 Jan )
carries following news :
“ Govt estimates 9 – 11 per cent IRR for renewable
projects “
The Ministry of New and Renewable Energy ( MNRE ), has
proposed Internal Rate of Return ( IRR ) of major renewable energy projects to
be in the range of 9 – 11 %
While computing IRR for “ Utility scale Solar “ projects
, following have been assumed :
=================================
ASSUMPTIONS
:
·
Zero government incentives
·
No subsidy
·
No market Risks ( Payment delays /
curtailment )
·
Capacity Utilization = 20 %
·
Capital Cost ( Rs Cr / MW ) = 4.10
·
Average Tariff ( Rs / kwh ) = 3.0
·
Weighted Average Cost of Capital = 10.5
%
·
Corporate Income Tax rate =
34.61 %
·
For details, read : http://mnre.gov.in/file-manager/UserFiles/Draft-Report-Study-on-ERR-for-RETs.pdf
=================================
MY OWN
INPUTS :
·
Target for Solar = 100
GW by 2022
·
Achieved till Dec 2017 = 15
GW
·
Remaining by Dec 2022 = 85
GW ( app. 1.5 GW per month for
each of next 60 months )
·
Capital cost / GW =
Rs 4,100 Cr ( @ Rs
4.1 cr / MW assumed in MNRE study )
·
Capital needed per month = Rs 6.150 Cr
( for 1.5 GW per month )
·
Current maximum installation of solar PV
ground mount projects done in a year is 3700 MW
QUESTIONS
:
Given the following “ Negative Factors “ , are Private
Indian businesses likely to come forward with investment of Rs 6,150 Cr , every
month , month after month , for next 60 months ?
·
Solar tariff have already hit Rs 2.4 / kwh
and continue to drop year after year @ 15 %
·
Will any bank come forward to lend huge
amounts to Solar projects whose IRR is only 10 % - and might further go down as
Solar Tariff drop ?
·
How will IRR work out when DISCOMS back out
of legally binding PPA ?
·
What happens if proposed “ Safe-Guard Duty
“ ( of 70 % ) on imported Chinese PV panels , push up the Capital Costs ? or ,
when projects are constrained to buy locally manufactured panels at much higher
prices ?
·
What would it do to demand situation if
Roof Top Solar become a cheaper alternative to the consumers ( as compared to Utility Solar Projects ) , since there is no “
Transmission Costs “ involved and there is possibility to sell the surplus
power to DISCOM under “ Reverse Metering “ ?
Despite these “ Negative Factors “ , is there some way
, by which Private Sector can be motivated to come forward to invest Rs 6,100
cr / month , month after month , for next 60 months ?
I believe , there is
!
If the IRR , instead of hovering around 10 % , can be
raised to 50 % , then we can expect Private Sector to put up 1.5 GW projects,
EVERY WEEK , instead of every month !
Now , calculating IRR is a
bit lengthy / trial-and-error process , employing formulas comprising “
variables “ such as :
·
Weighted Average Cost of Capital, adjusted
with the long-period consumer price index for the past 20 years to arrive at
the real discount rate. ( Taken at 10.5
% by MNRE study )
·
Corporate Income Tax rate ( taken at 34.61 % by MNRE study )
·
Initial Amount of Capital
·
Potential Opportunity Costs
·
Initial Cash Flow
·
Subsequent Period-wise Cash Flows ( Future
stream of benefits )
QUESTIONS
:
How would the IRR look if ,
·
Weighted Ave Cost of Capital was “ 0 % ( Zero per cent ) “ instead of 10.5
% ?
·
Corporate Income Tax rate was “ 0 % ( Zero per cent ) “
instead of 34.61 %
?
In such a case , could IRR become
50 % ?
( MNRE study does not provide
enough data for figuring out )
But if IRR does
really turn out to be somewhere near 50 % , will Private Sector rush in to set up 1.5 GW of Solar projects EVERY WEEK ?
And , would they be bothered even if Solar Tariff drops
to ONE RUPEE per kwh ?
This is NOT a fantasy !
Masdar and EDF Energies consortium recently placed the lowest-ever bids
for a solar PV project. The consortium placed a bid of 1.78¢ / Kwh for a 300 megawatt project in Saudi
Arabia. ( ie : approx. Rs 1.17 / kwh )
One of the reasons , is :
The
lending rate in Saudi Arabia has remained constant at 2% since 2009 !
Chile recently awarded 2.2
GW in renewables tenders at an average LCOE of $ 32.5/MWh ( approx. Rs 2.11 / kwh
)
HOW CAN WE GET “ RISK-FREE “ CAPITAL AT “ 0 % “ INTEREST
RATE ?
Besides showing “ how “ ,
in my following blog / email , I also suggested that the Govt approved Solar
Power Project SPVs , be exempted from payment of Corporate Income Tax for 10 years :
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