India is expected to add new solar capacity of over 9 GW this year as against less than 1 GW just three years ago. The country should join the exclusive top three solar countries club alongside China and USA. There are an estimated 15 GW of projects already allocated and in different stages of development.
Growing market has led to a burgeoning investment interest from Indian and international developers in the sector. The international developers are attracted by the prospect of a growing and open market. Notable players include Fortum, Softbank, Engie, EdF, Sky Power, First Solar, FRV, IBC Solar, Sembcorp and CLP. They have more solar experience and better access to technology and financial capital in comparison to Indian developers.
But we find that the international developers, despite their competitive advantage, have been reserved with their appetite. There are currently five Indian developers with a commissioned plus pipeline capacity of over 1,000 MW. In contrast, the biggest international developer so far is Engie (Solaire Direct) with total capacity of less than 400 MW. Utilities such as Sembcorp, CLP and Statkraft, who have been in India for many years, have barely shown any interest in the solar sector so far.
We believe that there are multiple reasons for cautious approach of international players. Doing business in India remains difficult on a day-to-day basis. For projects not located in solar parks, land acquisition is very tedious and costly. Offtaker creditworthiness and poor health of some of the distribution utilities still remain a big concern despite UDAY scheme. There is rising incidence of grid curtailment and payments delays in the sector.
The extremely competitive nature of solar auctions has also put off some international developers, who typically like to tie-up their equipment and EPC costs at the time of submitting bids. In contrast, the Indian developers are less risk averse and keep their procurement options open for as long as possible in order to benefit from falling prices and are therefore more aggressive with their bids. Overall, the international developers have a low-risk, low-return philosophy whereas their Indian counterparts usually have an opposite approach.
Based on our discussions with several leading international developers, we find that they are daunted by many project execution and operation challenges in India. Most of them have already won one or more projects and their primary focus right now is to execute these projects. They are keen to learn from their initial experiences and want to ramp up gradually. They are also much more selective in their bidding with a clear preference for solar park based projects tendered by central government entities such as National Thermal Power Corporation (NTPC) and Solar Energy Corporation of India (SECI).
Our expectation is that the project development competitive scenario will evolve as some Indian developers will find it challenging to sustain their growth because access to capital remains tight. Some Indian developers with gung-ho approach to risk will probably struggle in the future. Fall in tariffs will require developers to create value through superior technology such as trackers, robotic cleaning, storage integration and better design. International developers with a better understanding and experience of these technologies will have an advantage and they are well placed to play an important role in the sector growth.