As can be seen from the Table 1, the landed cost of solar modules, has risen unabated by ~40%⁴ since January 2021, driven by higher commodity prices, primarily of polysilicon and supply chain issues such as shortage of shipping containers.

For instance, mono-crystalline modules costed ~$0.21/kWh in January-February 2021 and were then expected to remain stable or decline marginally. However, by April this fiscal, spot prices had increased to $0.28/ kWh and could remain at this level throughout the year due to strong global demand and continued supply disruptions in China following extended lockdowns amid a resurgence of Covid-19 cases (see charts in Annexure).

Says Ankit Hakhu, Director, CRISIL Ratings, "However, there are three factors that are likely to partially offset the loss on returns - these include better module efficiency, and new revenue streams from carbon credit certificate revenue and lower cost of debt."

Firstly, the newer technologies of bi-facial and mono-perc modules can lead to higher generation per unit of cost compared to the poly- or multi-crystalline modules that were predominant two years back. This may increase P50 plant load factors (PLFs) by ~1.5%, thereby cushioning returns by 130 – 150 basis points.

Secondly, the Environmental, Social and Governance (ESG) focus for corporates - predominantly mining, oil and energy companies in Europe, North America and Australia - has given rise to a merchant market for carbon credits.

Recent contracts for carbon credits have been executed at $6-7 per credit, buoyed by the rising ESG focus. This is generally shared between the developers and counterparties to the power purchase agreements. Even on a conservative basis, $2 per carbon credit for project life would translate to overall revenue of ~Rs 0.8- 1 crore per MW (before 50% sharing), supporting cash flow. This in turn, will contribute to 100 basis points of returns.

Lastly, interest rates for solar developers have fallen significantly since the start of fiscal 2021. Even after factoring recent interest rate hike of 40-50 bps and further such hikes expected, the benefit on reduction in net interest cost is estimated to be about 100 bps over project life as compared to expectations at the time of bidding. This can contribute to ~120 basis points of returns.

That said, the RoE estimates remain sensitive to further rise in module and commodity prices on account of geopolitical issues or supply chain disruptions.

¹ This excludes 5 GW projects of central PSU scheme and 3-4 GW projects in open access/roof-top mode.
² Equity returns are as per CRISIL Ratings’ expectation of equity case at P50 PLF, interest income of 5% on cash balance, and topup of 20% debt at the end of the third year of operations
³ These cost are not pass-through or reimbursed. Hence, they will have to be absorbed by developers leading to a fall in equity returns
⁴ It is assumed that projects will be grandfathered from ALMM and basic customs duty as they were auctioned before respective cut-off dates