While solar power has crossed grid parity globally, commercial and industrial (C&I) consumers in India continue to pay substantially higher grid tariffs to discoms than domestic consumers. In order to reduce their operating expenses, C&I consumers are now procuring significant solar power through onsite rooftop solar plants and offsite solar plants. Industry experts share their views on the key developments, challenges and emerging business models in the C&I solar segment in India. Excerpts…
What are the key trends in the C&I solar segment in India? What are the major growth drivers?
Vinay Kumar P.
Across the country, irrespective of geography, C&I grid tariffs remain substantially higher than the levellised cost of onsite rooftop solar and offsite open access solar. This, by far, has been the most significant growth driver for the C&I solar market. There are other drivers as well, but tariff arbitrage shadows the rest. This does not take away the substantial contribution that net metering regulations and policies have made to the growth of onsite rooftop solar for the C&I segment.
Rooftop solar installations in India reached around 3.3 GW by the end of the third quarter of 2018-19. According to estimates, commercial and industrial segments, with 0.78 GW and 1.59 GW of installed rooftop solar capacity respectively, account for about 70 per cent of the total installations. Statistics also reveal that rooftop solar has been growing at a healthy pace compared to the previous year. The main drivers for the adoption of solar PV have been the fall in solar PV module and installation costs against the rising cost of grid power, the policy thrust to large-scale deployment of rooftop solar PV, an enabling regulatory framework, and streamlining of the utility-grid connection process.
In addition, the ripples created by the perceived impact of the goods and services tax have subsided now. The availability of financing options and innovative funding structures aided by channel partners with lending support from banks has enhanced access to finance. The widespread adoption of the opex model, which constitutes about two-third of all installations, has also been one of the factors in the growth of the segment.
The C&I segment has the largest market share in rooftop solar deployment today and is seeing significant traction. The primary driver is the attractive economics for this segment, which results in substantial savings in power cost on each unit replaced with solar. Other major drivers are the “green image” and “carbon neutrality” that the C&I user achieves, as well as the renewable purchase obligation compliance requirements of users procuring fossil fuel-based power under open access or from captive power plants. Favourable state policies including concessions or exemptions from open access charges and attractive models such as group captive models have also encouraged many C&I consumers to procure solar.
What are the emerging business models in this space? What are the solar tariffs currently being offered to C&I consumers under the opex model?
Vinay Kumar P.
The capex and opex models have been the mainstay of the onsite rooftop business for C&I customers. There is scope for much financial innovation in this space. Leasing models that allow C&I customers to retain depreciation benefits are likely to find favour as we go forward. Debt products for funding the debt requirements for onsite solar also need innovation.
Offsite open access solar has conventionally been either built in captive mode or is third party owned. There is need for more innovation in this space. We need to promote “community solar” in a big way, wherein clusters of individual customers tie up with a sponsor for building solar plants. This is popular in western countries and we need to promote it in India too. Net metering policies should have uniform enabling clauses for innovations such as community solar and virtual power plants. Peer-to-peer trading of rooftop solar power (as some state policies already allow) will open up the market further. There is also a case of linking the renewable energy certificates market with onsite rooftop solar capacity.
In addition to the standard capex and opex models, the rooftop solar industry has been gearing to adopt innovative business models that are a win-win for all stakeholders. The key areas of innovation in the upcoming models are demand aggregation, shared ownership and shorter terms for power purchase agreements (PPAs) and rooftop lease arrangements. A lot of variants of the existing opex model, customised to suit the consumer needs, have also emerged.
Multiple tariff structures are currently being followed under the opex model in the C&I segment, such as those linked with the prevalent retail tariff (with or without escalation) and those that share the savings linked to performance. One of the under-explored markets in the C&I space is the medium and small scale enterprise segment.
Third-party PPAs have mostly dominated the market, owing to their simplicity in execution and lower transaction cost. Although the generation tariff for solar is competitive at Rs 3.50 to Rs 4 per unit, high regulatory charges like cross-subsidy surcharge or additional surcharges and transmission and distribution (T&D) charges levied by the utility inflates the “landed cost” to the consumer, making solar energy purchase uneconomical at times. However, we have seen the emergence of the group captive structure in which an equity investment of 26 per cent gives the consumer the benefit of exemption from surcharges. The policies of some states also favour captive over third-party PPAs where exemption for T&D charges is provided specifically for captive consumers only.
