Pass-Through Fees to Waive the Electricity Tariff for Certain Solar Projects: Report

New Delhi: The decision of the Ministry of New and Renewable Energy to consider the Basic Customs Duty (BCD) on the importation of solar cells/modules as a “change of law” event and allow its pass-through could increase the tariff of 50 to 70 paise per unit of electricity for eligible projects, a report by rating agency Crisil said on Monday.

According to the national credit rating agency, Crisil said the tariff increase would stay well below the average cost of purchasing power for discoms in India.

“However, more importantly, this announcement provides partial relief for up to 6 GW of solar projects that are already experiencing high project costs, as they are close to reaching COD/import modules starting this fiscal year. “, he added.

The solar energy industry is already affected by a sharp rise in module prices over the past two years. This situation has been further aggravated by the imposition of 40% BCD on the import of modules and 25% on the import of cells as of April 1, 2022. Although the decision is intended to encourage local manufacturing of modules /solar cells and reduce dependence on imports, it increased the cost of the project by around 25%4, reducing the already low returns to developers.

“Based on our discussions with industry players, we estimate that for 50-60% of the 17 GW capacity, the modules can be procured domestically, which keeps them outside the scope of the An additional 10-15% of this capacity was modules imported before BCD was imposed, so treating BCD as a “change of law” event will benefit the remaining 6 GW of capacity, making projects economically viable,” said Manish Gupta, Senior Director of Crisil Ratings.

These projects have been the subject of tenders at prices ranging from 1.99/unit at 2.92/unit, with only ~20% of projects being priced above 2.55/unit, so the increase in tariff pass-through should be of the order of 3- 3.2/unit, which keeps them competitive with the average cost of supplying electricity to discoms in India.

“The tariff pass-through remains only a partial relief as returns from these projects will remain lower than expected at the time of the tender, as module prices have increased by around 50% since then. This contrasts with industry expectations of lower prices, in line with past trends, and was not budgeted in the tariffs during the tender,” said Ankit Hakhu, Director of Crisil Ratings.

“Timely approval by regulators of tariff pass-through is essential to protect further yield erosion,” Crisil said.

The imposition of BCD was likely to impact 17 GW of projects tendered between October 1, 2019 and March 9, 2021. These projects were likely to acquire modules after April 1, 2022 and could not have taken factor customs duties into their bid tariffs, he added.

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