Lenders skip solar projects as tariffs drop

As tariffs quoted in solar bids sink and costs shoot up due to recent imposition of safeguard duty on solar components and a weak rupee, banks and investors are taking a hard look before committing funds for the solar projects.

Kushagra Nandan, co-founder and president of SunSource Energy, told DNA Money that aggressive bidding by some solar developers was making financiers jittery resulting in some power projects finding it difficult to raise funds.

"What is happening is people quote difficult tariffs or lower tariffs than debt service coverage ratio (DSCR). So what they (banks) are saying is developers, who are quoting it (tariffs) properly and where they are ensuring that DSCR are proper and returns are okay, and not very aggressive, those developers are able to finance their projects versus developers who are playing the volume games. They not able to ensure the financial closure," he said.

A member of the Solar Power Developers Association (SPDA), who spoke off the record, said the tariff cap set by the government on manufacturing and hybrid technology projects was another reason solar projects are becoming unviable.

This, he said, was leading to a lower response to tenders floated by the government. He believes securing funds for such projects will be tough for the developers.

"What we are saying is bids related to manufacturing and hybrid technology have a tariff cap, which is a constraint. We are saying there should not be a cap on the tariff. It should be kept open for the market to discover the tariff during the bid process. The bid may be low or high but it will be a more realistically discovered tariff. It will also give comfort to the funding agency," he said.

Solar tariffs have been tumbling as players are indulging in intense competition to acquire huge government contracts through the bidding process. Tariffs fell to Rs 2.44 per unit in the auction for 2,000 megawatt (mw) solar project conducted by Solar Corporation of India (SECI).

There is already a fear that the highly leveraged books of many of the players could see the sector going the power sector way.

Nandan said in segments where there are tariff caps or few takers, projects were getting underbid as developers were not confident of being able to raise finance for them.

"In the segments with tariff caps, tenders are not even getting enough applications for the bids or they are getting underbid because developers are unsure whether they will be able to finance the project at those tariffs. Even falling rupee and safeguard duties too have made the matter worse," he lamented.

According to him, "they (banks) don't want to finance projects which are too aggressive, rightfully so, because they should make financial sense". Nandan said only those with healthy margins were being favoured by banks.

"Input costs have gone up for these projects. Companies and developers, which have robust margins or who understand the risk, are able to finance their projects. Not all of them are able to get financing," he added.

With fundraising becoming difficult for some players, the sector has been witnessing consolidation where fund-starved projects were being acquired by well-financed players.

"People who can finance projects have no dearth of projects as those with financing issues are coming to them and saying can you take a look at our project," he said.

He said many solar companies were aggressively bidding for projects and winning them on bank guarantees but were finding it tough to secure funds when they actually went out in the market.

In the government tenders, they only ask bidders to put bank guarantees in place and later the winner needs to finance the projects. A lot of developers with government contract put in the bank guarantee and once they land the project they try to secure financing. That's when they are getting stuck. They not able to get the finance after the bank guarantee," he said.

He also said with the dollar becoming strong, investors are finding it more lucrative to invest in US and other markets.

"There is more opportunity coming in globally. There is a lot of demand in the US and other markets which offer better returns. So developers or investors, if they have limited capital and have to decide which market to focus on then they are looking at the US because of margins in India are very tight despite the volumes. Opportunity in India is also there due to large volumes but tariff has to be right to get finance. So it's a tricky situation but in the long run people with right financing and developers who can ensure the projects are financeable are only going to survive," said Nandan.

Gaurav Mathur, CEO of a Chinese solar panel and module manufacturer Trina Solar, said many domestic players were trying to protect their margins by sourcing "substandard" and cheaper imported solar equipment and components for their projects.

"To maintain their margins under the prevailing tariff, many developers are going in for substandard and cheaper solar panels. That will get them double-digit returns. Many of these suppliers of solar panels are small Chinese companies. If they go out of business tomorrow, what will happen to their warranties and guarantees," he cautioned.