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Unwarranted pessimism on Indian solar PV

A closer look at the Solar PV feed-in-tarrifs in India and that of the global PV leaders points to the fact that the Indian industry is well positioned; and cost of capital which represents the key hurdle is being addressed.

There exists skepticism regarding India’s solar PV growth story. Many believe that solar projects may not be able to take off with unattractive feed in tariffs and project financing issues plaguing the Indian solar industry. However a comparison of Indian and German solar feed in tariffs reveal that India’s tariffs for solar PV declared under the Phase 1 of Jawaharlal Nehru National Solar Mission (JNNSM) are just marginally lower than Germany (the biggest solar market). With programs being announced to de-risk the solar projects and provide financing support, it’s a matter of time that investor confidence will increase and India will be able to capitalize on its potential demand to emerge as a major solar power.

As of now 37 companies have been awarded contracts for solar projects under the first phase of JNNSM. The total funding requirement for the current phase will be to the tune of Rs 15,000 crores of which Rs 10,500 crores is expected to be debt capital (70%) and Rs 4,500 crores will be equity (30%).  The proposed feed in tariff for PV was Rs 17.91 per kWh but with reverse bidding project developers had to submit a discounted tariff which they could offer. Bids for PV projects have been in the range of INR10.95/kWh to INR12.76/kWh with average feed in tariff being INR12.1/kWh.  Many industry pundits and solar manufacturers are skeptical about the commercial viability and sustainability of these projects at the final bid tariffs.  It is believed that discounted feed in tariffs and lack of certainty regarding plant performance may mar the commercial viability of these projects which may make financial institutions wary of funding them. However, if we consider German solar feed in tariff applicable from 1 Jan 2011 post a 13% cut viz-a-viz Dec 2010 tariffs; there exists a marginal difference between them and the Indian tariffs.

Table of German FITs

Project financing hurdle
This leads us to question the reason behind the pessimism regarding the sustainability of Phase 1 JNNSM projects. One reason may be the project financing issues faced by project developers. Considering technological risks, lack of availability of credible irradiation and performance data, relative unfamiliarity with the sector and the existing risk return mismatch, financial institutions are wary of funding these solar projects which leads to high interest rates and in turn decreases the RoI of the project. Also, many project developers are being forced to resort to balance sheet financing due to lack of non-recourse project financing which would be ideal for solar projects which have high capital cost, long return period and variable revenue stream. Since non-recourse project financing allows the lender to have a lien on the project’s cash flows but not on the developers balance sheet, the lending institutions need guarantee on project viability, performance and revenues which is still a question mark in case of Indian solar projects.

Steps being taken to address financing needs
However, there are steps being taken to increase the flow of financing for solar projects.  Asian Development Bank (ADB) has recently announced a credit guarantee mechanism to support cINR1916crores (USD425m) worth of investments in solar projects. ADB plans to guarantee 50% of the loan raised by solar projects of less than 30MW size. It also plans to help extend bank loan tenure from 8 to 15 years in order to encourage Indian and International banks to finance Indian solar projects. Other international financial institutions such as IFC, EIB, KfW etc. are also planning to invest in Indian solar projects. Also, central Government is planning to set up a Solar Payment Security Fund. As per the proposal by Ministry of New and Renewable Energy (MNRE), this INR330 crores fund available to PV projects selected under Phase 1 of JNNSM, “will ensure an uninterrupted payment stream for sale of solar power by solar project developers contracted with NTPC Vidyut Vyapar Nigam Ltd (NVVN).” Such schemes ensuring government backing and certainty of return will also increase the interest of private lenders in the solar sector.

After the initial hiccups in project financing get resolved, investor confidence will increase and Indian solar industry will boom on the back of enormous domestic demand and low cost manufacturing base.

