Business Today

Hotting up

Sky-high capacity targets and lollipop tariffs may spur investor frenzy in the nascent solar energy business.

K.R. Balasubramanyam | Print Edition: February 21, 2010

Until three years ago, Inderpreet Wadhwa, now 37, was a Silicon Valley techie who dreamt of doing something in his hometown of Amritsar that would help people there and also earn him some profits. On December 1 last year, when his 1 mega watt (MW) solar power plant went on stream in Awan, 40 km from Amritsar, he didn't just realise his dream but also became the first entrepreneur to build a solar power plant of MW-scale in India's private sector.

Wadhwa's start-up, Azure Power, has become a lifeline for 20 villages. He is scaling up the plant's capacity to 2 MWto feed more villages. For each unit of electricity pumped into the grid, his company gets Rs 15 from the Punjab State Electricity Board, of which Rs 6 is borne by the Union Ministry of New and Renewable Energy (MNRE). It's not a windfall really (coal-based power sells for between Rs 3 and Rs 6 a unit) considering the huge capital investment— Rs 18 crore per MWagainst Rs 4-5 crore per MW for coal-based power. But Wadhwa is bullish. He says the average cost of generation, or levellised tariff, works out to Rs 9 per unit for the power purchase agreement (PPA) period of 30 years.

The 13 acres on which the plant stands has been taken on lease from villagers. "This is going to be our approach more or less everywhere,'' says Wadhwa, who has planned similar projects totalling 24 MW in Gujarat, Punjab, Karnataka and Haryana. The first MW-scale plant to come up in India was that of West Bengal Green Energy Development Corporation (WBGEDC). Its 1 MW plant in Asansol began generation on August 28 last year. Karnataka leads in terms of capacity with two projects of 3 MW each, at Kolar and Belgaum, going on stream on September 30. The Asansol plant is being stepped up to 2 MW and has already sold 5 lakh units, according S.P. Gon Chaudhuri, MD, WBGEDC. "Each 3 MWplant generates 4 million units annually and can irrigate about 1,200 acres," says S. Ramesh, Chief Engineer at state-owned Karnataka Power Corporation.

The Mission
With four solar projects running successfully, the coming months are likely to witness heightened action. But on the whole, the sector's performance makes for baby steps so far: 12 MWin India's total installed capacity of 156 GW. This is particularly disappointing given that about 5,000 trillion kilowatt-hour (kWh) of energy can be generated from India's land area annually. With piecemeal initiatives by states yielding very little result, Prime Minister Manmohan Singh, on January 11, launched the Jawaharlal Nehru National Solar Mission (JNNSM), setting a somewhat ambitious target of 20,000 MWcapacity by 2022 (see Tall Target). JNNSM is one of eight national missions which form India's National Action Plan on Climate Change. The Prime Minister has urged the industry to see the mission as a huge business opportunity. "I do sincerely believe that the target is doable and that we should work single-mindedly to achieve it as a priority national endeavour," he said at the launch.

The JNNSM hopes to see solar power achieve grid parity (when costs of solar power and conventional power become same) by 2022 and parity with coal-based thermal power by 2030. The prices of solar power and conventional power are predicted to move in opposite directions after reaching an inflexion point. According to Wadhwa, the cost of generating solar power has already dropped by 40 per cent in the last two years. The solar programme, devised by MNRE, is generous in its incentives.

NTPC Vidyut Vyapar Nigam, the nodal agency, will buy solar power from developers at Rs 18.44 per unit for a period of 25 years. The Nigam will mix it with low-cost thermal power drawn from the Centre's unallocated quota and sell to state utilities at Rs 5.50 a unit. The offer is available to developers who have operational plants and can sign up with the Nigam by March 31, 2010. The projects coming up later will receive the tariff as decided that year. "The mission has created an innovative framework for attracting investments and should enable Phase1 to build a strong foundation for achieving the target of 20,000 MWby 2022," says Gauri Singh, Joint Secretary in the MNRE.

The Solar Power Loop

  • WHO BUYS: NTPC Vidyut Vyapar Nigam
  • AT WHAT PRICE: Currently Rs 18.44 per unit
  • HOW NTPC SELLS: By mixing cheap thermal power with solar power
  • WHO NTPC SELLS TO: State utilities
  • AT WHAT PRICE: Rs 5.50 per unit
  • AND, WHY: State utilities meet their renewable purchase obligations
  • HOW: By inviting applications
  • COMMITMENT: Developer must agree to commission project by March 31, 2013
  • DECIDING FACTOR: Developer's turnover, net worth, land in possession, etc.
Very few power biggies are likely to ignore this mother of all solar campaigns. Even those going slow are sure to pick up speed, for each year of delay could mean losing out on higher tariffs. The tariffs tend to decline as capacities add up. Anil Ambani-promoted Reliance Power has evaluated sites in Rajasthan for a 100-MW solar power project, while Tata Power is looking at generating 300 MW by 2013. The Tatas are beginning with a 3 MW plant at Mulshi, in the Western Ghats. Astonfield Renewable Resources has proposed 778 MW worth of projects across the country and hopes to commission two projects of 5 MW each this year and another of 10 MWnext year. Other plants being built include those of Videocon and Moser Baer. Industry experts indicate each MW creates 10 jobs.

