If India’s conventional power sector, particularly coal-based thermal power projects, has found itself squarely stuck under the long shadow of governmental inefficiencies and suspect allocation mechanisms, there is a drastically different story unfolding in the country’s solar energy sector.
The rising cost of conventional power, largely driven by increasing raw material exports and the growing cost of establishing greenfield projects, alongside a steady decline in solar power prices — mostly a function of a sharp reduction in the prices of solar photo voltaic (PV) modules — could result in solar projects reaching grid parity by 2014, a new study by KPMG has suggested. Grid parity is the point at which the cost of solar power equals the cost of utility power from conventional sources.
“The positive feature of the last two years has been the development of capacity in the ecosystem, triggered by the (Jawaharlal Nehru) National Solar Mission,” the study said, “India’s solar capacity has grown from less than 20 Mw to more than 1,000 Mw in the last two years.” By 2017, the study forecasts, this could grow to 12,500 Mw of solar power generation capacity.
KPMG’s prediction is based on the expectation that the landed cost of conventional electricity to consumers will increase over the next decade at the rate of between 4 and 5.5 per cent every year. Solar power prices are likely to decline at the rate of 5-7 per cent annually during this period.
“In the last 18 months, retail consumer tariffs have gone up, partly the fallout of the financial condition of state utilities. We expect this to continue,” said Santosh Kamath, partner (energy & natural resources), KPMG India. “Also, if power capacity addition gets delayed, then the cost of power will go up. The dependence of imported coal is also likely to increase,” he added.
Yet, solar tariffs have dropped by around 20 per cent since May 2011, Kamath added, bringing the cost per unit down from between Rs 10.5 and Rs 12.5 to around Rs 5-7. “This is also because PV module prices have come down by around 40 per cent in the last 18 months,” he explained.
By 2017, according to Kamath, this momentum could potentially allow for the development of 4,000 Mw through the Jawaharlal Nehru National Solar Mission and other state programmes, 2,500 Mw of captive solar installations, 2,000 Mw of solar projects for diesel replacement and 4,000 Mw of roof-top solar generation capacity.
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This scale of growth, according to the report, could mean that by the end of the 13th Plan period (2022), solar projects could meet as much as seven per cent of India’s power requirement, mitigating 30 per of coal imports and creating foreign exchange savings of up to $ 8 billion.
Incremental investments
These projects, however, are being increasingly backed by substantial investments into India’s solar energy sector. In 2011, India saw $10.3 billion of clean energy investments, according to Bloomberg New Energy Finance, which is only about four per cent of the global investment in the sector, but 52 per cent higher than the $6.8 billion that came into the country during 2010.
Within this, funding for grid-connected solar projects increased by seven-fold — up from $0.6 billion in 2010 to $ 4.2 billion in 2011 — bringing investments in solar almost at par with wind projects, which stood at $ 4.6 billion.
The World Bank Group’s International Finance Corporation (IFC), for instance, has put in about $80 million into India’s solar sector since 2010, with approximately $64 billion coming in the last fiscal alone. IFC is also helping to develop the off-grid lighting market and assessing the viability of solar component manufacturing.
“Installed capacity in India continues to be well below the estimated potential in both wind and solar, which will continue to provide strong impetus for growth,” said Soumya Banerjee, IFC’s senior investment officer for South Asia. “Going forward, continued significant private investment will be needed,” he added.
Early days
This private funding is helping players like Azure Power, which has $10 billion from IFC, to grow their portfolio from a small 2 Mw utility-scale solar power plant in 2009 to about 35 Mw currently.
“I think it is pure economics that is making everyone look at India, because it’s a market driven by demand, not climate change,” said Azure Power’s founder and CEO Inderpreet Wadhwa, “The economics make sense. You have a regulated tariff, there’s a market, there are customers and the price is more palatable now.”
That is why Wadhwa seems fairly confident that his home-grown firm will be able to develop and operationalise 100 Mw of solar power by 2014. “We are tripling in size every year and we can continue to see that growth if the policy continues,” he explained, “But more visibility is required. Right now it’s more of start and stop, so you get one allocation and you don’t know when the next is coming. Since you have a big team, it can allow you to plan accordingly.”
But others like Kiran Energy, which operates a joint venture with Mahindra, are playing the game differently. It is focusing on building clusters, of between 55Mw and 100 Mw, which could be utilised by multiple industrial users, particularly if renewable power purchase obligations are enforced. These will designed to ensure that distribution companies, open access consumers and captive consumers buy a certain percentage of their power from renewable sources of energy.
“In the last year, India Inc. has slowly realised that solar power is reliable,” said Ardeshir Contractor, Kiran Energy’s co-founder and managing director, “The demand in India is elastic at the moment, so if there’s some (further drop in prices), then the solar sector will take off.”
That, according to KPMG’s report, is likely to happen sooner rather than later.