What makes the solar cowboys ride?
In an earlier blog post, my colleague Tobias Engelmeier suggested that the Indian market is for players with long-term strategic interests in solar (read his blog here). While this is true, the market will also see what we call ‘Cowboys’ (players with no strategic interest in solar) who will utilize three levers to drive the market in the initial stages.
- Accelerated Depreciation benefit for solar projects
- Locking-in on land prices and reaping benefits after 20-25 years
- Recognizing that the price of metals will rise multi-fold in the coming years in order to cash-in on the scrap value of the solar power plant.
There are many ‘Cowboys’ or players with no strategic interest in the Indian solar industry. They are attracted by the general buoyancy but also by specific business opportunities. These players have little or no knowledge of solar in India, but want to jump onto the solar bandwagon. The overwhelming interest in the Indian solar market serves to raise awareness in the market, but can be detrimental to the industry in the long run, if they result in poorly planned and poorly constructed projects. For example: A 5 MW project in Uttar Pradesh is operating at a Capacity Utilization Factor (CUF) of 14% compared to some other plants in Rajasthan that are operating at a CUF of 23%. The prime reason to establish the plant in Uttar Pradesh was the pre-availability of land. Cowboys who want to capture the market could potentially outbid other developers without considering the full project cost implications. Already, some market participants are worrying that the current prices of solar energy in India are not commercially viable.
So what makes the Cowboys ride?
– Accelerated Depreciation: Most Cowboys are cash rich real estate developers, SME industrialists, film stars or land bank owners who are looking for ways to reduce their tax burden. Solar provides a great opportunity to do so. The wind sector in India experienced a similar trend in the initial phases. Film stars, politicians and any cash-rich companies cashed in on the accelerated depreciation benefit. We are seeing a similar trend for solar in India. Most of these projects are in the red due to lack of technical know-how.
– Locking-in on Land – Land prices in India are skyrocketing. This is also true for land for solar power projects. For instance, land was available in remote districts of Rajasthan for INR 20,000 per acre before the announcement of the National Solar Mission (NSM) Phase 1. Just after two years, the same land prices have reached INR 500,000 per acre – a rise of nearly 2,400%! Land owners are beginning to recognize the value for their land and demanding much more. The cowboys want to cash-in on this and lock in the land for 20-25 years. The returns from the sale of land would be many times higher than the returns from the solar project. This also means that the quality of the solar plant takes a back-seat.
– Scrap value of power plant – Cowboys also recognize that the prices of copper, steel and other materials that go into building the solar plant will rise multifold with increasing demand for these materials in India. The scrap value can be as high as 15% of total CAPEX.
These ‘outliers’ are making the Cowboys ride – for now. Unless the cowboys make the transition to becoming serious long-term players, they are likely to jeopardize their projects.
The call of sirens: Is India really a good solar market?
Download our latest INDIA SOLAR DECISION BRIEF, ‘The Project Development Handbook’, for a free overview of the processes, timelines, costs, challenges and opportunities in solar project development in India.