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Solar power: Striking a delicate balance

Nov 01, 2018

Solar power sector is breathing slow after several years of extremely fast growth, writes Shravan Sampath.

New Delhi: The solar power sector in India has seen an interesting trajectory. India was a late follower, with the commencement of the National Solar Mission (NSM) in 2010. In its capacity additions, India took the route of large scale ground mounted capacity additions to increase the installed solar power capacity, as opposed to the rooftop solar route taken by most of the European and east Asian countries. Given the scale and relatively low risk, the interest of the private sector in these capacity additions has been very high. Each new auction has resulted in lower tariffs, with the Government of India taking several measures towards streamlining and de-risking policy to ensure that tariffs remain low.

Late last year, things had reached a threshold, wherein solar power tariffs had gone below even the variable cost of conventional coal power plants. In effect, this meant that it is cheaper to buy solar power than it is to shut down a coal power plant while still paying them their fixed charges. A new tariff threshold of Rs. 2.44 / kWh was discovered, and various states kept tying up solar capacities at increasingly lower tariffs. Things had reached a point where there was no demand for conventional power (coal, gas, hydro), and everyone was focused on increasing their procurement of only solar and wind power.

However, the last six months have seen a series of developments that have deepened the uncertainty around the immediate term growth of the solar power sector. As a protective measure for the domestic industry, the Government of India imposed safeguard duties on imported solar cells and panels. This increased the input costs of solar developers, and also momentarily increased the uncertainty about whether such cost increases would be passed through in the Power Purchase Agreement (PPA).

In addition, there has been turmoil in the Indian capital markets, and the banks and financial institutions suddenly appear unsure about their ability to lend to renewable energy. The costs of finance are likely to increase substantially, thereby throwing the return calculations of developers out of gear. The rupee has been depreciating against the dollar uncontrollably in the last few months, and this has resulted in higher capital costs for the developers.

It is also seen that the receivables from various state utilities are mounting, and there is reduced comfort to the developers that they would get paid on time. All these uncertainties resulted in higher tariffs and muted participation. Leading power developer like Renew and Azure have called off their imminent public issues, and are introspecting on their future plans.

In summary, it is clear that the sector is breathing slow after several years of extremely fast growth. While this is a discouraging sign for investors that are looking for a return on their investment at the earliest, such a pause is always welcome in the lifecycle of an emerging sector. These pauses provide time for introspection and course correction, and can help preventing issues from snowballing to threaten the system at large.

The next few months would be extremely important for the sector, and need careful stewardship from all stakeholders. The government needs to involve financial institutions and developers and provide suitable comfort that loans to renewable energy are secure.

The government also needs to introspect about what it needs to do to increase participation – capping the tariff of tenders may be good for the distribution companies, but reduces investor interest. It is also inappropriate for Governments to single out developers and accuse them or cartelization, without adequate evidence in the public domain or needful follow-up action. These moves provide uncertainty to the developers about the stability of the policy regime, and makes them think twice about their ability to recover their investments.

The government also needs to provide thrust to under-developed segments such as rooftop solar, where an ambitious target of 40 GW has been set out to be achieved by 2022. Rooftop solar has been the platform on which Germany, Japan and several other countries have achieved their initial momentum. Given high retail, industrial and commercial tariffs, it makes eminent sense for the government to devise a strategy to enable clients to go solar and reduce their dependence on the grid.

On their part, developers also need to introspect about whether their deeply discounted tariffs are stable and can result in the required returns for their investors. It is extremely important for a sustainable and viable tariff to emerge so that the sector remains lucrative for large pools of conservative capital in the world that are focused on renewable energy.

Over the next few months, the government also needs to think afresh and bring all stakeholders together to help resolve these issues before things snowball.

Shravan Sampath is the CEO of Oakridge Energy, a solar rooftop solar development company with a pan-India presence.

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