What are the policy and regulatory barriers hampering the growth of the segment? Which state has the best provisions for the development of these projects?
Vinay Kumar P.
Despite the obvious value proposition, the growth of onsite rooftop solar has been surprisingly subdued. Against a target of 40 GW by 2022, the current installed base of about 3 GW represents both a challenge and an opportunity. The initial slow start was due to the lack of a good engineering, procurement and construction (EPC) ecosystem for both construction and operations and maintenance of these systems. Over the past few years however, the EPC ecosystem has matured and we have a network of competent installers across the country that compete on quality and price. Despite this, the growth rates appear lukewarm. A part of the reason could be significant under-reporting of installations and discoms not being able to report the capacity that has been set up, especially if customers do not opt for net metering and go for completely behind-the-meter captive mode operation.
The market share of the capex model has been higher than the opex model, both due to the prospect of depreciation benefits and the higher tariff advantage that C&I customers enjoy, if they own the rooftop. Both these benefits go away in the opex model. It is also suspected that the credit flow to the C&I segment is not all that smooth and the conventional banking system has a long appraisal cycle before loans get sanctioned for capex and opex proposals.
The lack of adequate implementation push despite policy formulation, and frequent changes in policy at the state level are some of the primary barriers to the growth of the C&I solar segment. Furthermore, it has received differential treatment in many instances concerning the eligibility for net and gross metering. For captive systems, the maximum size of rooftop systems has been restricted to 1 MW, and the cumulative capacity to 15 per cent of distribution transformer loading, preventing the deployment of larger systems. Similarly, net metering limits are set to a percentage of the annual energy consumption. The established regulations do not facilitate innovative metering arrangements, which involve the aggregation of loads and deployment of larger systems such as metering aggregation (group net metering) and virtual net metering.
However, recently the Uttar Pradesh Electricity Regulatory Commission has enabled regulations allowing the group metering framework. Further, the Delhi Electricity Regulatory Commission has issued draft guidelines enabling the group net metering and virtual net metering framework. However, the eligibility criteria for the C&I consumer segments to participate in such frameworks is not clear. If enabled, these frameworks would open up opportunities for RESCO (renewable energy service company) players to explore the C&I consumer segment. It is important that the business models be structured in a way that offers discoms an opportunity to partner with the C&I consumer segment in establishing these models.
Although several states have issued solar policies that offer many benefits, on-ground implementation is a challenge. Regulatory delays in granting open access approvals owing to resistance from discoms has been a significant barrier hampering growth in several states. Further, there is regulatory uncertainty in charges and exemptions once the policy’s operative period is over.
What is the outlook for this segment given that C&I users are the most high-end consumers for discoms? Do you expect greater resistance from discoms to let go of these consumers in the future?
Vinay Kumar P.
As in other countries, we will expect to see some push-back from discoms to net metering policies. We already see this happening in states like Maharashtra, which has raised issues for C&I clients accessing net metering and open access from the same premises. There is an urgent need to make the discom a stakeholder in this roll-out of decentralised solar plants and not just be a victim of lost revenue and customers. Various ideas are being discussed in the industry and the Ministry of New and Renewable Energy seems to be on the right path here.
The crucial aspect guiding the future outlook may be centred on the design of revenue-neutral schemes for discoms. The reluctance of discoms to lose revenue from high-paying consumers can be overcome by demonstrating the long-term benefits of gross metering or some form of net metering and innovative group metering arrangements with utility participation. The development of utility-centric business models would improve discom confidence in variable renewable energy.
The distribution operations need to be significantly transformed, in terms of process streamlining, energy accounting, power procurement planning and load-generation balancing, to cater to the increasing penetration of renewable energy sources in general and distributed renewable generation, in particular. The possibility of deploying larger systems in the C&I segment to provide grid support functions can also be explored. Overall, the future remains optimistic if a new dimension is established in the utility-consumer relationship and mutually beneficial pathways are followed furthering the overall goal of clean, renewable and reliable power at affordable rates for all.
Any shift by C&I consumers to solar or other renewable energy sources would entail a cross-subsidy loss to the discom, which is likely to cause pain to discoms and result in some resistance. However, I believe that the consumer will demand access to the benefits of technology and efficiency and, in the long run, discoms will have to adapt to this through higher efficiency and innovative ways in order to maintain customer relationships and revenues.