The Indian solar market has come a long way since 2009-10 when it began with the installation of modest capacity of around 10 MW. The segment has grown rapidly over the years to reach the current installed capacity of over 12 GW. The key growth drivers of installed solar capacity have been falling solar tariffs, declining equipment costs, growing experience in the field, and policy and regulatory support from the government. The market has also matured in terms of tariffs, from being unaffordable to achieving grid parity. Solar tariffs have declined by almost 80 per cent over the past five to six years. From Rs 11-Rs 12 per kWh in 2010-11, solar tariffs have dropped to a record low of Rs 2.44 per kWh as discovered in the recent 500 MW Bhadla Solar Park (Phase III) tender.
While the decline in tariffs is a positive sign for consumers and discoms, the returns for investors are likely to be adversely affected. Besides, it has resulted in the unwillingness of discoms to sign power purchase agreements (PPAs) at the previously quoted higher tariffs.
Power Line takes a look at the key trends witnessed in the solar segment over the past year…
Capacity addition
The cumulative solar capacity as of March 2017 stood at 12,288.83 MW as compared to 6,762.85 MW as of March 2016, recording a growth rate of over 65 per cent. The installed capacity of over 12 GW is a noteworthy achievement, especially in view of the fact that the installed solar capacity was less than 1 GW as of March 2012.
Solar capacity additions in 2016-17 were 43 per cent lower than the set target of 12 GW (7 GW utility based and 5 GW rooftop based). A significant part of the underachievement was in rooftop solar additions with only 500 MW of capacity added during the year. However, the segment has set records on several counts, including surpassing wind capacity additions for the first time. Among the states, Andhra Pradesh added the maximum capacity in 2016-17 (1,294 MW) taking it to the number one position based on the solar installed capacity. This was followed by Karnataka (882 MW) and Telangana (759 MW).
Recent bids
The industry had contemplated that solar tariffs could reach grid parity in India around 2020. Exceeding these expectations, solar tariffs have not just achieved grid parity but have also fallen below the average power purchase cost of thermal power. Solar power tariffs have hit a historic low of Rs 2.44 per kWh with the auction of 500 MW of capacity at the Bhadla Solar Park (Phase III). This tariff was quoted by ACME Solar for 200 MW of capacity. Interestingly, this bid was not an outlier. The next best bid was of Rs 2.45 per kWh submitted by SBG Cleantech. While it had bid for 500 MW of capacity, the company was awarded only 300 MW. Other companies that quoted tariffs of less than Rs 2.50 per kWh include Hero Solar and ReNew Solar. The previous low of solar tariffs was Rs 2.62 per kWh, achieved during the auction of Bhadla Solar Park Phase IV, only two days prior to the results of Bhadla Solar Park Phase III being announced.
Tariffs have fallen by over 25 per cent in the past three months. Earlier this year, the tariffs discovered in the Rewa Solar Park and Kadapa Solar Park tenders were Rs 3.31 per unit and Rs 3.15 per unit respectively. Meanwhile, a 500 MW solar tender in Tamil Nadu remained highly undersubscribed. This was mainly owing to the lack of adequate transmission infrastructure in the state and the financially stressed condition of the utility.
The tariffs for other projects awarded during 2016-17 ranged from Rs 4.30 to Rs 5.30 per unit. The tariffs have more than halved over the past year, from Rs 5.30 per unit to Rs 2.44 per unit at present. In addition to the higher tariffs in the earlier bids, most of the projects (under the Jawaharlal Nehru National Solar Mission) are also entitled to receive viability gap funding from the government.
The tariff decline observed over the past year can be attributed to a number of factors including the fall in domestic debt costs by up to 1 per cent per annum in the past year, higher irradiation (as in the case of the Bhadla Solar Park), lower solar park charges, access to low-cost foreign capital and a relatively strong rupee. One of the major reasons for the low bids in the Rewa Solar Park auction was the sovereign guarantee provided by Madhya Pradesh. The state had provided assurance for power offtake in case of a default in purchase.
Emerging trends
The steep fall in tariffs has forced developers and discoms to rethink their strategies. While the Solar Energy Corporation of India extended the deadlines for the submission of bids for its solar parks, some states have indefinitely extended the timelines for the projects in view of the falling tariffs along with lower demand. Jharkhand’s 1,000 MW tender was floated in 2016, but no PPAs have been signed yet. Meanwhile, Tamil Nadu has lowered its offtake from the 650 MW Adani Green Energy solar park despite having a PPA in place.
The low tariffs also indicate the fact that investors are comfortable with low returns. There has been a growing focus on low-risk projects and patient capital, which brings modest yields over time. A low-risk, low-return model also implies that India is no longer a market for smaller players who find it difficult to access low-cost finance. If small developers have to stay in the game, they will have to review their strategies or redefine their business model.
Policy developments
In a bid to provide a further impetus to solar power generation, the capacity under the Development of Solar Parks and Ultra Mega Solar Power Projects scheme has been increased from 20,000 MW to 40,000 MW in March 2017. The scheme aims to set up 50 solar parks by 2019-20, each with a capacity of 500 MW or more and financial assistance of Rs 81 billion.
In March 2017, the Ministry of New and Renewable Energy (MNRE) also released the draft guidelines for tariff-based competitive bidding for solar projects. The key features of the draft proposal include 100 per cent land procurement at the site within three months of the signing of the PPA and a PPA period of not less than 25 years from the date of scheduled commissioning.
The MNRE also initiated a scheme in July 2016 to develop 10 solar zones over a period of five years, from 2016-17 to 2020-21, with an estimated central financial assistance of Rs 440 million. Each solar zone will comprise 10,000 hectares of waste, uncultivable or fallow land.
The Ministry of Power (MoP) issued guidelines in July 2016 providing a long-term growth trajectory for solar renewable purchase obligations. As per the guidelines, the state discoms had to meet 2.75 per cent of their energy consumption from solar power during 2016-17, 4.75 per cent in 2017-18 and 6.75 per cent in 2018-19. However, the final targets will be set by the respective state electricity regulatory commissions.
Under the upcoming goods and services tax regime, a rate of 5 per cent has been finalised for most renewable energy equipment, except solar modules, which have been put under the 18 per cent slab. While the tax rate for solar modules is likely to be lowered before the roll-out of the scheme, if this does not happen, it could lead to an increase in the cost of solar projects.
The way forward
Solar capacity additions have, no doubt, been commendable over the past few years. The capacity is going to increase further with projects of over 12 GW already under implementation. Given the slowdown in new tender announcements, the government’s 100 GW solar capacity target by 2022 is unlikely to be achieved. With respect to tariffs, lower tariffs have led to a rethinking among discoms to sign PPAs for capacity that has already been tendered at higher prices. At the same time, a continuing fall in tariffs could actually make solar a preferred source over other conventional fuels in the years to come. Overall, the outlook for the sector remains positive.
