Bridge India

How to make money in the Indian solar market

India has 3+ GW of solar installed. On the basis of that, in the last years, the country has built a broad ecosystem of manufacturers, installers, project developers and financiers. This sounds like a healthy launch pad for a big jump in capacity addition (perhaps even to an incredible 100 GW) – but it isn’t. Very few players in the market so far have made a good return. A common concern in the industry is the unavailability of finance. The government is focusing on solving that. However, finance follows returns (and low risk, but that is no longer the main concern). As soon as returns are attractive, there will be plenty of finance for the industry.

  • Most solar players are not earning reasonable returns from their solar business in India
  • A “strategic” rationale for investing into the solar industry has some merit, but cannot sustain the market
  • If India is serious about building a 100 GW (or even a 10 GW) market, it needs to offer solid returns from solar projects

Over the last years, the Indian solar market has been dominated by a host of mostly domestic players in manufacturing, installation and investment. Initially, the market was mostly populated by what we called ‘cowboys’ – businesses hoping for low hanging fruits and quick wins, no matter in what industry. Now, many cowboys have exited the market (most of them disappointed) in favor of more strategic, Indian players. Many of India’s leading business houses, such as Reliance, Tata Power (not to be confused with Tata Power Solar, the EPC arm) or Birla, that have long been standing on the sidelines, are now jumping into the fray. With few exceptions (the developer and EPC Sun Edison and inverter manufacturers being the most notable), international players and investors have been notably absent. Why? The reason is that the market does not yet offer sufficiently attractive returns.

Solar capacity addition in India has been stagnant at around 1 GW per annum for the last three years. Competition is intense. Planned equity returns at the project level hover between 13-16%. At a debt cost of 12-13%, this is too little. Driven by low project-level returns, it is very difficult for anyone in the preceding value chain (installers, manufacturers) to earn money on Indian projects. Prices are pushed lower and lower (India has seen some of the most competitive solar tariffs). Execution quality often suffers. As a result, many plants generate less than expected and returns are lower than planned for.

So, if returns are low, why is competition so intense? Of course, there is number of “irrational” or simply ill-informed players and there is a tendency to by over optimistic about plant performance. Leaving that aside, there seem to be four different strategies currently driving the market.

 1. Strategic entry

Some players wish to build a solar business, because they understand the magnitude of the long-term opportunity and believe that building a position in the market now helps them capture a larger share of the pie later. They might understand that returns, whether in manufacturing, installation or plant ownership, are not yet attractive, but are ready to take a hit now as they believe in some version of an early-mover advantage. Such an advantage may be in building a track record and brand to help in future pitches, in gathering experience and on-ground data or in building a team. There is a certain first mover advantage, especially for new entrants and less well-known companies. However, it is limited and a couple of projects might suffice. It will not drive the market.

2. Solar as a means to earn non-solar revenues

Some companies may not be interested in the revenue from the solar business at all, but may instead look at earning money in various other ways, related to the solar business. This could be: getting access to subsidies, getting access to land, or making use of accounting and taxation benefits and opportunities. Investing into solar is also a way to curry favor with political decision-makers (solar is a political buzzword). This can be used for other business ventures.

3. Taking a bet on the future

Another possible strategy is to take a bet on the future. A project, for example, might only yield an equity return of 14% today. However, there may be ways of increasing this in the future. Perhaps lending costs will fall, making it possible to refinance the project? Perhaps grid tariffs will rise much more and PPAs will not have to be honored (contractual security in India is weak), opening up a new route to selling power for a higher price to a new off-taker in the future? Perhaps carbon will be priced in some way in the future, opening up an additional revenue stream? Perhaps the dormant REC market in India will be revived? Perhaps modules will become so cheap and efficient in a couple of years so as to make re-powering of plants a viable option? Perhaps, if returns are not sufficient now, political influence can change parameters to make them sufficient in some way later on? Given that India is a very dynamic economic and energy landscape, such bets on the future are, perhaps, more reasonable than in more settled environments, such as the US or Germany. There are, of course, the inverse risks, too: There might be retroactive charges for grid-utilization or PPAs might not be honored by if they can buy solar for half the price some years down the line.

