There is great cause for being optimistic about the transformative power of India’s solar market. In the first part of this series, I outlined the drivers that currently propel the market into an entirely new dimension: real growth on the ground, highly competitive tariffs, and enormous investor interest. However, the optimism remains tapered as real challenges remain.
Here are my main concerns:
Margins: It remains difficult to earn money on solar projects in India. There is strong competitive pressure on tariffs and that percolates down through the entire value chain, leaving bare-bone equity returns of around 15% (at a debt cost of 11–13%), if at all. Many of the larger Indian corporates, by comparison, would not enter a business that does not offer an equity return of at least 20%. In many other Indian markets, such margins are attainable. Under Bridge To India’s technical and financial assumptions, for instance, SkyPower’s record low bid of INR 5 or US$0.08 per kWh yields a return of 12%. That seems hardly worth the trouble.
Why is investor interest so high, then? Leaving aside a group of players who are overoptimistic, take undue risk, or lack market information and a (relatively small) group of players who muscle into the market with strategic pricing, there is a widespread assumption that building a portfolio of projects generates value above the returns of individual projects and that there will be attractive ways of refinancing later.
Weak grids, weaker discoms: The Indian electricity grid suffers from high losses (20%+), frequent technical failures, and a lack of monitoring and maintenance. It is quite far from being a “smart grid” (although Indian load dispatch centres are probably more used to managing the grid actively and reacting to volatility than their American or European counterparts). In order to absorb much more infirm renewable power (and in order to deal with India’s future growth in energy demand), the grid has to be bolstered significantly. The trouble is, the utilities are in very bad financial shape. Their cumulative losses are around US$50 billion, with annual losses of around $10 billion. This financial situation makes utilities reluctant grid investors and non-bankable PPA counterparts.
To its credit, the government recognises the problem and has some good ideas of how to deal with it. One such idea is to unbundle the Indian utilities in order to separate the sale of power (which can be loss-making due to political power pricing, see point below) from grid infrastructure services. If that happens, the grid could become a functioning economic entity with sufficient funds to invest into improvements and expansion. The trouble is, utilities are owned by India’s states. Some will likely move ahead fast (Gujarat, Karnataka, or Andhra Pradesh come to mind), while others will lag behind.
Power pricing: This is a key immediate concern. Different tariff groups in India pay different rates for power. Industrial and commercial customers pay most and cross-subsidise agricultural customers, whose tariffs range between US$0 cents (free) and US$3 cents per kWh. Since the cross-subsidy amount is insufficient (India is a predominantly agricultural country), there is a deficit — see point above.
Utilities often prefer to load-shed (scheduled blackouts), rather than supply power to agricultural customers at a loss. A part if India’s power deficit is, therefore, by design. This limits utilities’ interest in buying any new power at all – whether coal, solar, or other, and is a serious roadblock for the growth of India’s power sector as a whole. The rationalisation of power tariffs is thus a key task to enable not only the Indian solar market to grow, but to ensure a healthy overall electricity sector and the provision of reliable power to consumers.
The challenge lies in politics, of course. India is a democracy and farmers are the largest voter group. In the past, offering them free or subsidised power was a powerful electoral strategy. (Even if, due to load shedding, in reality that often meant supplying no power at all.) However, there seems to be a trend change in Indian voter behaviour (I do hope I am right): away from seeking government benefits that often don’t come and towards seeking opportunities. Good governance seems to be increasingly rewarded. A part of that is providing reliable power to all — as the current government vowed to do — and in order to achieve that, power tariffs are increasing across the country (with the exception of Delhi). Higher power tariffs, in turn, make solar an attractive choice for more and more utilities and end consumers.
Land availability: Buying or leasing large tracts of land in India is very difficult. This is related to issues such as the dispersed nature of privately owned land (requiring a lot of land aggregation), to the fact that a lot of India’s land is designated agricultural land, to the widespread lack of catalogued ownership rights and by extension of these factors to corruption, which blooms wherever money hits lack of transparency. Of course, given the weakness of the grid, finding good land near good evacuation points makes the task even tougher. This is exemplified by the fact that even the government finds it very difficult to aggregate land for the many solar parks it is planning.
On the other hand, more and more solar parks are getting ready and offer solar investors an easy, if often expensive, option. Also, it must be noted that land is not in short supply per se. Bridge To India has estimated that at current cell efficiency levels, India could build around 1,000 GW of solar power on 3.5% of its wasteland (land that is so far not used productively), equivalent to the size of the Fiji Islands or half the district of Barmer in the Rajasthani desert.
On the whole, I am convinced that the challenges can be overcome and that solar will become the backbone of India’s future energy system. The basis of this prediction is that solar will become an ever more competitive energy source.
I am sure that, in a few years, it will, through hybridisation and storage, be able to provide competitive, reliable power. And why not? The market keeps surprising and outpacing itself. If India’s power market and grids will be mended, the solar transformation will happen by design, and will likely involve more utility-scale plants. If not, then the solar transformation will happen by default, and will likely involve more distributed plants.
A great way to stay up to date on Indian market developments is to subscribe to the free Bridge To India newsletter.
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