Shining brightly

India's solar power sector is growing at a fast clip, helped by robust foreign and domestic investor appetite for new projects and the country's massive 750 GW solar power potential. But it also faces significant challenges from the infirm nature of solar energy and prices falling to levels that may impact financial viability. India's steroid-charged solar power capacity addition will take it past Japan as the world's third largest solar market. India, which crossed 12 GW of solar power capacity in 2016-17, is expected to add about 15 GW more in the current fiscal. Minister of State for Power, Renewable Energy and Coal told the Rajya Sabha, India's Upper House of Parliament that the country would add 10,000 MW from largescale solar power projects and 5,000 MW from solar rooftop projects this year. A leading private consultancy, Bridge to India, however, has published a report titled 'Indian Solar Handbook 2017', which projects the addition of a more modest 8.8 GW of solar power this year. This lower capacity addition, too, will take India past Japan to the third position among the world's largest solar power markets with about 5 per cent of global capacity. Either way, India's solar capacity is expected to cross 20 GW by the end of the current financial year. Picking up pace Before the Narendra Modi government announced its plans of creating an additional 100 GW of solar power capacity in the country by 2022, to reduce dependence on fossil fuels as part of its commitments towards meeting climate change goals, India's Jawaharlal Nehru Solar Mission had, in 2010, under the previous UPA regime, set a fairly modest target of 20,000 MW of solar power capacity by 2022. That figure is likely to be surpassed in the current year itself. The pace of capacity addition is picking up at a rapid pace. In 2012-13, India had a capacity of 1,686 MW; this rose to 2,632 MW in 2013-14, 3,744 in 2014-15 and 6,763 MW in 2015-16. States like Andhra Pradesh, Rajasthan and Tamil Nadu, with cumulative capacities of 1,867 MW, 1,812 MW and 1,691 MW, respectively, are leading the charge, though others like Karnataka, Telangana, Gujarat and Madhya Pradesh are fast catching up. Plunging tariffs The rising pace of capacity addition in the Indian solar power space is driven primarily by plunging tariffs, which have fallen from more than Rs 10 per unit a few years ago to Rs 2.44 per unit (or less than 4 US cents per kwh). This price, discovered at the reverse auction for 500 MW capacity at the Bhadla Solar Park in Rajasthan, is the lowest in the world and is a function of falling prices of solar modules imported mainly from China. “At current rates, solar power generation cost is at par with that of thermal power generation. Solar power tariff has been declining on account of sharply declining prices of solar panels, better structuring of the project that reduces risk for project developers and better currency hedging deals that make financing available at competitive cost,” said NTPC in a recent statement. New challenges While lower solar power tariffs are good news for consumers and will make for a more environment-friendly consumption mix, they do pose fresh challenges for the power sector, regulators and lenders. While the falling tariffs should be welcomed - it will make India's energy consumption mix more environment friendly - the changing dynamics of the power sector could pose several challenges. As has been seen in several other sectors, aggressive bidding by players to win contracts often results in the so-called winner's curse - the viability of the project itself then gets called into question. The tariffs discovered at the last few auctions have been the lowest in the world. No one is sure how much lower they will go. And it remains to be seen if such low tariffs can be sustained in the long run. There have been reports that some discoms that had earlier signed power purchase agreements with solar power producers at higher prices are considering reneging on their commitments and demanding fresh negotiations to fix tariffs in the light of the lower bids. If this happens, the financial viability of the entire sector will be called into question and both investors and lenders will be wary of putting in the big bucks required to keep the sector humming. There is, as of now, no immediate fear of such a doomsday scenario unfolding, but experts are sounding warning bells and the authorities will do well to take note. Viability of other technologies India's power mix is still dominated by thermal power, which accounts for about 60 per cent of the country's total power capacity. Significantly, as renewable sources such as wind and now solar have come on stream, the plant load factor (PLF or capacity utilisation of thermal power plants) have fallen from more than 70 per cent to less than 60 per cent. 'The Economist' reported that falling power prices between 2010 and 2015 forced European utilities to write off assets worth €120 billion. There is no doubt that increased supply of cheap renewable power will affect thermal and hydro power units in India. As more and more cheap solar and wind power enter the system, discoms, which have an obligation to buy renewable energy first and also a requirement to purchase power on a merit order based on price, will increasingly turn their backs on thermal power, forcing down the PLFs of coal-fired plants further, squeezing their financial viability, thus, putting at risk billions of dollars of bank loans their promoters have taken to set them up. Infirm power to impact grid stability There is a critical difference between power generated by thermal and hydro plants on the one hand and wind and solar plants on the other. The former can generate power 24x7 if required and can be scheduled according to plan. Wind power, however, can only be generated when wind flows are available, which is usually intermittent. Likewise, solar power can be generated only when there is sunlight. Hence, one cannot generate solar power at night or on cloudy days. Experts warn that the stability of the Indian grid may be affected after solar power capacity crosses the 20 GW mark, as the country lacks sufficient “balancing power”. The sudden withdrawal from the grid of large volumes of solar power after sunset could destabilise electricity supply all over the country. Thermal plants cannot ramp up fast enough to make up for the deficit. The only two technologies that can ramp up so fast are hydro and nuclear, but India lacks the capacity in both to sufficiently balance the withdrawal of solar power. One way out of this problem is to adopt batteries in a big way to store solar power but the technology is still not sufficiently developed and it could take another five to six years for utility scale battery storage technology to be financially viable. India's power minister, Piyush Goyal, has repeatedly assured the country that infirm power will not affect grid stability and that the government is seized of the matter and is working to mitigate it. Solar parks an unqualified success The auctions of solar power by the central government, conducted by the Solar Energy