Weekly Update: Scaling back of government subsidies set to shake up the Indian solar market

Jasmeet Khurana , Market Intelligence Consultant at BRIDGE TO INDIA, works on project performance benchmarking, success factors for module sales, financing and bankability of projects in India.

Curbing the fiscal deficit has become a key priority in India. Therefore, the government has set itself a deficit target of 5.3 percent of gross domestic product for the fiscal year ending on 31st March 2013. India had already exhausted 80.4% of the target between April and November and as per the current spending trajectory, India will fail to meet that target by around 20% or INR 2.06 trillion. One of the key measures now being taken to achieve the target is the reduction of subsidies. This has positive and negative implications for the Indian solar market and accelerates the overall transition from a subsidised to a commercially viable market.

Phase two of the NSM will get delayed due to unavailability of funds to cover the cost of subsidising solar energy under Viability Gap Funding
The subsidy cut for bulk consumers of diesel improves the business case for distributed solar power generation in India
Non-fiscal policy actions such as enforcement of the RPO/REC mechanism, clarity on regulations regarding grid interaction and implementation of net-metering can help tap the potential of solar power

Project allocations under phase two of the National Solar Mission (NSM) delayed

The ministry of finance has delayed the release of payments to the National Clean Energy Fund (NCEF) (refer). The NCEF is supposed to cover the cost of the subsidising solar under the Viability Gap Funding (VGF) mechanism of the NSM. The idea that the NCEF provides significant upfront capital to be infused into the Solar Energy Corporation of India (SECI) to carry out the part upfront funding for the new projects (refer to the October 2012 edition of the India Solar Compass to understand VGF). As the funds are not yet available, phase two allocations under the NSM are getting delayed. The allocations were supposed to be completed by March 2013. How long the allocation process will be delayed is unclear. Many investors and developers have already been planning their projects and have incurred costs for typical pre-development work such as land and off-taker identification. Also, module and other component suppliers have planned for sales to NSM projects in the next financial year. Some of them have invested into contract manufacturing and growing their teams. A delay of more than two months (which might still be avoided) would have a negative impact on the confidence of market participants.

Better business case for distributed solar

In another measure taken by the oil ministry to scale back the fiscal deficit, diesel subsidies have been cut for bulk consumers of diesel (refer). Due to their high consumption, these consumers buy diesel directly from oil companies and not from retail outlets. Many of these consumers use diesel for captive production of power. Such consumers include large malls, hospitals, office buildings, hotels, airports, etc. The new price for such consumers has been increased by INR 10/liter, equivalent to almost 20%. Many of these consumers may now resort to buying diesel from the pumps, where the prices are still subsidised, despite the fact that buying diesel over a certain amount from retail outlets is not permitted. For most customers, however, the measure is expected to have a significant impact on their energy costs. Solar power is already financially attractive for consumers with high tariffs and/or high back-up or captive diesel consumption. With an increase in diesel costs, especially in areas where power supply is irregular, solar power will now become even more competitive, improving the business case for distributed solar power generation in India.

Non-fiscal policy actions related to enforcement of the RPO/REC mechanism, clarity on regulations regarding grid interaction and implementation of net-metering can help tap the potential of solar power that is already available in the country because of financial feasibility of such projects. These actions can help ease the financial burden on the government and still keep the capacity addition targets on track.

This post is an excerpt from this week’s INDIA SOLAR WEEKLY MARKET UPDATE . Sign up to our mailing list to receive these updates every week.

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