Insight

Let the Sun Shine Down

The evolution of the solar sector in India has been remarkable. From just 161 megawatts (MW) in 2010, the country’s installed solar capacity now exceeds 29 gigawatts (GW), or 5% of the total. It has grown faster than any other renewable energy source and India now has the world’s fifth-largest solar installation base. In 2008, the Centre had set a modest 50 megawatt (MW) target for it, focusing more on other renewable sources, such as wind. This target was revised dramatically upwards to 20 GW in 2010 and then raised fivefold again, to 100 GW to be achieved by 2022, by the NDA. Although progress has been rapid, project execution has slowed in the past year owing to regulatory and market uncertainties. Even as the industry has shown impressive growth over the past decade, the 100 GW target is looking ambitious.

Growth has been topsy-turvy and the sector is riddled with challenges

Of the 100 GW target, 60 GW is allocated to ground mounted projects and 40 GW to rooftop ones.  So far, India has achieved 27.4 GW in the first category and 1.9 GW in the latter. An additional 22.8 GW worth of ground-mounted projects have been tendered out by the government but are yet to be awarded. Developers today face concerns over tariffs, which have fallen so low that project viability sometimes comes into question. Moreover, they face hurdles in terms of land acquisition, the ‘evacuation infrastructure’ (i.e., transmission and distribution), water access, road connectivity and clearances, all of which delay construction and drive up costs. To some extent, these issues are being tackled through the creation of dedicated solar parks, but these account for just 15% of new capacity addition so far.

Development of ground mounted projects has slowed over the past year

Development has slowed in the past year, with developers adding just 7.8 GW in FY19, compared to 9.3 GW the previous year. The imposition of safeguard duty (25% in the first year, 20% in the next six months, and 15% in the following six months) on equipment imports from China and Malaysia has been one of the main causes. The industry is of the view that such protectionist measures will not spur domestic manufacturing in any meaningful sense. Simply put, two years of duty protection is not long enough to make it worthwhile to invest in new capacity. Meanwhile, the duties have only raised the cost of projects.

Cancellation of solar auctions also contributed to slower growth

The slowdown is also related to state and central agencies cancelling auctions when the resulting tariff appeared to be high in comparison with other state programmes, leaving projects in the lurch. Of the 35 GW tendered during 2018, 5.3 GW of valid, winning bids were cancelled. It is unclear why tariffs are being capped in the bidding process without accounting for market phenomena such as site location, financing costs and the poor financial health of utilities, which all add to market uncertainty. 

Inadequate energy infrastructure causes problems with evacuation

Developers and investors are also hesitant to put down funds on account of an inadequate transmission system, which cannot absorb power from solar projects. Without a capable energy transmission system, power fails to reach the end consumer. Grid failure can also be traced to a weak transmission infrastructure, which remains a serious issue.

Upward revision of solar RPO targets is a good step but enforcement remains to be seen

Further, while the Centre has mandated states to procure a portion of their total energy from solar, many have failed to do so. In fact, just a handful – Andhra Pradesh, Gujarat, Himachal Pradesh, Karnataka, Madhya Pradesh, Mizoram, Nagaland, Rajasthan, Tamil Nadu, Tripura and Uttarakhand – have achieved even 60% of their Renewable Purchase Obligation (RPO) targets. The recent upward revision of solar RPO targets to 7.25%, 8.85% and 10.50% in 2019-20, 2020-21 and 2021-22, respectively, is a step in the right direction. However, enforcement will remain a key factor to watch for.

Floating solar: A new growth area
In an effort to help meet the 100 GW target, the Centre recently announced a dedicated target of 10 GW of floating solar capacity by 2020-21. India has a total estimated ‘floating solar’ potential of 300 GW, assuming that just 10-15% of water bodies in states such as Kerala, Assam, Odisha and West Bengal are utilised for this purpose. Such project cost more to build: the EPC cost of a ground-mounted solar plant is USD 600-650/KW, while that of a floating plant is in the range of USD 800-1,200. However, thanks to the cooling effect of water, floating solar can generate more power per square inch, thus making the levellised cost of the two broadly comparable. On the whole, given the challenges around land acquisition, the business case for floating solar is strong in areas where such water bodies exist. Since the equipment is voluminous and expensive to transport, being able to build them indigenously will be critical. In March 2018, the Solar Energy Corporation of India (SECI) tendered the first such project, and the Shapoorji Pallonji Group won a contract for a 50 MW plant.

Rooftop development has been insignificant compared to the target

Meanwhile, rooftop installation, at 1.9 GW, compared to the 40 GW target, continues to lag behind. A key challenge is the lack of uniform policies on net metering that would allow consumers to sell surplus power to utilities. Further, even where rooftop projects are commercially feasible, it can take applicants several months to receive approvals, grant of connectivity or subsidy disbursement. Even fixing these issues in the near-term would make it a far-off dream to achieve the 40 GW target in just three years. Individual project sizes are small, and getting many millions of people to invest in rooftop plants in such a short timeframe would be a tall ask.

All said, while India’s progress on the solar front has been commendable, getting to 100 GW by 2022 looks, on current trends, to be a bridge too far.