Understanding the basis of Record Low Tariff

So, a few days back we woke up to a record low tariff of INR 2.97 and realized that, it’s become much cheaper (by more than 50% refer) for the buyers Delhi Metro Rail and MP utilities to purchase this electricity (refer). This sets a whole new landscape about how cheap solar energy has become and in the future may become. But, everyone has been toying with the idea of how it could reach this tariff in the first place. How is it POSSIBLE?

Highlights

Let’s have a look at the broad highlights of the PPA (shown in the picture below). Focus on the column on the extreme right. The levelized tariff achieved now is a whole rupee lower than that achieved last year. But then again, in the last year, prices of panels have dropped as well (refer). But let’s try to answer more reasons on how it could get to this tariff.

How could it reach this tariff?

Well, let’s look at the design of the PPA (from what is known in public forums), the escalation per year is 5 paisa which is only 1.6% in a year for 15 years. One of the critical points is that there is Deemed Generation benefit which means that ‘x’ number of units everyday would be paid for by the buyers irrespective of their consumption. Another point that hedges is the risk is that, this is backed by payment guarantee by the State Government which secures the payment even more.

Payback period

Well, not too much can be said about the payback period just yet and nor can too much be said about the IRR as winning bidders have not revealed too many assumptions and terms when finally bidding for a INR 2.97 tariff. So, it remains to be seen how the project is really done.

But, if we have to compare it to the INR 4.34 tariff (last year) with the levelized tariff of INR 3.30 there has been a 23% reduction in the tariff with a 26% decrease in cost of Solar Panels which amounts to 16% decrease in overall project cost. There may be other contributing factors such as reduction in last cost which may have contributed for this project to make sense. But it does remain to be seen.

Who stands to win? Both the buyer and the seller (let’s hope!).