India Ratings and Research (Ind-Ra) believes depreciating rupee, if unhedged, will impact investor returns in bid solar power projects in the event of a significant exchange rate variation between the time of bidding (bid assumptions) and finalisation of module supply agreement. The exchange rate deteriorated 5% yoy in May 2018, when the bids were hovering around Rs 2.5 per unit.

However, post module supply agreements, the developer may opt to hedge the exchange rate risk evaluating the costs involved. As per the agency's calculations, an Rs 1 increase in USD/INR exchange rate leads to a 2 paisa/unit increase in tariff. For instance, if the rupee depreciates to Rs 67 from Rs 65 between the time of tariff bidding and finalisation of terms of payment for module supply (which can easily extend to six to eight months), the solar power developer (SPD) will suffer an overall 4 paisa/unit reduction in margin, which is significant considering the modest margins for SPDs.

The Ministry of New and Renewable Energy awarded about 10.5GW of capacity to SPDs in FY18, when the rupee hovered around Rs 64-65 per USD. The rupee has now depreciated to INR67-68 per USD. India imports about 90% of its solar module requirements. Based on the sample set of Ind-Ra-rated solar projects, solar modules account nearly 60% of the solar project cost. As per Ind-Ra's portfolio, most of the projects generally do not hedge rupee, given the short time frame between negotiation and delivery period. 

The study is based on the premise that SPDs will pass on the full impact of increase in project cost, arising from rupee depreciation to the consumer.