Investment opportunity Scenario in Indian Solar Industry

Renewable energy sources have a combined installed capacity of 81+ GW, pegged at around 22% of the country’s total energy capacity. Solar power accounted with a share of 36% (30 GW). Solar power capacity has increased by more than 11 times in the last five years from 2.6 GW to 28.18 GW in 2019.

• 42 solar parks of aggregate capacity 23,499 MW have been approved in 17 states up to March 2019
• Kurnool (1,000 MW) and Bhadla-II (648 MW) Solar Parks are fully operational
• Largest Solar Park of 2,000 MW in Pavagada is under installation
• 60 solar cities approved and $1.3 bn allocated for setting up 50 solar parks of 40GW by 2020
• New areas of opportunities

Investment in Solar Power has potentially access to

A rapidly growing global opportunity –

 Evidence suggests global solar power capacity could increase from 5 to 32 per cent of global power capacity by 2040.

Low ongoing costs after initial investment – 

Fuel for solar assets is free and unlimited – life span of solar panels is 25+ years meaning the majority of investment costs are incurred upfront.

Generally lower operating costs – 

Once panels are producing, minimal operating costs mean assets will generate cash flows throughout their useful life, irrespective of technology changes.

Ongoing cash flow generation – 

Ownership of relatively low risk producing solar power stations that generate cash flows by selling zero emissions electricity into the power grid.

Socially responsible investments –

 Climate change, pollution, natural resource constraints and positive public sentiment are creating more demand for electricity procured from renewable sources.

Limited exposure to technology risk – 

Solar photovoltaics is not new technology, while investing in high quality assets may also be largely de-risked through long-term Power Purchase Agreements with high quality off-takers (i.e. governments, utilities and large corporations).

Benifits of Investment in Solar Power

Detailing Economic Benefits

As well as providing commercial benefits to project developers, solar PV projects offers many economic advantages to local and national economic growth. Economic benefits and costs should be considered by policy makers, developers, investors and lenders to ensure that individual profitable projects develop within a framework of sustainable development. Lenders often require compliance with social and environmental standards.

Multilateral agencies such as the IFC may have their own Social and Environmental Performance Standards. Other lenders may require compliance to standards as outlined in the Equator Principles before agreeing to finance a project. Government bodies may aim to mitigate the adverse impact of developments through permitting requirements.

The Government of India has implemented an array of policies to enhance the growth of the solar market and support the National Action Plan for Climate Change (NAPCC).

Local Economic Benefits and Costs

In general, a solar project is likely to usher in economic benefits for the local area. But the level of benefit may be region-specific, and may vary across the country.

An awareness of these local economic benefits will help developers and investors in pushing solar projects as a development tool for local communities and government agencies.

Local economic benefits may typically include the following:

• Generation of direct and indirect employment.
• Infrastructure developments such as roads, water and electricity.
• Development of barren, unproductive or contaminated land.
• Grid network upgrades providing power supply security.
• Less polluting power generation.

However, these benefits must be weighed against:

• Resource impacts: Many projects are likely to be constructed in areas with a scarcity of water and electricity. So the use of these resources during construction and operation of the plant may have an impact on the local economy. Careful siting and design of the projects should minimize this potential impact.

• Demand management: In urban India, peak demand normally occurs in the evening. Shortage of supply and inability to manage demand results in power cuts, which have a negative impact on the local economy and quality of life. While solar power is only generated during the day, there is no facility for trimming peak demand during the evening. Solar power development should, therefore, be part of a wider strategic plan to manage demand and supply.

National Economic Benefits and Costs

There are a number of national or macroeconomic benefits which are likely to accrue from the development of solar power generation within India. An awareness of these benefits will aid developers and investors when pitching the case for solar development to policy makers. National economic benefits may typically include the following:

• Increased energy security arising from diversification from coal-fired generation.

• Long term energy price pressures mitigated due to diversification of generation mix and technology development. The cost of installing solar power generation is currently more expensive than coal-fired generation in India. This gap would be expected to reduce as the solar market matures and coal prices rise. Energy price stability can lead to a wide range of social and economic benefits. These include improved global competitiveness of domestically produced goods and services, inflation reduction and social cohesion.

• Reduced dependence on imports resulting from long term solar project development targets and mandates set by the National Solar Mission for consumption of domestically produced project components.

• Technology development, which leads to a redeployment of human resources from primary industrial activities to higher value-creating secondary industries.

• Climate change mitigation, in line with the NAPCC.

• Reduction in pollution externalities such as health and environmental consequences.

• Increased tax revenue.

These benefits must be weighed against the cost of upgrades to major transmission lines. Grid upgrades are likely if significant levels of solar power are installed in areas with a weak transmission network.

Budget diversions may also be significant as higher government budget allocations for solar projects may divert resources from low income groups. Engagement of the developer with the local community (by supporting local employment, for example) would be one way to work out a mutually agreeable solution.

Benefits to Developers

Investment in solar projects offers a number of economic benefits to potential developers, the most important of which are outlined below:

• Preferential tariff and guaranteed returns – Solar projects in India receive a Feed-in-Tariffs (FiT) for 25 years.

• Concessional duties and tax breaks – The Government of India has announced a concessional customs duty of 5% on imports, with an exemption on excise duty for some project components.

• Meeting the renewable energy obligation – Utilities and independent conventional power producers have been mandated by the State Electricity Regulatory Commissions (SERC) to purchase renewable energy under the Renewable Purchase Obligation (RPO). At present, the proportion of renewable energy to be purchased varies from 3% to 5% of the total generation across various SERCs. This is likely to increase to 15% by 2020.

• Renewable Energy Certificate (REC) – RECs are market-based instruments which give the developer the option to either sell power produced at the state specific average power pooled cost, or alternatively to trade RECs separately.

• Certified Emission Reduction (CER) revenue.

• Improvement in corporate image – Investment in solar power projects allows developers to demonstrate their commitment to environmental concerns.

• Business diversification – Development of expertise and technical skills within the developer organization, allowing diversification of income generation streams and access to a large emerging marke