Corporation of India (SECI), have met with tremendous success. Buoyed by this positive response, the government has doubled the capacity of the solar parks under SECI from 20 GW to 40 GW. These solar parks, across various states, are clearly demarcated. Bidders received land at concessional prices, ready power evacuation facilities, a 25-year power purchase agreement and several other concessions from the governments of the state in which the park is located. Thus, execution risk is minimised and delays on account of land acquisition and land permits are eliminated altogether. Then, 25-year PPAs also reduce financial risks to a great extent and provide comfort to lenders, who can then advance money against the future assured cash flows. And incentives from state governments form the icing on the cake. Little wonder then, that solar park auctions have emerged as the most successful part of the Modi government's plan of adding 100 GW of solar power by 2022. State auctions a mixed bag The states also auctions licenses for solar power plants. Alternatively, investors can also approach individual states to set up solar power plants at locations of their choice. But these are riskier than SECI's solar parks. In most cases, the investor has to identify and acquire the land for the solar plant and then undertake the exercise to change land use. This can be a tedious, long-drawn exercise and can get caught in local politics and litigation. Then, the power evacuation facilities from such solar plants have to be built by the developer further increasing costs and risks. And finally, only a few of these projects have PPAs with the state. The rest have long term agreements with private players, who may or may not be in a position to honour them through the term of the contract. Not surprisingly, state auctions of solar capacities have met with less success than the ones being auctioned by SECI. Rooftop solar a laggard Rooftop solar units have not yet taken off the way solar parks have and experts have expressed concerns about this sub-segment of the otherwise highly successful solar power sector being able to meet its target of setting up 40 GW of installed capacity by 2022. The main concern relates to grid integration of this capacity and poor net metering facilities that are impeding the growth of rooftop solar. Foreign players dominant India's solar power sector has seen large doses of FDI flow in from companies in the US, Europe and South East Asia. Japan's Softbank, which has committed investments of $10 billion to India, is a large player in this field. Other large players, with significant capacities either already running or in the pipeline are international developers such as Fortum, EDF, AES, SoftBank, Engie, CLP, IBC, Sembcorp, FRV, First Solar and Skypower Global. There is a second group of foreign investors who are primarily financial investors in projects promoted by Indian entrepreneurs. For example, Indian renewable energy companies such as ReNew Power, Ostro, Mytrah, Suzlon, Azure Power, Welspun, Energon Solar and Hindustan Power are packed by large private equity investors, who, in many cases, hold a majority stake in the investee companies. This is not to say that Indian business houses are absent from this sector. Tata Power Renewable, part of Tata Power, is the largest player in this sector. Other large Indian business houses that have invested in the solar sector include Adani, Shapoorji Pallonji, Aditya Birla Group, Mahindra Group, Reliance Industries, Rattan India and Hero Future Energies. Long-term investors India will require an estimated $100 billion over the next five years to meet its renewable energy targets. But given India's attractiveness as an investment destination and the rush of investors in the renewable energy space, several large global pension funds, which are known to be patient and long-term investors, are keen on investing in India. Canada's top pension fund managers - Canada Pension Plan Investment Board (CPPIB), Caisse de Dépôt et Placement du Québec (CDPQ), and Ontario Teacher's Pension Plan (OTPP) - the Abu Dhabi Sovereign Wealth Fund, the California Pension Fund, Temasek and Norway's National Pension Fund are all keen on investing in Indian renewable energy, particularly solar power, companies, CDPQ, which has $199 billion in net assets, plans to invest in India's New York-listed Azure Power, which has 1 GW of solar capacity. “Our approach is really to pick the right partner and then build a platform that can be sustained over several years,” Anita George, CDPQ's South Asia head, told the media, adding that her fund may also invest in other solar power companies. Then, Dutch fund manager APG, the private equity arms of Goldman Sachs, JP Morgan, Morgan Stanley and Canada's Brookfield Asset Management are all present in India. Ripe for consolidation India's solar energy sector is currently highly fragmented with many small players. Even the big boys of the sector have relatively small capacities. The smaller players, many of whom entered the sector opportunistically to gain the early bird advantage have weak balance sheets and may not be able to sustain their operations in the face of the cut-throat competition that is emerging. Analysts expect many of them to start selling out by the end of the current year. Already, the sector has seen M&A deals worth $1.6 billion last year but this could be just the tip of the ice-berg. Just as it happened in the mobile telephony sector, which started out with three players in every circle two decades ago, but now has five large national telecom companies in the private sector, experts expect the solar energy sector to consolidate over the coming years, with a few large RE companies emerging from the churn. Massive growth potential India's current solar power capacity of 12 GW is barely 4 per cent of its total installed power capacity of 314 GW. The government proposes to increase this to 100 GW over the next five years. But even that is way short of its full potential of about 750 GW. India gets about 300 days of bright sunshine every year and the government will want to cash in on that in the future as well. Clouds in the sky The sector faces significant challenges as well. The problems related to land acquisition for projects won under state auctions and the problem of rooftop solar have already been discussed above. Other problems relate to getting returns on investments and getting paid by heavily indebted state-owned distribution companies. Climate goals There is no doubt that the boom in the solar energy sector will help India meet its power requirements in an environmentally sustainable manner and meet its goals under the Paris climate change accord. But how much further solar tariffs will fall and whether the sector can remain financially viable at such low prices remains to be seen. Some experts have also expressed doubts over whether India can meet the target of adding 100 GW of solar capacity by 2022. But that is well into the future. For now, the Narendra Modi government can bask in the sunlight for having kick started a sector that could change India's energy scenario for the better.