The Indian solar market is growing at a breathtaking speed: This year alone, by more than 300%, next year perhaps by 150%. Competition is as intense as the market is enthusiastic. Is this a recipe for an investment bubble? Projects are being won at record low tariffs – tariffs that many observers doubt will leave investors with acceptable returns. Will these projects be “stranded solar assets”? Is there a bubble in the making? Richard Martin has recently asked this question in the MIT Technology Review (refer). My answer is a clear “no”. Here is why.

  • Some investors will be disappointed with returns as competition remains stiff
  • Power demand in India is high and growing – it is a solid business opportunity
  • In future, as financial engineering becomes more complex, there might be more room for speculation

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On Sunday, 5th June 2015, one of India’s leading economic journalists, Swaminathan Aiyar, in his weekly column “Swaminomics”, wrote that India should wait for five years before trying to implement big plans for solar (refer). He argues that solar is still a comparatively expensive energy generation technology and that because India is an evening peak country, increasing the share of solar would be a “double whammy”, by driving up indirect costs for thermal, peak power generating sources. As a result, he concludes, India should go all out on solar only after it is fully established that the cost breakthrough has been achieved and the technology is more mature. While there are interesting insights in the article, we disagree with his conclusions. Here is why.

  • Solar costs are not as high as Swami claims. In fact, upcoming NSM bids will show that it’s neck to neck with        new thermal projects.
  • India is an evening peak country right now but as the economy develops the peak will move into the daytime          (cooling).
  • Global investors already see the social and economic appeal of solar and are moving out from coal to the                sector.

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Recently, the Ministry of New and Renewable Energy (MNRE) released a draft of the “National Renewable Energy Act” (refer). Along with the proposed amendments to the Electricity Act 2003 and the National Tariff Policy 2005 (refer), this act will create structural policy changes to help increase the share of renewables in India’s energy mix. In the first section, the document describes in detail how institutional structures would be created. However, it is the subsequent sections that have caught our attention. This is our take:

  • National, uniform and mandatory regulations will govern renewable purchase obligations
  • A “National Renewable Energy Fund” will be created and a fixed portion of the National Clean Energy Fund will be directly channeled into it
  • There will be guidelines for renewable energy procurement, including but not limited to competitive bidding processes

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In the early 20th century, when cars started to compete with horse-drawn carriages in Europe, they still had innumerable technical teething issues and no distribution channels. Germany’s last emperor William II famously said (possibly while sitting on a horse): “I believe in horses, automobiles are a passing phenomenon.” Well, you know which side of history he was on. Cars, of course, did not only complement horse-drawn carriages, they replaced them. I would argue that we will see something similar in our energy future, where renewables will not only complement, but replace fossil fuels.

  • Most energy projection see a gradual shift in the energy mix
  • However, as the cost of renewables continues to fall quickly, the shift may be much more radical and abrupt
  • Investor may preempt this development and move the shift forwards even more

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Last week, 300 MW of solar capacity was auctioned in the Indian state of Madhya Pradesh (MP). The record low tariffs surprised most observers. Canadian developer Sky Power offered to sell solar power at INR 5.05/kWh (50 MW capacity). The bids closed at INR 5.64/kWh with the median tariff at INR 5.34/kWh. The auction received a lot of interest and over 2,200 MW of projects were offered at tariffs below INR 6/kWh.

  • Solar tariffs in India are falling dramatically
  • At these tariffs, effectively, there should be no need for incentives anymore
  • Are return expectations sufficient for scaling up?

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