Interview: SGS Group on overcoming bankability and project execution challenges in the Indian solar market
Dr. Thomas A. Louis is the Global Business Development Manager for Renewable Energy at the SGS Group Management Ltd. He has the following views on successful implementation of solar projects in India:
- Public incentive programs as well as private players need independent advisors and contracted third party service providers for support on key decisions
- Project developers can improve their bankability through verification by an independent professional services partner
- Collaborating with experienced and strong partners can lower the project risk and make project financing terms more favorable
BTI: What potential do you see in the Indian solar market and how is India different from other markets?
TL: We see certain major trends favoring growth in the Indian solar market. First, there is increasing electricity consumption per capita, population growth and hence demand for building new power generation capacity. Second, the levelized cost of electricity generation (LCOE) using solar power, whether using photovoltaic (PV) or concentrating solar thermal technology (CST), continues to decrease rapidly, in line with reductions in the cost of core components and overall system cost. Third, India has high levels of irradiation. A favorable legal framework, large areas of suitable land and vast numbers of technically skilled people can potentially contribute to developing, manufacturing and deploying large numbers of power generation plants in India. This could be both grid-connected and standalone plants over a wide geographic area and using state-of-the-art renewable power generation technologies. However, the Indian solar market is very different from European markets with regards to the ability to finance significant investments, reliability of the transmission and distribution network and the experience of key players. The effective collaboration of all the stakeholders is required in order to design, finance, build and connect significant renewable power generation capacity.
BTI: What module technology is best suited to Indian conditions?
TL: The best technology for a solar power plant depends critically on the specific application and circumstances. In some cases, where the tariff structure is progressive and the ability to generate revenues from electricity sold at peak demand is dominant, CST with thermal storage capability has the ability to match electricity supply to demand. Despite CST’s higher LCOE, it may be more attractive to decision-makers than PV. In the case of ground mounted installations and where the cost of land is low, thin-film PV technology is favored due to its low cost per wattpeak. This is in contrast with the best technology for small, roof-mounted, grid-connected PV installations, dominant in many European countries. In such cases, the cost per m2 and limited space availability favor the use of higher efficiency crystalline silicon PV technology. In addition to the above mentioned considerations (tariff structure, meteorological conditions, availability of land, area related cost) the choice of particular solar power technology that is best for a large country like India will also reflect the future role the country aspires to play in the global supply chain. The question as to what solar power generation technology best meets India’s needs thus cannot be addressed from a single point of view. It all depends on which perspective you take.
BTI: Do you think solar PV plants in India will perform as per expectations?
TL: Whether individual solar power plants perform as per expectations is a matter of professional execution. Whether solar power can make a significant contribution to addressing India’s growing demand for electricity, is a more complex question. The success of public incentive programs designed to stimulate the adoption of solar power technologies is often linked to the generation of jobs in respective industries. Such programs require more than projects being diligently planned and professionally executed. The need is to have independent advisors and contracted third party service providers to support public and private players on key decisions.
BTI: What can project developers do to improve the bankability of their projects in India?
TL: The cost of solar power generated electricity is front-loaded, i.e. determined largely by the cost of the system to be built and the weighted average cost of capital (WACC) used for financing the project. The system cost is determined by the choice of technology, suppliers and project partners and their professional execution. The WACC is determined by the debt to equity ratio and the respective cost of debt and equity. The more experienced and stronger the partners in the project, the lower the project risk and the more attractive project financing terms will be. The ability to secure project financing through loans, with long payback times and low interest rates, in other words bankability, is a key to success in every solar project. Project developers can improve this bankability by subjecting their work to verification by an independent professional services partner. The cost of engaging such a partner, whether by the project’s developer, investor or owner, lender or bank, or EPC contractor, will certainly be offset by the benefits gained in the form of securing attractive project financing swiftly.
BTI: What are the key challenges with regard to project execution in India?
TL: The choice of local partners, the ability to handle administrative processes, to obtain permits and to effectively deal with counterparty risk, are key to successful project execution. This applies everywhere, but specifically in fast growing markets, which often attract new and inexperienced players. This may be the case in emerging solar power markets such as in India. Here, the price sensitivity of the solar power market and its potential for growth not only attract large, experienced and well known players but also those whose willingness to offer the lowest price may not be matched by their ability to deliver and provide guarantees for lasting solutions at the lowest cost. The challenge is for decision makers to distinguish what appears to be a low price from a genuine low cost offer from a partner with a strategically defendable position and resulting cost advantage.