Lowest Tariffs, Accelerating Growth: How India’s Solar Market is Changing

17 July 2015 |

A year ago, the Indian government announced a goal of 100 GW of solar by 2022. Large parts or the markets (including us) were skeptical. In the last couple of months, however, the mood has changed.

  • We revise our growth projections for 2015 up from 3 GW to 4.5 GW
  • Solar tariffs have dropped to as low as 5.05 per kWh
  • Some stumbling blocks remain

These are the reasons to be optimistic:

  • Real growth on the ground:In the last three years the Indian market grow by 1 GW per year. This year, India is expected to add as much as 5 GW (1.1 GW already commissioned). Until recently, our estimate was 3 GW but now revised our projections upwards (see our India Solar Handbook). In 2016, India may add 7-10 GW of solar (the government plans to auction 10 GW this year).


  • Radical fall in tariffs:The most competitive bid in October 2014 was INR 6.01 kWh for a 40 MW plant by US-based First Solar. In the just opened bids in Madhya Pradesh, the highest winning bid was INR 5.64/kWh for a 50 MW plant by Indian developer Hero Future Energy and the lowest bid was an incredible INR 5.05/kWh for a 50 MW plant by Canadian developer Sky Power Solar. (Globally, the lowest tariff is from developer Acwa in Dubai at $ 0.06 or INR 3.8 per kWh – earlier this year.) That brings utility scale solar to a point where it may no longer need government support. For instance, the benchmark tariff set by the government, starting from which project developers are to bid for Viability Gap Funding in the upcoming NSM auction is INR 5.45/kWh. At this rate bidders should offer the government money to sign power purchase agreements! Consider also, that the price for new thermal power from coal in India is between INR 4.5 and 5/kWh. In future, as solar project sizes will further rise and costs fall, we might see the market turn towards providing “dispatchable” power, with solar complemented by e.g. wind and gas.
  • New players in the market:The Indian solar market is maturing fast. A good sign of that is the rapidly rising interest of large, professional international players. A game changer in the market was the announcement by Softbank (Japan) to invest $20bn into the Indian solar market over the next 10 years together with partner Bharti (India) and Foxconn (Taiwan) (link). This was followed by announcement by Russia’s Rosneft to build up to 20 GW of solar in India (link). In addition, there is significant interest from global solar companies, from private equity investors and from international utilities. Some of this interest is linked to shifting global dynamics in the energy markets, but the larger part is due to renewed investor confidence in India.

While this is all very encouraging indeed and points towards India becoming one of the most dynamic solar (and, in fact, energy) markets in the world, there still are some stumbling blocks.

  • Margins: It remains difficult to earn money on solar projects in India. There is strong competitive pressure on tariffs and that percolates down through the entire value chain, leaving bare bone margins of around15% (at a debt cost of 11-13%), if at all. Why is the interest so high, then? Leaving aside a group of players who are overoptimistic, take undue risk or lack market information and a (relatively small) group of players who muscle into the market with strategic pricing, there is a widespread assumption that building a portfolio of projects generates value above the returns of individual projects and that there will be attractive ways of refinancing later.
  • Weak grids, weaker discoms: The Indian electricity grid suffers fromhigh losses (20%+), frequent technical failures and a lack of monitiring and maintenance. It is the opposite of a “smart grid”. In order to absorb much more volatile renewable power (and in order to deal with India’s future growth in energy demand) it would need to be bolstered significantly. The trouble is, the utilities are in very bad financial shape. Their cumulative losses are around US$ 50bn, with annual losses of around $10bn. This financial situation makes utilities reluctant grid investors and non-bankable PPA counterparts.
  • Power pricing:This is the biggest immediate concern. Different tariff groups in India pay different rates for power. Industrial and commercial customers cross-subsidise agricultural customers. And since the cross-subsidy is insufficient, there is a deficit – see point above. Agricultural rates range between 0 and 2 INR per kWh. Utilities often prefer to load-shed (scheduled blackouts), rather than supply power to these customers at a loss. This limits their interest in buying any new power at all – whether coal, solar or other. The rationalisation of power tariffs is therefore a key task to enable not only the Indian solar market to grow, but ensure a healthy overall electricity sector and the provision of reliable power to consumers.

If India manages to mend its overall power sector, there is little stopping solar – especially when it will, through hybridisation and storage, be able to provide competitive, reliable power in the years to come.


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