The Challenges
The task ahead is enormous, though. For instance, adding 1,100 MW capacity by March 31, 2013 means building an average of 275 MW capacity each year. The availability of modules, however, is not a problem as the mission document mentions that the country already has a PV (photovoltaic) module manufacturing capacity of 700 MW. But panel costs are an issue, and they need to fall.

Madhusudan Atre, who heads the India operations of Applied Materials, a global leader in nanomanufacturing technology, says the academia has to closely follow fundamental research in devices, materials and processes in collaboration with the industry to get overall systems costs down, increase cell efficiencies, and help build scale. "As the costs start going down, grid parity by 2022 will become possible," he says.

Entrepreneurs are sure to hunt for modules available at cheaper prices regardless of who makes them. China, home to about half of all solar manufacturers, is sitting on giant capacities aimed at foreign markets. Azure Power itself, for instance, sourced its panels from China, and Wadhwa says the Chinese-made panels are cheaper by 20-30 per cent.

The Solar Mission's approach has drawn a bit of flak, too. PV cell makers are agitated at MNRE's moves to get 60 per cent of grid-connected plants under the still-evolving solar thermal technology that aims to use steam to drive turbines. "Solar thermal is a nascent and unproven technology with no base in India while PV is a tried one, developed over the last two decades…As a matter of official policy, the mission should be tech-neutral and let the market decide the winners," wrote Tata BP Solar CEO K. Subramanya in a newspaper recently. MNRE's Singh, however, clarifies that equal importance has been given to solar thermal and PV technologies. "By carving a space for solar thermal, we are paving the way for solar thermal manufacturing industry to set up base in India, which would, hopefully, result in lowering of costs and thus tariff," she says.

Some experts reckon the policy will benefit Rajasthan and Gujarat more, as these states get maximum sunshine and would thus attract the largest number of developers. They favour two or three types of tariff linked to a region's solar incidence. That could lead to an equitable distribution of projects. A project could then earn twice as much in Rajasthan than in West Bengal, they suggest.

Power sector experts think the Centre can hope to meet its vision if it can involve states too. Says WBGEDC's Chaudhuri: "The mission's success is in everyone's interest. The Centre could set state-wise targets for capacity addition and allocate projects accordingly." As of now, one compelling reason for states to participate in the mission is that they can meet their renewable energy purchase obligations by buying the bundled power from NTPC Vidyut Vyapar Nigam.

There is also the question of the government's own ability to absorb huge subsidies. Arvind Mahajan, Executive Director of KPMG Advisory, thinks the subsidy burden will come down after a few years once costs come down and scale picks up. "You must look at 2022 goals more as a vision than as a target. A vision helps build an ecosystem which will sharpen the focus of all stakeholders." At Rs 18 crore a MW at today's prices, funding, too, looks like an issue. But Somak Ghosh, Group President, (Corporate Finance and Development Banking), YES Bank, dismisses such concerns. "If PPA's are designed in a bankable manner, there is no problem with the availability of funds. Banks know there is a power shortage and power generation is a good business." Investors, we guess, have heard that.


The Early Birds: Solar power accounts for only a negligible 12 MW out of the total installed capacity of 156 GW.
DEVELOPERAzure PowerKarnataka Power Corp.Karnataka Power Corp.WBREDA
PLACE Amritsar, Punjab Kolar, KarnatakaBelgaum, KarnatakaAsansol, West Bengal
PROJECT COSTRs 19 croreRs 60 crore Rs 60 crore Rs 21 crore
COST OF GENERATIONRs 9 per unit (average for 30 years)Rs 18 per unit (average for 13 years)Rs 18 per unit (average for 13 years)Rs 14 per unit (average for 15 years)
SELLING PRICERs 15 per unitUndecided yetUndecided yetRs 15 per unit
BUYERPunjab State Electricity BoardBangalore Electricity Supply CompanyHubli Electricity Supply CompanyDishergarh Power Supply Company
GENERATION FROMDec. 1, 2009Sep. 30, 2009Sep. 30, 2009August 28, 2009

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