Big vs. Small – What is the future for PV in India?
As the Indian solar market is moving from subsidy-driven PV projects with public PPAs to commercially-driven private PPAs, two trends are emerging to service India’s power customers: large PV plants (e.g. 100 MW), located in high irradiation areas selling power through the grid directly to end-users and local, captive PV plants (e.g. 100 kW). Both might have a role to play in India. Which model will provide the end customer with cheaper solar power will depend on economies of scale and the cost of using the grid.
- Large plants make sense in areas with good grids and favourable policies
- Small plants make sense in areas with bad grids
- A new household level retail market is fast emerging
The Indian solar market is abuzz with talk of large PV plants. We have been in various interactions with developers who are looking to build PV projects of 50 or 100 MW, sometimes 200 MW. Even 1 GW projects are being considered. To be sure, there is a long and stoney path between talk and realization. Yet there is a clear trend towards conceptualizing large plants.
In some ways, this is a natural progression from the 5 MW plants allocated under the National Solar Mission (NSM) phase 1 batch 1 (a ‘learning’ size), followed by the 10 to 50 MW plants allocated under subsequent policies. It also means that the transaction costs of such plants make sense. The developer can get a much higher return for time invested. Such projects can easily absorb the fees of extensive data gathering, detailed project reports, expensive consultants and lawyers or the cost of international travel. Most importantly, it is a size that lending institutions and certain equity investors find attractive to due diligence and perhaps fund (refer to our report on bankability and financing of solar in India). This resonates well with those accustomed to traditional power plants and other large infrastructure projects. However, it does not imply that the price of the solar power offered to the market can be exceedingly low and the return of the project particularly high.
According to our estimates, the cost per MW of installed solar capacity between 5 and 100 MW comes down by around 5-10%. (There is a significant drop in prices upon reaching 1 and then 5 MW and the economics might change significantly above 100 MW, bearing in mind that there might also be adverse effects of scale, such as an increased cost of acquiring suitable land or new evacuation infrastructure that might have to be built.)
A key determinant of the cost of power to the end customer that can be supplied through such projects will be related to the grid: outage times (often more than 20%) and various fees such as cross-subsidy surcharges, open access charges, banking, wheeling, etc. Some policy makers are thinking about reducing or entirely waiving grid charges for solar projects. The recent solar policy of Andhra Pradesh is an example. This can be a game-changer.
An alternative to building large projects, supplying solar power through the grid to end customers is to supply power directly to the customer through an on-site plant. This avoids or at least greatly reduces the need to use the grid or acquire land – two large headaches of solar in India. On the other hand, financing is more difficult to obtain as projects are much smaller in size and there is a higher off-taker risk. What happens if the on-site power customer no longer wants to buy the power? A key issue here is to ensure that the power customer is bankable and contracts can be enforced (refer to our Project Development Handbook). The risk can also be mitigated through a portfolio of projects across which default can be managed. In such a portfolio, also, financing and sourcing can be done for a larger number of MWs, unlocking similar scale effects as large projects can. The American solar power provider SolarCity, which successfully went public in December 2012, has installed over 40,000 systems. It gets excellent module prices and good financing conditions.
At projects sizes between 1 MW ans 100 MW, the market moves from a utility (power sale) model to an equipment sale model – with a number of hybrids (downpayment, lease, etc.) emerging along the way. One of the most dynamic markets in India today is the rooftop PV market for households, where many new companies and business models are emerging, especially in the South, in Kerala (refer) and Tamil Nadu (refer to our Tamil Nadu Policy Brief). Here, net-metering is the potential game changer.
The described markets will have fundamentally different success factors and drivers. Sustainable success will require such long-term USPs as access to low cost financing, to power customers or to a strong sales and marketing network (refer).
Tobias likes to write about solar business models, solar and energy policy and wider issues of sustainability, development and growth.
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