The rupee tariff and the dollar module

Most discussion of currency risk in Indian renewable energy concerns borrowing: dollar bonds, their hedges and what happens to them when the rupee falls. That risk is real, and I have managed it. In my experience, though, the more consequential exposure for a solar developer sits somewhere less visible, in the months between the day it bids a tariff and the day it pays for its modules. This letter is about that window, and about a policy that cost my company an auction and that I would still recommend to any board in the sector.

Where the exposure actually sits

A solar plant's revenue is fixed in rupees for twenty-five years at the tariff we bid. For most of the last decade its largest single cost has been modules bought from overseas manufacturers and priced in dollars. Once the plant is built there is little currency mismatch to speak of: revenue and debt are both in rupees, and the modules have been paid for. Before the plant is built the mismatch is complete. Between bidding and paying for modules, typically twelve to eighteen months, the rupee cost of the largest component can move while the price we will receive for every unit over a quarter of a century cannot.

The arithmetic is unforgiving because margins are thin. In one auction we lost in 2023, three paise per unit separated the winner from us. Modules have recently made up somewhere between a third and two-fifths of project cost, so a 5 per cent move in the rupee during the window changes total project cost by roughly 2 per cent, which is comparable to the entire margin between winning and losing. Yet the common practice when I became CFO, ours included, was to bid at the spot rate and decide on hedging after the power purchase agreement was signed, or not at all.

There is an understandable reason for that practice. Hedging costs money. The price of forward cover in rupees reflects the difference between Indian and foreign interest rates, which over a window of sixteen months has recently amounted to a few per cent of the sum covered. A developer that includes that cost in its bid is bidding higher than one that leaves it out, and in a competitive auction the difference matters.

A bid should carry its own hedge

In early 2023 I proposed to our board that no bid leave the company without either the cost of currency cover for the module window, or a rupee-priced supply contract, inside the tariff. Our chief business officer opposed it with a good argument: competitors were not doing it, and the policy would make us lose auctions. Our Risk Management Committee supported the proposal. In the next auction, for 600 megawatts, we bid ₹2.62 per unit and lost to a bid of ₹2.59. Our cover would have cost about two and a half paise.

The uncomfortable part of the story is what happened next. Over the following sixteen months the rupee moved less than the cost of cover. Judged after the event, bidding at spot would have served us better in that auction. I said so to the board at the time, and I say so here.

I still think the policy is right, for a reason that has nothing to do with forecasting the currency. A company that bids at spot and hedges later is taking a position on the rupee with its shareholders' money, usually without its board ever having decided to take one. The return on a winning bid then depends on something nobody in the company can control or reliably predict. When the rupee weakened by about 4 per cent within a few months from late 2024, two projects we had won earlier that year were already covered, and their returns were unaffected. I do not offer that as proof of foresight, since currencies can move either way. I offer it as a description of what the policy buys: a return that depends on our work rather than on the exchange rate.

Cover for this window also has an accounting side that boards should understand. Under Ind AS 109, forward cover for a forecast purchase of equipment can qualify for hedge accounting if it is designated and documented properly, so that its cost becomes part of the plant's cost instead of a swing in reported profit. If the designation is careless, the same economic decision produces volatile earnings that investors misread. Treasury and the auditors should agree the approach before the first forward contract is signed, not at the year-end.

Domestic modules move the risk rather than remove it

Since April 2022, basic customs duty on imported cells and modules, together with the government's approved list of models and manufacturers for many categories of project, has shifted much of the industry's purchasing to Indian manufacturers. Most of the modules for our 2024 projects were bought from domestic suppliers in rupees. Our dollar exposure in the module window has fallen sharply, and the hedging question has become smaller.

It would be a mistake to conclude that the risk has gone. It has changed shape. A domestic manufacturer that is still adding capacity exposes us to delivery delays, and a late commissioning can cost more than a currency move. Many domestic module makers import cells or wafers themselves, so their prices still carry currency exposure, which they may pass on through price adjustment clauses that deserve careful reading. And a supplier's financial health becomes our concern in a way that a large overseas manufacturer's rarely did, because if a smaller domestic supplier fails halfway through a contract, we have few quick alternatives on the approved list.

So we now assess module suppliers with the discipline we apply to buyers of our power: their balance sheet and order book, their dependence on imported inputs, their record of delivering on time and the terms on which their prices can change. We negotiate fixed rupee prices where we can, accept indexed prices where we must, and price what remains into the bid.

The lesson I take from all this is general. A developer's bid should price every risk the company will carry between the auction and commissioning, whether it is a currency, a duty or a supplier. Leaving one out does not make a bid cheaper. It makes the company's return depend on luck, and its board deserves to know when that is the case.