(Follow the next article on: Future of Solar PV manufacturing in India)
 

Annexure: List of solar PV projects selected under JNNSM Phase 1 and final bid tariffs

  Name of the Bidder Final Tariff Rs/Kwh       Project Location          Cummulative  Project Capacity
1 Camelot Enterprises Pvt. Ltd.          10.95   Maharashtra 5
2 Khaya Solar Projects          11.50 Nagore Rajasthan 10
3 DDE Renewable Energy          11.55 Nagore Rajasthan 15
4 Electro Maritech Pvt Ltd          11.60 Nagore Rajasthan 20
5 Vasavi Solar Power          11.65 Nagore Rajasthan 25
6 Fine Hope Allied Energy          11.65   Rajasthan 30
7 Karnataka Power Corpn. Ltd          11.69   Karnataka 35
8 Newton Solar Pvt. Ltd          11.70 Nagore Rajasthan 40
9 Green Tech Power Pvt. Ltd.          11.70 Jodhpur Rajasthan 45
10 Saidham Overseas Pvt. Ltd          11.75 Nagore Rajasthan 50
11 Mahindra Solar One Pvt. Ltd          11.89 Jodhpur Rajasthan 55
12 Azure Power (Rajasthan) P.Ltd.          11.94 Nagore Rajasthan 60
13 Rithwik Projects Pvt. Ltd,          11.97 Anantapur AP 65
14 Sai Sudhir Energy          12.00 Anantapur AP 70
15 Maharashtra Seamless Ltd          12.24 Jaisalmer Rajasthan 75
16 Viraj Renewable Energy          12.37 Jodhpur Rajasthan 80
17 Northwest Energy          12.38 Nagore Rajasthan 85
18 Sun Edisson Energy P.Ltd          12.39 Bikaner Rajasthan 90
19 Electrical Manufacturing Co.Ltd          12.49 Allahabad UP 95
20 Alex Spectrum Radiations P.Ltd          12.49 Bikaner Rajasthan 100
21 Indian Oil Corpn. Ltd.          12.54 Barmer Rajasthan 105
22 Coastal Projects Ltd          12.60 Chitradurg Karnataka 110
23 Welspun Solar AP          12.64 Anantapur AP 115
24 CCCL Infrastructures Ltd          12.70 Tuticorin TamilNadu 120
25 Alex Solar Pvt. Ltd.          12.72   Orissa 125
26 Punj Lloyd          12.73 Jodhpur Rajasthan 130
27 Bhaskar Green Power P.Ltd          12.74 Jaisalmer Rajasthan 135
28 Oswal Woollen Mills          12.75 Jodhpur Rajasthan 140
29 Amrit Animation P.Ltd          12.75 Jaisalmer Rajasthan 145
30 Precision Technik P.Ltd          12.76 Jaisalmer Rajasthan 150

 

The author, Aparna Khandelwal, is a Sr Associate at cKinetics, a venture accelerator catalyzing rapid adoption of low carbon sustainable growth practices in emerging economies through technology transfer, capital access and adaptation interventions.

Article references:
1. http://mnre.gov.in/pdf/mission-document-JNNSM.pdf
2. http://mnre.gov.in/solar%20energy%20conclave%202010/solar-energy-conclav...
3. http://www.ivgpartners.com/reports/US%20India%20Solar%20Energy%20Opportu...
4. http://www.epia.org/fileadmin/EPIA_docs/public/Global_Market_Outlook_for...
5. http://www.solarplaza.com/article/india-on-roll-to-be-a-solar-energy-sup...
6. http://www.cea.nic.in/planning
7. http://www.bloomberg.com/news/2010-12-14/adb-to-guarantee-425-million-of...
8. http://www.digitimes.com/news/a20101217PD201.html
9. http://www.solarfeedintariff.net/
10. http://www.indianexpress.com/news/centre-plans-solar-payment-security-fu...
11. http://www.scribd.com/doc/39378905/Preview-of-India-Solar-PV-Advisor-Sep...
12. http://www.nvvn.co.in
 

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