Why Indian Solar Developers Are Quite Dumb In Their Financial Projections and Risk Assessment

Importance of Proper Financial & Risk Assessment of a Project

Indian infrastructure developers have been one of the worst developers in the world in terms of getting their financial and risk assessment. They routinely ignore risks and bid aggressively for major infrastructure projects making preposterous financial projections and assumptions in a bid to win at any costs. Then when the projects go down as mostly they do, they go crying to the government for a bailout. This has been the trend ever since the mid-2000s when the government opened the infrastructure sector to private investments.

This has been seen in almost all infrastructure sectors whether it is roads, power, mining, ports, railways etc. Some of the biggest infrastructure disasters such as the Mundra power plant, the major roads, desalination plants have all been due to the foolhardiness of the infrastructure developers. All the major infra groups in the country have made this mistake time and time again. One does not understand the reason for this stupidity except that they are motivated by short term gains and a lot of the money committed is taken from the government owned public sector banks which are not exactly known for their great due diligence either.

This has been seen in almost all infrastructure sectors whether it is roads, power, mining, ports, railways etc. Some of the biggest infrastructure disasters such as the Mundra power plant, the major roads, desalination plants etc. have all been due to the foolhardiness of the infrastructure developers. All the major infra groups in the country have made this mistake time and time again. One does not understand the reason for this stupidity except that they are motivated by short term gains and a lot of the money committed is taken from the government owned public sector banks which are not exactly known for their great due diligence either.

What went wrong with Solar Developers

Solar energy developers in India have been also guilty of this issue. They have bid aggressively at every stage without taking cognizance of multi fold risks such as forex, interest rates, equipment supply etc. They have been blessed by Lady Luck in the last few years as falling solar panel prices have made their foolish bids seem like a stroke of genius. The solar panel and inverter prices have fallen faster than expected leading to good gains for these developers, as their forecasts of the panel and inverter prices, turn out to be higher leading to good profits as project costs turn out to be lower.

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However, this trend following will now lead to a major blowback as the last aggressive solar bids of INR 2.44/kWh was made on the assumption that solar panel prices will keep falling by 10-20% every year. However, that has not been the case with solar panel prices going up by 20% in the last few months. This has been due to some geopolitical issues such as the looming USA ruling on import duties on solar panel imports and China deferring the lowering of its feed in tariffs to September from June. This will mean that Acem and Softbank face some serious financial viability issues for their Bhadla solar plant projects which were seemingly bid of prices of panels as low as 25 cents/watt. Currently, the prices are near 35 cents/watt throwing their financial model totally out of whack.

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Indian solar industry has seen tons of financial investors and developers entering the market lured by the massive size of the solar opportunity in India. However, most of these developers have employed some really dumb people who are just following the trend like the financial traders during the 2008 global financial crisis. When the tide turns, the naked will be exposed. Unless the solar panel prices fall back drastically again, I think some people will get badly exposed.

Source

“If you compare with three months ago, if it’s a large volume (of imports), price impact may be 2-3 cents a watt. If it’s a smaller volume, the impact is about 5-6 cents,” said Gagan Vermani, managing director and chief executive officer of MYSUN, a solar rooftop solutions provider. Power producers that banked on lower prices to bid for projects will take a hit on profitability, he said.

Some state governments also delayed signing PPAs after an auction due to worries of excess capacity, said PwC’s Rao. This will also affect the viability of projects where bidders have an exposure to panel prices, he said. “In recent times, it had become common for bidders to delay procurement in the hope of buying at lower rates.”