Bridge India

New “entrepreneur” scheme for solar seems a non-starter, unlikely to work in current format

Last week, India’s Ministry of New and Renewable Energy (MNRE) released a new policy designed to encourage unemployed youths and farmers to install renewable energy plants (refer). The idea is to increase employment as well as power generation. The government has set a very ambitious target of installing 20 GW of solar capacity through this scheme. 40 GW more is supposed to come from utility scale plants and another 40 GW from rooftop plants. To put these numbers in perspective, India’s current solar capacity stands at 4 GW.

  • BRIDGE TO INDIA feels that the policy will be difficult to implement
  • It seems improbable that many unemployed youths or farmers will be able to raise capital for this
  • Commercial banks will also be wary of providing any financing to applicants with little or no solar experience on a non-recourse basis

The core driver of the policy is a grant from the central government of INR 5 million per MW, initially for a total capacity of 9,500 MW. It is not clear how MNRE will fund this aggregate grant of INR 47.5 billion. Each project is to be 0.5-5.0 MW in size. These projects will be split between states based on their Renewable Purchase Obligations (RPOs) (see table below). The scheme is proposed to run for seven years to achieve the overall target of 20 GW. Apart from solar, this policy is open for other renewable sources such as wind, small hydro and biomass.

The Proposed state-wise allocation is as follows:

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The MNRE has written to the states for formal acceptance of the allotted capacity. If any state government does not wish to participate in the scheme, its capacity will be distributed between other states.

The state governments will be responsible for identifying the beneficiaries, setting up tariff structure for power purchase agreements (PPAs) and providing basic training to the beneficiaries (the cost will be borne by the central government) for running the solar projects.

The beneficiaries are required to hold a majority stake in the projects and will be allowed to bring in partners for up to 49% of the equity. Apart from the central assistance, state governments are free to provide additional financial incentives in the form of capital subsidy or interest rate subvention. This might well be needed.

Can the policy fly? We have serious concerns. Firstly: how will an unemployed youth or farmer find money to invest – equity requirement in the projects is expected to be around INR 20 m/MW (assuming a debt to equity ratio of 30:70). After adjusting for the central incentive of INR 5 m/MW and possible infusion from partners, beneficiaries will still have to arrange for roughly INR 5 m/MW. It seems improbable that many unemployed youths or farmers will be able to raise that kind of capital. Additionally, commercial banks will also be wary of providing any financing to applicants with little or no solar experience on a non-recourse basis.

The second key question revolves around off-take. The cost of generation and finance for small -scale plants will be substantially higher than that for larger developers. To make such projects viable, DISCOMs will have to offer tariffs of around INR 6.50-7.00/kWh. Given that many of the DISCOMs are in very bad financial health, their enthusiasm will likely be limited.

BRIDGE TO INDIA is of the opinion that this scheme is fundamentally flawed and will be difficult to implement. The government is trying to mix two very different policy goals – more employment and more power – in a very unimaginative manner and it will fall short on both accounts. It would be better to invest more into building the technical skills India’s young need to make the overall solar story a success. If India’s solar market will continue to grow as fast as it currently does, it will provide plenty of new employment opportunity.

1 comment

  • I agree with your analysis and conclusion. There will be no additional power generation but Taxpayers funds will be misused. The scheme will in fact result in mass scale corruption.Projects will be completed on paper,money will be distributed to few favoured clients and rest will go into the accounts of politicians, bureaucrats and middlemen.