Investors Fear Depreciation in Rupee May Affect Solar Tariffs: Study

“If the rupee depreciates to Rs 67 from Rs 65 between the time of tariff bidding and finalisation of terms of payment for module supply (which can easily extend to 6-8 months), the solar power developer will suffer an overall four paisa per unit reduction in margin, which is significant considering the modest margins for the developers.”

The fear of depreciation in rupee has struck a note of caution among companies investing in bidding for solar power. The fear looms that if left unhedged, the tariffs may increase and in turn will reduce their returns.

According to report by India Rating, this could be due to a significant exchange rate variation between the bidding and finalisation time for projects.

Almost 90 percent of India’s solar module requirements are imported that account to the 60 percent of the total cost of project.

India Rating in a statement said “Most of the projects generally do not hedge rupee, given the short time frame between negotiation and delivery period. Therefore, any further depreciation in rupee will not just have an impact on the investor returns but also lead to increase in tariffs.”

The report says, “If the rupee depreciates to Rs 67 from Rs 65 between the time of tariff bidding and finalisation of terms of payment for module supply (which can easily extend to 6-8 months), the solar power developer will suffer an overall four paisa per unit reduction in margin, which is significant considering the modest margins for the developers.”

India Rating noted the recent round of auctions conducted by NTPC for 750 MW of solar power has witnessed winning tariffs of Rs 2.72-2.73 per unit.

“If rupee depreciates to Rs 72 from the current around Rs 68, the developer will incur a loss of about eight paisa per unit until the actual payments, as currency fluctuation is not covered by the procurer under ‘Change in Law’ or any other clauses under the power purchase agreement (PPA),” it said.

India Rating further said the developers may also opt for reducing direct current to alternating current overloading ratio due to increased module costs, thereby negatively impacting the project’s generation performance.

“Also, any sharp fall in rupee could lead to delays in project execution, if the developer opts to renegotiate the module supply contracts to keep the costs at same levels as assumed for financial closure,” it added.