The rise of Solar in India’s energy mix
Solar Energy can share center stage in the Renewable Energy mix of our country in the next five years, driven by falling costs and aggressive expansion by the government. Solar power potential in India is estimated at 759 GWp, at 20% Capacity Utilization Factor (CUF), this accounts for ~1330 Billion units (BU) power per year.
The real Solar journey started in 2010 by the launch of Jawaharlal Nehru National Solar Mission (JNNSM) with a vision to promote ecologically sustainable growth while addressing India’s energy security challenge. The target, then, was 20 GW by 2020 in 3 phases. This helped the solar power tariff to come down to Rs. 9.35/unit from the earlier levels of Rs. 18-20/Unit levels. Here, the government had supported in two modes for development of grid connected solar power:
- By a mechanism of “bundling” of solar power with relatively cheap thermal power from un allocated quota of the Government of India and
- Viability gap funding (VGF) for availability of solar power at reduced rate.
The Solar industry and its fortunes dramatically changed with a new Government in 2014 in India. Renewable Energy and Solar in particular was made as the key growth driver to meet our climate goals and the Renewable Energy target was pegged at a staggering 175 GW, which includes 100GW of solar by 2022.
To support these aggressive targets, Government had focused on the key problem areas of solar power developers like 100% FDI, Tax breaks, business friendly environment, establishment of solar parks with no land acquisition hassles and other allied clearances which have been appreciated by the private players and international players and this segment was seeing a huge traction in the last 15-18 months in India. We could already see a 2GW installation of Solar last year and nearly 4-5 GW are expected in the next year.
The unexpected steep fall of prices in Solar Power
Such aggressive targets and with a relative ease of doing business, it was expected that prices will fall and that the industry will become more competitive and maybe reach grid parity by 2017-18 or 2019. But, what was witnessed is the last 6 months as shown in the figure below has led to some serious issues and the future sustainability of this growing business being questioned by many.
With an increased business outlook, it was expected that there will be a gradual price reduction as in any business – here too in Solar, there were new materials getting used in the manufacturing of solar cells, the economy of scale in manufacturing of PV Cells/Modules were the key reasons for an overall drop in capital costs of the projects and thereby the price per unit quoted by firms in these tenders. It was seen that on one side the prices were decreasing but on the other hand it was attracting more and more investments in the Solar Industry – This was one of the main reason that power sector had contributed 4% in total inflow ($) till September 2015.
We have finally reached a stage, where companies like SunEdison bagged the Andhra Pradesh project @ Rs. 4.63/kWh, and Fortum Finnsurya Energy has quoted Rs. 4.34/kWh for one of six projects of 70 MW each to be put up in Rajasthan under the National Solar Mission at Bhadla Solar Park-II, near Jodhpur in Rajasthan. These prices has made both the industry players and the industry observers to take a step back and see closely what these prices mean in the long run and where will the fall finally stop.
For many observers, it is a stark reminder of the UMPP days where private players bid very aggressively and later went to back to their customers to renegotiate their PPA’s.
The key reasons for this steep fall
While, there has been a considerable value maximization that has been done at the Polysilicon/Solar PV Cells/Module level – huge economies of scale plants in China, R&D improvements etc, the other BoP components have yet to reach that stage. The most important element that is now driving these low prices is the “access to funds” and “Cost of funds” of many of these projects. That is also one of the reason why we see 2 foreign firms bidding at these aggressive price levels not matched by any Indian firms as yet. It’s also seen that the foreign investment is only feasible for projects not less than 70 MW, we can also say that this is the breakeven for feasibility of foreign investment if the project size goes beyond that limit then the interest rate after hedging gets equivalent to the domestic rate of interest. If we talk about the cost break up of solar project, the module & inverter together costs approximately 50% of the project cost, this has fallen down from 72% in FY’11.
What does this drastic price fall mean for the Industry?
This price fall in the Solar Grid Connected industry is very similar to the scenario in the LED Lighting Industry in India – where there is now a huge buyer (EESL) with huge buying powers and the prices have fallen by over 5 times in the last one year. This has now led to the large traditional lighting players considering to pull back from these tenders as it is not making further business sense for these firms. One hopes that this is not the same of the large players in the Solar Industry as this industry is still in its emerging phase and India would need serious players to reach its goals.
What we see happening in this sector at these prices levels and competitiveness is summarized below:
- We will continue to see a dominance of foreign players and international funds driving most of the next phase of solar growth in India.
- It is expected that this business environment will give birth to new business models and innovations to manage businesses within this cost boundaries
- We will see some new business models which will revolve around the concept of “Lowering of cost driven by aggregation” which is widely used in the E-commerce industry and the new age start-ups. Anything that could be aggregated will be aggregated and consolidated by a large stakeholder to maximize costs – for e.g. Mounting Structures – this is currently being fabricated by small/niche mounting firms, we could maybe see a ISP doing this is large volumes at their factories and driving costs down multi-folds! Similar aggregation of products, services and even manpower required for this huge growth is likely to unfold in India
- There could be some shakeup in the industry and smaller players will be pushed away and the industry could be led by serious players going forward.
- Utilities / RE power buyers will come up with stringent terms with Developers so that there is no scope for revision going forward, having learnt from their UMPP experience.
- There will be a continued dependence on China for meeting most of the industry’ sourcing needs.