Clean Power

Published on July 27th, 2015 | by Tobias Engelmeier


How Solar Power Is Transforming India’s Energy Market (Part II)

July 27th, 2015 by  

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.

Tags: , ,

About the Author

is working towards a low carbon world. He believes that this is a great opportunity rather than a sacrifice and that it will be driven by business and economic fundamentals rather than by political directive. Developing countries, who can still make a choice about their future energy infrastructure, are in a particularly good position to get the most out of the renewable energy and energy efficiency solutions available. The good news is: A global energy transition is inevitable. The bad news is: current market designs in most countries are not conducive enough and could delay this inevitable transition for just too long to save our climate. So that is what we need to work on: better market designs. (Disclaimer: views in motion...) Companies I am involved with: TFE Consulting ( (sustainability solutions for India), (helping consumer go solar in India), (the business platform for the global renewables industry).

  • hemenparekh


    India’s trade
    imbalance with China is approx $ 36 billion

    With slowing down of Chinese economy and speeding up of Indian economy , it is
    quite possible that this may get worse

    How ?

    > To grow at a faster rate , India will need to import more raw
    materials and components from wherever these can be got cheaper

    > To counter its own slow down , Chinese companies will compete

    fiercely ( with the rest of the World ) to
    export its products to


    This is evident in supply of PV Solar Panels from China, where Chinese
    companies have dropped their prices drastically

    This price drop has enabled Chinese companies to export to India, PV Systems
    worth :

    > Rs 352 Crores in 2010-11

    > Rs 3,745 Crores in 2014-15

    Result :

    > India’s domestic power output , using PV Systems , went up from
    1,000 MW in 2010-11 to 4,000 MW in 2014-15 !

    > Average solar power tariff went down from Rs 17 per unit to Rs 5 per
    unit !

    Now , Indian PV System Manufacturers are very unhappy with this Chinese ”
    dumping ” , for two reasons :

    > Their annual production capacity is only 1300 MW of PV Systems

    > They cannot match the Chinese prices

    But the Power Minister seems to be saying :

    ” My target for Solar energy generation is 1,00,000 MW by 2022 .

    Of this, Indian Manufacturers can deliver, no more than 10,000

    And I want to bring down Solar Power tariff below the current


    This is possible only when ” Rs / MW of installed capacity

    becomes less than that for coal-based power

    So , I must buy Solar Plants at less than Rs 5 crores / MW of


    Only Chinese companies can supply me at Rs 3 Crores / MW

    For 1 lakh MW ( 100 GW ) target , I need Rs 3 lakh*crores funds

    And the Chinese companies will also get me ” Suppliers Credit
    ” @


    Last week , 649 companies from all over the World , bid for 20.6

    GW of Solar Power auction in Brazil

    Brazil expects to place orders by Nov 2015

    I must place my orders on Chinese Companies before Brazil ties up

    their production
    capacities !

    Remember , 100 GW of Solar Power will help us,

    > Light up 5 Crore homes ( @ 50,000 homes / 100 MW )

    > Generate 15 lakh ” green jobs ”

    > Raise our GDP by 0.5 %

    Must act fast ! !

    Only thing Power Minister would not say publicly is :

    ” If importing Solar PV Systems from China worth Rs 3 lakh*crores is
    going to worsen our trade balance , please treat it as a welcome problem !


    hemen parekh

    03 Aug 2015


    • Bob_Wallace

      You expect your message to get across when presented in that form?

  • Ronald Brakels

    As reported in the earlier article, the fact that the cheapest solar PPA in India is now equal to a run of the mill PPA for coal is great news. Even if no allowance is made for future costs of greenhouse gas emissiosns and other pollution – which is not a sensible thing for a business person to do – after 20 years or whenever the PPA is over, a coal plant is going to have to sell its electricity on the market where it might only be worth a few cents a kilowatt-hour while still having to pay the cost of coal, maintenance and repairs. While for a solar farm, after 20 years its fuel will still be free and maintenance costs will still be minimal. This will help tip the balance in favour of solar, as will the likelyhood of coal’s externalities being priced in, at least to an extent, in the future.

  • sukumar

    the best way to expand in India will be again Roof Top Solar Power in the cities and mini power plants for a village.The entrepreneur nature of people will explode the solar power uses, if 12 % return with depreciation benefits to one and all that is salaried class also shall be made available.but the state govt are yet to get active and bring clarity on net metering.

  • UKGary

    Some international developers such as Japan Softbank have financing costs far below Indian domestic companies, and can hedge for currency risk lowering their overall operating costs.

    Not spoken about much in India are commercial rooftops – these will provide a ready market for the electricity in the building on which they are mounted, and do not have the same issues with split land ownership.

    • Nilesh Patel

      The Government has dedicated 40GW allocation aside for next five year for rooftops and small solar projects per say. Though actual implementation may differ based on scheme being announced by government(s). Beside the western rooftop business model is very unsuccessful in INDIA so far. ( Gujarat Gandhinagar 5 MW rooftop project owner’s had worst experience working with private rooftop model, ended installing on government rooftop most part)

  • JamesWimberley

    Isn’t equity return calculated in constant rupees? In that case, 12% is very reasonable. The debt cost may look about the same, but it is set in nominal, depreciating rupees, in real terms only 6%. Such returns are a sign of a competitive market, not a cause for concern. Note that renewable energy plants are very low risk. With a PPA in place, and the gear covered by long-term warranties, the only big worries are the purchaser (typically a state-owned distribution company) going broke, and retroactive changes in policy. There is next to no technical, marketing or competition risk. In the USA, returns on renewable yieldcos will be evaluated against other low-risk assets like municipal or corporate bonds.

    • Bob_Wallace

      Thanks, again, for bringing such high quality information and insight to the discussion.

    • Dear James, thank you for the comment. Equity returns are NOT in constant, but in nominal Rupees. In India, inflation is not traded (as far as I know), so it is impossible to have constant rupee returns. A 12% nominal equity return is hardly worth it, because one can get low risk (and low work) investment returns of 10% in India.

Back to Top ↑