Analysing the falling solar and wind tariffs: evidence from India

Abstract

ABSTRACTIndia needs to accelerate its solar and wind energy capacity addition in order to meet its renewable energy (RE) targets. Besides policy commitments, the cost-competitiveness of RE tariffs facilitates the uptake of renewable power. This paper focuses on the major determinants of RE tariffs, disaggregating the impact of equipment-related factors and financing costs (costs of debt and equity). The paper finds that financing costs account for the largest component – over 50% of RE tariffs. Further, equipment-related factors have been the major drivers of tariff reduction historically, accounting for 73% of the solar tariff reduction between January 2016 and May 2017. However, the paper demonstrates that there could be a role reversal – changes in financing costs could drive future declines in both solar and wind tariffs. This necessitates the de-risking of these sectors through suitable policy- and market-led interventions in order to lower financing costs.