Addressing The Currency Risk Fluctuations in Solar Projects
Recently, the rupee has been devalued significantly and USD is trading above 82 rupees per USD. The depreciation of rupee is direct consequence of global as well as domestic macro-economic conditions. Controlling the rupee depreciation is not fully in the control of Government of India (GoI). Most of the solar PPAs are in rupee terms however, the profitability of the developers is highly dependent on Rupee-USD variation. As in case of PPAs for coal and gas-based power projects, the Rupee-USD exchange rates are considered in the PPAs however, in solar projects Rupee-USD variation still remains unaddressed.
The recent solar PPAs wherein the developers are to provide round the clock (RTC) electricity does not even address the dollar-rupee variation. Some of these projects will have significant concerns of viability as the developers has no means to hedge the risk of currency variation. Typically, the solar developers borrow cheaper money through USD loans and foreign currency hedging is done through various hedging facilities however, the hedging cost itself is about 3-4 % and additionally there is a market risk premium to be paid by developers for these currency instruments. The depreciated rupee value is also going to increase the overall project cost of the developers as most of the solar components (such as inverters, modules, DC cables) are highly dependent on Rupee-USD index.
Foreign currency hedging facility is one of the method adopted by the developers to insulate their US debts through a hedge fund. In case GOI provides sovereign guarantee for such FX hedge funds, the cost of hedging can be significantly reduced. However generally government does not get in to such transactions to extend the sovereign guarantees against their own currency. In most of the solar projects the foreign currency risk exposure is is borne by the project developer. However in the current scenario, while the Rupee has depreciated unexpectedly high, the developers have to pay a significant to cover their foreign currency debt payment.
The typical interest rates for underlying USD loans is at 5% cost of capital and the market cost provided a 10 years USD to INR is about 7% points. In this case the effective interest rates is about 12%. There are currency hedging facilities available from multiple foreign currency hedging funds which can provide the effective currency hedging from 3% to 5%. There are several possible ways for foreign currency hedging to cover the Rupee-USD variations however, in the current situation wherein the depreciation of rupee is unexpectedly high, the developers effective hedging cost for foreign currency is also going to increase.
The biggest problem is for the Renewable Energy projects being implemented under Solar Energy Corporation of Indian Limited (SECI) round the clock (RTC) renewable tender wherein developers are to provide a mix of power through fossil fuels as well as non-fossil fuel based power sources. These projects are facing not only the foreign currency risk but also the increased fuel prices. The tariff discovered in SECI RTC tenders is about 3.01%/kWh and at such a low tariff in current scenario these projects are nonviable and the developers may not be able to implement these projects due to rising fuel prices as well as significant depreciation in Rupee-USD value.