India plans 100,000 MW of solar, but doubts over pricing rules could frighten investors

10 July 2018
05 July 2018, Week 26, Issue 615

What: India aims to put 100,000 MW of solar capacity out to tender 

Why: Pollution is rising in cities and the government wants to cut oil and gas imports

What next: Doubts remain about India’s ability to offer a credible pricing regime that would make solar competitive and attractive to investors

India’s plans to make solar power a major part of its energy mix are moving forward with an ambitious 100,000-MW tender, around 10 times the size of the world’s largest current solar tender. 

Indian power minister RK Singh told an energy conference in Spain that his government would launch a 100,000-MW tender, which would include solar manufacturing and storage. 

Singh did not provide more project details, other than saying the tender would be held “in the near future.” New Delhi already intends to launch a 10,000-MW tender in July. 

He added that India was on track to surpass its 2022 target of 175,000 MW of renewable capacity. 

India has already installed 70,000 MW of renewable capacity, with another 12,500 MW currently under construction.

Energy growth

Singh’s comments come as India turns to renewables to try to rein in rampant air pollution in many of its most populous cities and to diversify the energy mix away from costly oil and gas imports. Twenty cities in India are ranked among the most polluted in the world, Singh added, while there is an urgent need to reduce fossil fuel use, and to deliver electricity to every household by the year’s end.

His disclosure also comes just two weeks after Tokyo-based SoftBank Group announced it would invest US$60-100 billion in solar in India. 

In 2017, India bypassed Japan to become the world’s third largest market for solar power, after China and the US. 

Indian Prime Minister Narendra Modi has already called for 100,000 MW of solar capacity by 2022, which is nearly 30 times what the country had only three years ago. 

Modi also set a goal of reducing India’s oil and natural gas import dependency to two-thirds by 2022, and to half by 2030.

Despite these targets, coal still accounts for nearly 60% of India’s power mix, while wind provides 10% and solar 5%, according to government figures. 

Yet India installed 20,000 MW of solar capacity in 2017, nearly doubling its capacity from a year earlier.

India’s power demand has grown in lock-step with is economic growth, which posted an average annual rate of approximately 11% between 2004 and 2014, according to the US Energy Information Administration (IEA). The country has also posted a GDP growth rate of more than 7% for each of the past three years. 

Doubts remain

Singh’s remarks reflect the scale of India’s ambitions to become a renewable energy leader, but several doubts remain. 

Vinay Rustagi, the managing director of Bridge to India, a renewable energy consulting firm, told Indian media “there are many, many operational constraints to the plan in terms of land availability, transmission connections, who’s going to buy and pay for those [transmission] towers, and so forth.”

There are also funding questions that have to be answered before India can achieve its solar energy goals, said Tim Buckley, a director at the pro-renewables Institute for Energy Economics and Financial Analysis (IEEFA). 

Buckley said, in comments carried by India’s Economic Times, that the economies of scale would be huge, and would require total financing of around US$100 billion. 

However, he added that given renewables were already 10%-20% cheaper than existing thermal coal power generation in India, and half the price of imported coal-fired power, it made “entirely economic sense for India.”

Ricardo Barcelona, managing director of Barcelona Advisers, an energy analyst and former investment banker, agreed with Buckley’s estimated price tag. 

He told NewsBase Intelligence (NBI) that India would need to raise US$100 billion to fund its new 100,000-MW solar ambitions. The country would need to build 1,000 square km of solar panels.

“To make funding viable via the capital market, India may secure a power purchase agreement [PPA] either in the form of guarantees or price commitments,” Barcelona said.

“This brings us back to the take-or-pay structure that [ends] up being renegotiated every now and then when there is a large divergence between contract and market prices. With all the enthusiasm in policy circles, India does not have this money. Investors may likewise not part with their money that easily.”

Barcelona said that in a market with surplus, new supply might displace existing capacity. 

“This implies that the long-term price trend may be down rather than up, further putting pressure on sustaining a fixed price commitment for the next ten or fifteen years.” 

He added that India could offer front-end subsidies to help fund its solar projects, but it is a hard sell given its contradictions. 

“Solar cannot be promoted as being competitive [or cheaper than coal] and at the same time insist on getting a subsidy in its many guises [tax breaks, capital grants, and feed-in tariff (FiT)].”

Another obstacle is land availability, alluded to earlier by Rustagi. Barcelona said that using 1,000 square km of land, particular agricultural farmlands, diverted to solar farm use raised the problem of the food-against-energy debate.

India’s power grid is also “not the best class,” Barcelona said, while “incorporating intermittent supplies of this scale could pose technical challenges to maintain stability, which means more costs to the existing power generators.” 

Underinvestment in India’s transmission network, described as a one giant bottleneck by a recent Brookings Institute report, has created systematic and chronic blackouts in the country for many years.

The way forward?

Despite these obstacles, India could benefit from ongoing trade tensions between Washington and Beijing, which have resulted in Chinese cutbacks on solar panel exports. 

“They [China] expect a 35% fall in installations. If this comes to pass, you will see panels flooding the market as they did in 2008 to 2014,” Barcelona said. 

India then might be able to take advantage of lower prices resulting from a market saturated with solar panels.China exported 37,900 MW of solar panels in 2017, around 37% of global solar installation, up 78% from 2016, according to China Photovoltaic Industry Association data. 

However, access to the US market will remain uncertain amid President Trump’s announcement earlier this year to impose a 30% tariff on solar panel imports from China. 

Ironically, India has also discussed a 70% duty on solar panel imports from China. NBI thinks that the Indian government might want to reconsider this proposition if it is to get anywhere near its 100,000-MW target.

New Delhi must also, in NBI’s opinion, inject some clarity and transparency into its funding and tendering models if investors are to form an orderly queue. Likewise, investment in the country’s grid infrastructure will also be required to guarantee connections.

Edited by

Richard Lockhart

Editor

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