 4. Valuation game

A solar player might hope that in the future, because of the vast long-term potential of solar in India, an investor will be willing to pay a premium for a solar business or for a bundle of solar projects. This premium might be sought through a strategic sale, through a sale to a financial investor or (most commonly) through an IPO. Whether or not a valuation which exceeds the business fundamentals (in the case of projects, the average returns of the projects) is justified, depends on whether the factors in points (1.) to (3.) are considered valid. In general there seems to be a widespread hope that investors’ enthusiasm will be high.

 What is common to all the above strategies is, that they are not based on the simple, core business of generating and selling solar power at an attractive rate of return (above 16% EIRR).

 The government has marked out the lack of finance (primarily debt) as a key bottleneck in the industry. It is true that there is not enough debt. However, this is a symptom not the cause. The cause is the low profitability of the solar industry. Once that is achieved, debt and equity (including international investment), will follow. To move from the current 3 GW to 100 GW will crucially depend on that. How can solar become profitable? Moving from the current reverse bidding process to a clear, feed-in tariff based process (solar costs are now well known and quite stable) would help; as would a move from the many different allocation processes to a standardized framework across the country.

Tobias Engelmeier is the Founder and Director of BRIDGE TO INDIA


  • Tobias, thanks for this article.
    I share the same sentiments over an irrational “hot” market.
    In some countries, local and state governments can help raise the Unlevered IRR (PIRR) by introducing financial policies to lower the cost of building RE projects; for example: tax reduction or exemption for first few years, exemption on import tax on RE equipment, VAT refunds, deferred tax etc. China is one country that has introduced a slew of financial measures at state and govt level to build up the RE industry very quickly.

    Governments can also help reduce the WACC (weighted average cost of capital) by providing clear policy framework – e.g. stating guidelines for feed-in tariff, mandatory acceptance by grid owners to connect and fully receive power generated by RE IPPs into their grids – all these help to reduce risk, hence reducing the financial premium associated with Country Risk that contributes to WACC.

    Developers can also do their part to reduce project risk before financial closure to qualify for cheaper financing – e.g. by having a thorough feasibility study done, a lock-in arrangement EPC contract with reliable contractors with penalty clauses for delayed delivery (one area that is always a challenge is grid interconnection construction), PPA that is ready-to-go with grid operators etc. When project risks are clearly identified, with a clear plan how to execute and mitigate key risks, the access to cheaper finance becomes wider as more financiers are willing to jump into the bandwagon if the risk can be properly quantified and managed. With cheaper finance available, the Levered IRR (EIRR) can be higher, especially when the gearing ratio is high. Beside financing the project by equity, developers can also choose between different types of project financing, from straight-up debt financing to more complicated subordinate financing (mezzanine, convertible bonds etc), the latter usually is “cheaper” than the former. But the general rule is that financiers will be more willing when the execution plans and project risks (and mitigation) are clear.

    Certain greenfield developers have a greater appetite for risk and are willing to take on EPC risk and start-up risk to develop a greenfield project. Once the EPC risk is over and the project is fully operational, the financial performance becomes more stable and visible as the residual risk are more contained – at this stage, the project may become attractive to a different class of investor who has a lower risk appetite but with access to much lower cost of financing at a much higher gearing ratio, as this generates a higher Levered IRR (EIRR) for the investor even though the Unlevered IRR (PIRR) may be mediocre. Hence, greenfield developers may be able to sell off the project to such investors at an acceptable premium. Eventually, the Levered IRR to equity investor is often the defining criteria, or at least one of the most important criteria.

  • Your analysis is on the dot. it is telling comment on the plethora of motivated responses of businesses to the solar business.

    Indeed it is a travesty that while India’s policy makers twiddle policy thumbs just to get it right, countries are already on their solar way.

    “We see a boom this year and next,” said Ash Sharma, a senior research director at IHS. He expects capital spending to rise through 2016.

    China, in a pact with US President Barack Obama, agreed in November to get 20 per cent of its energy from renewable sources by 2030, with its total carbon emissions peaking the same year.
    To reach that goal, the Chinese government earlier this year boosted its target for 2015 solar installations to 17.8 gigawatts from about 12 gigawatts.

    Japan may install as much as 12.7 gigawatts of solar power this year, the most after China. The country has promoted wider use of renewable energies, especially rooftop panels, after the 2011 Fukushima nuclear plant meltdown.

    Indian government has a long way to go to reach those numbers.