Renewable auction prices in India for both solar and wind have trended significantly downward in the past few years. Of the more than 35 GW of renewable projects awarded in auctions from early 2017 to June 2019, more than 45% were won by developers quoting tariffs between $37/MWh and $40/MWh. Another 40% of the capacity was awarded at tariffs between $40/MWh and $45/MWh, while the remaining 15% was awarded at tariffs higher than $45/MWh. To reduce their cost of procurement, offtakers have also started fixing tariff ceilings as low as $40-42/MWh for tenders.

These low tariffs raise pertinent questions about the accuracy of the financial and operational assumptions made by winning developers and the economic feasibility of these projects. Developers are making favorable future assumptions about equipment costs, interest rates, and project performance; however, disruption to any of these assumptions could present a serious risk to the economic feasibility of the projects. IHS Markit analysis shows that the return expectations from the low-tariff projects will be squeezed downward along with optimization of costs. Moreover, the projects with tariffs below $40/MWh may not be feasible if assumptions falter.

Figure 1: Recent auction prices in India's renewable tenders

In this environment, developers with access to low-cost financing and with experience of executing and operating high-volume projects will have a competitive edge. The market will consolidate in favor of large portfolio owners, while smaller players with limited financial flexibility will struggle to grow.

India has evolved into a fast-growing renewable market but one with high structural risks. Renewable demand in India has long term visibility, driven by an ambitious target; however, renewables have high policy, market, and performance risks. The combined effect of these risks has a direct bearing on the renewable projects' financials, which, if not dealt with care, can interrupt pipeline development and operation. In view of these risks, the future growth of the market stays deeply hinged on the developmental and operational success of the current investments. Going forward, there is a need for a serious attempt to attune the tariffs to reflect the real costs to allow the market to develop in a sustainable way and ensure that India can effectively deliver on its renewable ambitions.

Learn more about our coverage of the India power and renewables market.

Ankita Chauhan is a Senior South Asia Renewable Analyst for IHS Markit.

Posted 30 August 2019

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.