Dr. Tobias Engelmeier is Founder and Managing Director at BRIDGE TO INDIA.

No doubt: the Indian solar market has strong fundamentals. Irradiation is very high, power is expensive and in short supply. Solar is getting cheaper. In addition, there are now a host of new policies (NSM phase II, Tamil Nadu, Andhra Pradesh, etc. – please refer to our other blog entries) promising upwards of 4 GW of new solar installations in the coming months. On the other hand, there are only a few players that are really enjoying themselves. Tier 1 Chinese module manufacturers find price pressures too high – as do many EPCs. Project developers still face difficulties in getting their projects financed. The question is: does anyone earn any money? The answer is: no. But those who are ready to try new approaches will do so in future.

• Solar in India is a long-term business proposition with moderate returns
• ‘Quick wins’ are rare
• The market has only deceptively low barriers to entry
• To tap the great fundamentals, patience and a real business case are needed

On the face of it, solar power in India seems like a no-brainer. And the national and state governments are willing to encourage it in various ways – from providing subsidies to creating demand. Large figures for new allocations are making the rounds. Tamil Nadu alone aims to have 3 GW of installed solar capacity by 2015 and the NSM double that by 2017 (for our assessment of the growth, see the blog’The Indian Solar market – new market, new chances‘). This creates a great attraction from a distance: EPCs and module suppliers in need of new sales opportunities, overseas Indians (often with a finance background) looking for a promising opportunity in India, Indian business houses and land owners with political connections, and many more – they are enthralled by this promise.

However, at a closer look the opportunity is far less straight-forward. In urban slang, the word, I believe, is ‘layogenic’ – or, to go with the 1996 film ‘Clueless’: “A full-on Monet – from far away it’s ok, but from close up it’s a mess”. Once the math is done, solar is a pretty mediocre business proposition. This is, I believe, by-and-large is a success: The Indian government does not overpay for solar power (refer to ‘Rent management in the Indian solar market‘) and allocation processes have so far been transparent and highly competitive (refer to our blog ‘Why the ‘I know the Chief Minister claim’ does not work for solar in India‘). There are also significant risks and uncertainties in the policies, the wider power regulations and infrastructure (including the strength of PPAs with loss-making DISCOMS), the data-basis, and the legal environment that continue to raise concerns about the bankability of solar. Many of the large, 100 MW+ projects being talked about in the market will not come to fruition.

Quick wins are also difficult to realise. Land prices have risen in some areas. Those who sold just the land have profited. However, many of those who wanted to take the process further and have invested into power purchese agreements with a view of selling them on without significant own value addition or constructing a plant with little understanding of the technology have lost money (e.g. their bank guarantees). Even those who knew well what they are doing have made little money. As far as I can see, refinancing of projects post construction has not happened at favorable terms. Selling of completed projects has been difficult, more because of low project IRRs and unmitigated risks than because of legal limitations.

Market entry barriers are only deceptively low. The technology (PV, not CSP) is not difficult to master. Solar projects in other markets (US, Germany) have become household commodities. However, especially in a seemingly simple market, competition is high and making money requires a competitive advantage. That can be found in, for example, a superior ability to raise money at favorable conditions, the provision of real energy solutions to customers, the delivery of quality project development, the mitigatition and hedging of risks, the prediction of pricing developments of the global solar industry, tapping into tax breaks or other policy support, the building of strategically aligned assets and from the point of view of the capital markets.

The hard challenges in the market have been somewhat cushioned by the fact that projects under NSM Phase I and Gujarat have simply ‘lucked-out’, as a large Indian investor recently put it to me. The rapid fall in module prices over the last 18 months has saved project profitability. As per my understanding of the larger industry trends, this cost reduction is not going to be repeated.

If returns are not so exciting, another reason for getting into the market could be strategic. Many participants do not know yet, when or even how they will earn money, but they believe that it makes sense to establish themselves early. However, while there are notable exceptions, many seem to be strategic movers without a strategy and early movers without an early mover advantage.

All this smacks of disappointment. This can be good: The enthusiasm is exaggerated, disappointment separates the wheat from the chaff. And from this more realistic position, the real work to create value starts. It can also be too much. The fledgling industry could get a serious dampener, if too many developers, banks, and module suppliers burn their fingers. It would be difficult to reanimate the industry then. But I don’t believe that will happen. With 1 GW of installed capacity, the market is past this highly vulnerable, nascent stage. Much has already been learned and improved.

This is the good news: The strong fundamentals of the Indian solar market are becoming stronger by the day. Those players who have patience, accept normal financial returns (on the project level, say 15%) and concentrate fully on developing sound power solutions, can look forward to building a busines to cater to a vast, growing market. The single most important factors are: an ongoing, accelerated deregulation of the power industry, which will lead to increasing power costs and a further wave of privatisation of power supply; an underfunded and underperforming grid infrastructure that will make local or regional power solutions more attractive (see our blog: ‘Is the Indian grid ready for expansion to renewable energy?‘); continuously growing power demand across the country with a growing power deficit and falling (in future, less precipitiously falling) solar costs. For more thoughts on this, please have a look at the blog post ‘Making unsubsidized PV work in India‘.

In an upcoming blog post, my colleague Akhilesh Magal will discuss how some project developers are nevertheless looking for ‘quick wins’ rather than sustainable business models.

You can also 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.