Cost of solar for residential sector could be as low as INR 10/kWh

The residential rooftop solar market in India has a huge potential customer base. The levelized cost of energy (LCOE) is currently in the range of INR 10/kWh to 13/kWh. This is still much higher than the (subsidized) tariffs paid by households. But the two figures are rapidly moving towards convergence. For further details, please refer to ‘India Solar Decision Brief’ titled- “India’s Solar Transformation: Beehives vs Elephants” (online downloadable version available here).

LCOE will likely decline at around 4% per year
In 2015 average LCOE will be INR 11.5/kWh; in 2024, it will be INR 8.3/kWh
By 2023 it will be cheaper to generate solar power on site than to generate and deliver power from new coal plants

The LCOE for residential rooftop solar systems is calculated after considering the capacity utilization factor (CUF), the capital cost and the cost of capital. Over time, it will decline as system costs will likely fall. For a landed cost of power (LCOP) calculation, technical losses of 2% are additionally considered.

Table 1: Factors considered for LCOE and LCOP calculation

Parameter	Small rooftop
CUF	17% in 2015 increasing to 17.5% by 2024
Additional grid infrastructure for net-metering	INR 5,000 per system
Capital cost	INR 100,000/kW
Annual decline in system costs	5% – 7%
Effect of net metering	2016 onward
Technical loses	2%
Maintenance cost	1.5%
Annual increase in maintenance cost	5.72%
Interest rate	11.5%
Loan tenure	10 years
Debt ratio	70%
IRR	12%
Grid availability	96%

The LCOE and LCOP has been calculated using BRIDGE TO INDIA’s financial model. For the year 2015, the LCOE is estimated at INR 11.5/kWh, which reduces to INR 8.3/kWh by 2024. LCOP declines from INR 11.7/kWh in 2015 to INR 8.4/kWh by 2024. Residential rooftop is expected to reach parity with imported coal by 2016. Given the strategic nature of the power market and the long-term path-dependency associated with choices such as building new coal-fired plants, it makes much sense for the government to already support distributed solar in its initial stages.

Figure 1: LCOE and LCOP of residential rooftop solar

Is distributed solar a good investment case? India is a diverse country with varying geographical conditions. Additionally, different people have different expectations from their investments. In the sensitivity analysis, three cases have been envisaged – a median, conservative and an aggressive case. Based on these cases, the LCOEs vary for projects across India. We have considered a variation of CUF from 16% to 18% in 2015 going to 16.5% to 18.5% by 2024, interest rates range from 11% to 12% (no prediction of future rates) and return expectations from 10% to 14% (assumed stable over time). For the analysis in the report we have taken the median case as reference.

Figure 2: Sensitivity graph for LCOE