A need, but not yet a market? What holds the Indian private PPA solar market back?
There has been much talk about the great transition in the Indian solar (power) market moving from a centralized, policy-driven market, to a distributed, private PPA market. In fact, we have ourselves added to the chorus (see our various blogs and reports). While we see some first projects in that space, however, the breakthrough is yet to happen.
- Is the pain not strong enough? Or the gain not attractive enough?
- There is a larger question about India as an infrastructure market and the country’s readiness for long-term solutions
- Diesel replacement with storage might be a better way to play to short-term needs
The first question, one encounters when interacting with a power consumer to whom one offers solar, is, of course: what can I save? Even in very favorable locations (high irradiation, high grid tariffs), the answer will rarely be more than INR 1/kWh on a levelised basis, assuming the solar solution provider has market return expectations and a sound financial model, and there are no subsidies involved. It is interesting to the consumer, but not a revelation. And then there are hassles: Long term contracts to be signed, construction to be done. The savings are often insufficient to trigger immediate action. While this is changing- power prices are rising fast, while solar costs are stabilizing- it is anyone’s guess, when the savings are substantial enough to move solar to the top of more power customers’ agendas.
However, even if savings improve, the return on investment time for going solar will drop from, say, eight years, to four years. In the highly dynamic Indian market environment that is still a long time. In four years, companies and entire industries grow, falter or change entirely. The macroeconomic (e.g. rupee conversion rates, cost of fossil fuels) and political frameworks are subject to frequent, incisive ruptures. As a result, flexibility is valued and cash often prioritized over longer term benefits. There is an inbuilt myopia that is further aggravated by insecurities such as concerns about the enforcability of contracts or limited availability of information.
To put it into context: the reason why diesel gen sets are a hugely successful product in India, despite high costs and pollution, is that they offer great flexibility and costs are pushed into an uncertain future. The user only pays if and when there is a power cut. It is a typical ‘Jugaad’, or patchwork, solution- not a structural one.
In future, there will be a market for long-term infrastructure investments like solar in India. The fundamentals of rising power tariffs and diesel prices, the energy deficit and stable solar costs will make going solar attractive enough to get consumers excited. At the same time, it is probably a good idea to look at the already existing and profitable power markets around diesel and develop solar solutions targeted at them. Here, storage will play a key role.
Read more about the Private PPA market here.
Tobias Engelmeier is the Managing Director at BRIDGE TO INDIA.
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