India’s hidden solar opportunity lies in captive consumption – and this is starting to make sense right now, far away from the fanfare of the NSM and other government programs.
Key points:
- India’s electricity shortage is not going to be met by conventional power, least by government driven policies
- The government solar policies, like the National Solar Mission, although successful, cannot possibly scale fast enough to meet the enormous energy challenge
- This gives the industry an opportunity to disseminate the solar captive consumption model in India
India’s solar market is currently primarily driven by the National Solar Mission (NSM) and the state solar programs. These, although successful, cannot scale as quickly as India needs them to. India is facing a severe shortage of electricity – some estimates peg this at 14% during peak demand. There is simply no way India can bridge this gap going by the current developments in the energy sector. Coal has its environmental shortcomings and a genuine shortage in supply. The nuclear debate rages in India. Hydro power has its concerns with altering ecosystems and silting of rivers. Among the renewable energies, wind is not as scalable, given India’s limited wind resources. The only other option remaining is to scale energy production through solar energy. Although current policies further this goal, they are insignificant in the larger context. The government of India has set a generation capacity target of 78,577MW by 2012 based on the assumed GDP growth rate of 8% p.a. The target is likely to be missed by 60% resulting in a deficit of 47 GW. In comparison, the government with its flagship solar program – the NSM – targets 20 GW – that too only by 2020.The opportunity for solar energy lies in the largely untapped captive consumption market. The captive market is the key business model for solar in India for the following reasons:
1) It does not depend on government subsidies: As we have seen in Italy, Spain and the Czech Republic, there is a risk that the government can roll-back subsidy schemes in the event of a financial crisis. Investors are growing weary of this risk, which is reflected in the downturn of the solar industry in Europe.
2) No restrictions: The NSM currently has a minimum installed capacity of 5MW and requires previous experience in solar to participate in the auction process. This keeps out smaller players and entrepreneurs – exactly what is needed to kick start a solar market.
3) Minimum transmission and distribution investments: large solar plants are located in remote regions of Gujarat and Rajasthan. They require expensive transmission and distribution and there are high losses associated with it. Captive solar power is located right at the point of consumption driving down electricity prices from solar further.
4) Speed: The procedures of government programs can be quite slow and involve cumbersome bureaucratic processes. Foreign investors are increasingly looking for quicker investment options that require minimum interaction with the government.
5) Bid Price – In an attempt to outbid competitors, there is a tendency to bid for a price that is unrealistic given India’s dynamic project development process and more importantly lack of previous experience in large solar projects. This puts the entire NSM at a risk. Captive projects on the other hand are location specific and allow project developers to customize their energy concept (and therefore the price offered) in a more realistic scenario.
6) Alternate financing options such as the renewable energy certificates (REC): The REC market is taking off. Demand is driven by obligated entities that have to meet their renewable purchase obligations (RPO). This opens up a second revenue stream that makes off-grid projects viable in certain consumer segments.
7) Grid independence: Being independent from the grid has its advantages, especially in areas of intermittent energy supply. Although solar usually cannot meet the demand of heavy loads such as machines, it can meet the demands of low load electrical equipment like lights and computers.
Captive consumption refers to generators set up for the exclusive, local consumption. In case of captive solar energy, storage technology is yet to mature to guarantee a secure round-the-clock supply of electricity. But solar is fast reaching grid-parity in certain consumer segments in India like industries and commercial consumers who especially use diesel as a backup source. These establishments can continue to consume base load power from the grid/diesel and can look to offset a portion (say 10%) of electricity demand from solar – at a price which is lower than the cost of electricity combined from diesel and grid power. Solar EPC (Engineering Procurement and construction) prices have dropped more than 20% in the last two years and will continue to fall by another 10 – 15% in the next year, making captive solar viable across a larger segment of consumers.
