India to revise the rooftop solar subsidy mechanism

On the very first day of 2015, the Ministry of New and Renewable Energy (MNRE) has notified proposed changes to the rooftop solar subsidy (refer). The two major changes are: reduction of subsidies from 30% to 15% and a lower priority for subsidy disbursement to industrial and commercial consumers.

  • The funding available for subsidy mechanism does not nearly meet demand and that this makes it actually counterproductive
  • Just like the water heater subsidies, the subsidies for industrial and commercial customers could have simply been revoked altogether
  • So far less than 15% of the installed rooftop solar capacity has made use of the subsidy

BRIDGE TO INDIA has been arguing for quite some time that the funding available for the subsidy mechanism does not nearly meet demand and that this makes it actually counterproductive. The earlier subsidy scheme has arrested growth even for those industrial and commercial consumers in the country for whom rooftop solar was already a viable option even without government support. The vague (and ultimately unfulfilled) promise of getting subsidies has led customers to just wait and see (refer).

Thus, there was an urgent need to overhaul the scheme and we are happy to see that the government has taken a first step in that direction. However, we believe that overall, the proposed new policy is still flawed. Just like the water heater subsidies, the subsidies for industrial and commercial customers could have simply been revoked altogether. This might sound counterintuitive, given that the government is planning to raise the target for distributed solar to 40 GW by 2022. However, it is clear that a subsidy will not in itself help achieve this highly ambitious target. It could only support a tiny fraction of this capacity and hence its only purpose could be to accelerate a market.

According to a recent BRIDGE TO INDIA analysis, so far less than 15% of the installed rooftop solar capacity has made use of the subsidy (around 40 MW out of 285 MW – refer to our “India Solar Rooftop Map”). Even within that, currently the EPC companies that are able to avail the subsidy (the so-called “channel partners”) also attach a premium to the project cost. This is broadly on two accounts: firstly, they have to use Indian modules that can be 5-10% more expensive and secondly, they put a value to all the hassles, delays and risks associated with the subsidy disbursement. A 15% subsidy will put such players and projects on almost a level playing field with those that are operating outside the realm of subsidies. Thus, the subsidy might not even accelerate the market towards a 40 GW. Its only function might then be to protect domestic manufacturers in a niche market of “subsidised rooftop solar” worth perhaps 50-100 MW (depending on the actual subsidy amount made available).

There is currently still too much ambiguity left in the proposed new policy to contribute in any meaningful way to the larger objective of increasing the market size by a factor of more than 100. If the target of 40 GW is to be reached, the focus has to change from government incentives and protection of domestic manufacturers in niche markets to the creation of an overall, attractive market. The latter includes: financial innovation, availability of reliable information, standardisation of PPAs, and clear and predictable grid rules for grid access. In the commercial and industrial segment, the rest will be done by the dynamics of energy pricing: rising tariffs and falling solar costs. In the residential segment, subsidies make more sense as the viability gap is still too large for solar to gain significant ground without support. However, for residential rooftop subsidies, too, we need a predictable framework in which available subsidy meets the expected demand for it.

Overall, BRIDGE TO INDIA believes that this will have a small positive impact on market growth. However, with the raised expectations of a 100 GW target, we are still waiting for policies that can be substantial building blocks in a comprehensive and ambitious policy framework that does justice to the very ambitious national goals.

India finalizes amendments to the REC mechanism
In other news, on 30th December, the Central Electricity Regulatory Commission (CERC) has released the final order for the third amendment to the Renewable Energy Certificate (REC) regulations (refer). Two key changes that have been enacted are: the new floor price for solar RECs now stands at INR 3,500/MWh and the forbearance price at INR 5,800/MWh and, under a vintage REC mechanism, older solar projects registered under the REC mechanism will get a multiplier on RECs for every MWh of energy. BRIDGE TO INDIA’s analysis to the changes suggested in the draft stage of the amendment can be accessed here. Most of the changes proposed at the draft stage have been incorporated.

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