Weekly update : As solar targets become larger, the spotlight turns on policy delivery

Several new announcements at the central and state level are creating a lot of excitement in the Indian solar market (read the October 2014 edition of the India Solar Compass). Last week, Rajasthan notified that it is looking to revamp its solar policy to achieve 25 GW of solar capacity in five years (refer). The proposed policy aims to streamline land lease/acquisition and statutory approval process to attract investors.

  • More public sector companies are being asked to consider investing into solar
  • Scaling-up effect will help bring down the cost of solar power in India significantly
  • India has the attention of the local and international investment community

 At the central government level, the Ministry of New and Renewable Energy (MNRE) has persuaded large public sector companies National Thermal Power Corporation (NTPC) and Coal India to invest into GW-scale solar projects. More public sector companies, especially those under the Ministry of Petroleum and Natural Gas, are also asked to consider investing into solar. NTPC is clearly looking at this investment as an expansion of its portfolio as a power producer. But Coal India and other public sector companies are being nudged by the government to use available resources such as land and capital.

 Land for new solar parks (typically, 500 MW to 2,500 MW) has been identified in 11 states under the draft solar parks policy released last month (refer). Andhra Pradesh alone has earmarked a solar park for a 2.5 GW capacity. Under the solar park policy, for the states that come forward for central support on such parks, their distribution companies are obligated to buy 20% of the power from these parks. The remainder may be sold within the state, or to other states through national grid.

 All these are excellent initiatives and if they go through, the scaling-up effect will help bring down the cost of solar power in India significantly. However, attracting interest from investors into the sector has not been India’s biggest challenge. Most bids at the central and state level have been oversubscribed in the past and intense competition has led to some of the lowest tariffs globally. But solar power is still likely to be more expensive compared to conventional power (at least in the initial years) and the distressed distribution companies may be hard pressed to pay for it.

 It is still not clear: who will buy this solar power and on what terms? Only 3 GW of capacity is planned for the bundling mechanism (that makes solar power competitive by bundling it with cheaper coal power). The off-take of most other planned solar plants is uncertain. It is important to remember that the Renewable Energy Certificate (REC) mechanism also initially found a lot of takers but, in the absence of an adequately functioning market, has now come to a complete halt.

 India has the attention of the local and international investment community. To sustain this phase of optimism and to ensure that the Indian solar market maintains its upward trajectory, the government needs to quickly address key questions around off take and distribution companies bankability. This requires much closer co-ordination between centre and states.

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