Solar developers and manufacturers in India are looking at new routes to growth and longevity in this burgeoning renewable energy market, according to Bhupesh Trivedi, CEO of Mumbai-based solar consulting firm REECODE Energy Solutions.
By Bhupesh Trivedi
The solar power market, including its key constituents of power project developers, EPC contractors and module manufacturers, would be better off by staying away from feed-in-tariffs (FITs) and the ambitious government-sponsored 20-GW National Solar Mission (NSM) in India.
FiTs and the NSM have lost value in their current format of bidding process, with offers touching a low of Rs 7 per unit, against existing rates of Rs 7 to Rs 12 per unit for conventional power supplied by various power distribution companies to commercial and industrial users. (Domestic users do receive power at highly subsidized rates across the country).
The vendor market was largely dependent on government policies for their business, with investors showing interest in only those projects that finally won the bids under different state government policies as well as the NSM, to sign power purchase agreements (PPAs) for a period of 25 years.
Free Market Trading
With no dependence on government subsidies or generation-based incentives, manufacturers of solar power plant equipment can look forward to a freer market to sell their products to. Under the central (federal) government’s NSM, it was essential that crystalline module-based power plants bought their modules from Indian manufacturers. There was no such condition set for developers wanting to use thin-film technologies or developers signing PPAs with the state government of Gujarat.
On their part, Indian module manufacturers would be better off exploring smaller projects at the smaller levels of various district or industrial clusters. They would certainly find it difficult to compete against Chinese module manufacturers who would offer the most competitive rates for bigger MW-size solar power projects.
The shift from being a government policy-denominated opportunity to an opportunity determined by industrial and commercial users will further open up the floodgates for investments in solar power sector, reduce government’s subsidy burden, and put the country’s solar plans on the fast-track.
With falling project costs, the logic could go against solar power project developers asking for higher rates. However, promoters of new and under-construction thermal power plants with a total capacity of 42,000 MW are already asking the government for a higher rate under their respective PPAs because of the continually rising cost of imported coal.
So, when conventional power costs in the country are likely to surge from the existing Rs 7-12 per unit levels, it is obvious that a solar power project developer in India is losing money by selling power to the government at a price of Rs 7-7.50 per unit through a power purchase agreement (PPA) that is mutually obligatory for a period of 25 years.
Instead, it makes a lot more sense for an investor or a project developer to shun 25-year-long (PPAs) with governments and use the ‘Open Access’ system to sell power to industrial and commercial users directly. Such users will be keen to pay even more for reliable supply. Solar power project developers can exercise an option too to raise the cost of power supplied at regular intervals over the supposed lifespan of 25 years of the power project, thereby improving profitability in the years to come.
End users v. national grid
With the same business model in mind, some EPC companies have even actually started proposing to their blue-chip clients that they will be open to making the capital investments required to set up a captive solar power plant, provided the clients signed a long-term power purchase agreement with them. It is evident that an investor or developer will gain more by directly supplying to end-users, rather than to the government power distribution companies under long terms PPAs.
That surely raises questions on the significance and value of various state governments’ policies as well as the ambitious National Solar Mission of the central (federal) government of India. One wonders what will happen to these policies and the mission itself, if project developers refrain from bidding to sell power to the national grid.
For the state governments’ policies and the NSM to remain significant, the price offered by the government to solar power project developers will have to become variable over the entire duration of the PPA. If not, it would surely be a losing proposition for a solar power project developer/investor to commit power at such low rates for the next 25 years.
The ‘Open Access’ system enables any power producer to sell power to any user across the country through the national grid, by bearing costs of transmission and distribution losses as well as wheeling and banking charges. These costs may weigh on the profitability of the power project for now. But, committed higher billings over the next few years could provide much higher returns, compared to fixed rates provided under the PPAs with different governments.
The success of the ‘Open Access’ system will also depend on the condition of “minimum committed load” that makes an industrial user to pay a minimum bill amount every month to the local distribution company, irrespective of how much of conventional power was consumed.
Market rules and Regulations
But, different regulations in the country have already cleared the way for other precedents where large industrial units set up gas or coal-based captive power plants. A similar arrangement for solar power will ensure that the end consumers and solar power project developers will be able to build mutually-profitable relationships.
At the other end, while the state government policies were expected to boost the solar power sector in the country, the captive or end-user segment offers a much larger market of at least 25,000 MW over the next 5-7 years.
Even if the benchmark solar PV power project cost falls from the current Rs 9 crore to Rs 7 crore, it promises to be a market with a value of Rs 175,000 crore (US$35bn).
The rules of the game in India have surprisingly changed even though the total installed solar power generation capacity in the country has not crossed 1,000 MW, against state and national governments’ targeted capacities exceeding 30,000 MW over the next decade.
So, one can safely assume that the balance targets would be best achieved by solar power projects that get set up under the ‘Open Access’ system.
Bhupesh Trivedi is the CEO of Mumbai-based solar energy consulting firm REECODE Energy Solutions and can be reached on email@example.com or +91-9324246639