As solar tariffs hit record lows, stakeholders gasp for breath

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Solar industry stakeholders are a worried lot nowadays.The record low tariffs, which have fallen below Rs.5 per kilowatt hour (kWh) to Rs.4.34 per unit, are raising uncomfortable questions about profitability and business viability.According to research firm Mercom Capital Group, many projects which were won at low tariffs are awaiting financial closure.“Most” domestic banks are unwilling to fund them due to concerns over the internal rate of return, or IRR, Mercom says.Developers are hoping that EPC (engineering, procurement and construction) and interest costs will continue to fall, ensuring commercial viability. But if prices do not fall as expected, then the bids may run into trouble.Analysts who track the sector say intense competition has substantially lowered the project returns (IRRs), reducing the margin of safety.“Strong competition has led to developers lowering target IRRs to meet their development commitments, but the margins remain sufficient to cover the limited risks,” says Kameswara Rao, partner at PricewaterhouseCoopers Pvt. Ltd (PwC).But rating agency ICRA Ltd’s calculations show that if one considers the borrowing or the funding cost at around 11%, then the companies can find it difficult to generate double-digit returns (IRR).

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