Solar modules form over 50 per cent of total project cost and bulk of them are imported. Thus material variations in their price and exchange rates from expectations at the time of bidding can pose viability risks on the projects.Developers typically buy the modules 9 to 12 months after they win the auction. This wide gap exposes projects to risk of fluctuations in solar panel prices and currency exchange rates. More so because these variables remain unhedged and are also not a pass-through as per agreements.Crisil estimates 12 GW of projects were bid at low tariffs of less than Rs 2.50 per unit since March 2020. These projects had factored in the price trend of solar modules which had fallen by more than 10 per cent compounded on-year over the five-year period ending March 2020.However as these projects are nearing the module procurement phase, a reverse price trend is visible with module prices spiking to USD 0.24 per watt in June -- a 10 per cent increase since January. Remaining components of project cost being land and other electrical equipment have been fairly stable.Ankit Hakhu, Director at Crisil Ratings, said although some support has come from a stronger rupee (assuming no further strengthening of rupee against dollar) at USD 0.25 per watt, landed cost of solar modules will be higher by over 10 per cent in rupee terms and project costs by 6 to 7 per cent in this calendar year. "This will ultimately squeeze equity returns by 200 basis points, down from a typical range of 10 to 12 per cent for bid out solar projects having lower tariffs," he said.Module price rise is driven by an increase in cost of critical raw materials such as polysilicon, aluminum and copper, together forming more than 50 per cent of the module cost.

While prices for these commodities are cyclical, presently they are showing firmness (having increased by 2 tp 25 per cent since January) given the strong demand of these commodities from other industries like auto, construction and electronics.Varun Marwaha, Associate Director at Crisil Ratings, said if module prices remain high at over USD 0.25 per watt, future solar bids are also likely to become relatively expensive compared to the low tariffs of around Rs 2 per unit seen around January. Rise in tariffs may disincentivise distribution companies to sign offtake agreements given they have been wary in the past of signing such agreements where tariffs have been relatively higher.

This may add on to an already high pipeline of capacities bid out but not finding a buyer or even cancellations.