The current rooftop solar capacity in India stands at 3.4 GW. Of this, rooftop solar projects set up for commercial and industrial (C&I) consumers account for 70 per cent. Moreover, rooftop solar uptake in the C&I segment has not been dependent on any tender pipelines and is largely driven by commercial aspects. However, there are several roadblocks in scaling up rooftop solar photovoltaic (PV) capacity in this space. These largely pertain to the ineffective implementation of policies and regulations. A look at the key growth drivers, emerging business models, important issues and challenges, and outlook for rooftop solar in the C&I space in India…
Key growth drivers
The C&I segment has been increasingly adopting rooftop solar systems due to its greater cost economics vis-à-vis grid power. It must be noted that grid tariffs for the C&I segment are among the highest across states. Greater access to debt financing, emergence of the operating expenditure (opex) business model and increased familiarisation with the technology have further facilitated the adoption of rooftop solar in the C&I segment. Since most of the consumers in this segment operate on large premises, there is abundant rooftop space available for setting up solar PV systems.
Tariff arbitrage: Given the high C&I tariffs, saving on electricity bills becomes the primary driver for these consumers. According to BRIDGE TO INDIA, these consumers effectively save up to 50 per cent of their power expenses by moving from grid-based power to rooftop solar. A high level of cross-subsidisation is another reason that incentivises C&I consumers to install rooftop solar projects. State discoms continue to subsidise agricultural consumers at the expense of C&I consumers. For instance, in Andhra Pradesh, agricultural consumers account for 26 per cent of total energy sales and only 2 per cent of the total revenue. Industrial consumers, on the other hand, account for 35 per cent of sales (slightly larger than agricultural consumers) but contribute over 54 per cent to the total revenue of the discom. The scenario is similar in most states.
Policy framework: The state governments have introduced comprehensive rooftop solar policies, along with net metering regulations. Moreover, exemptions from solar open access charges have given confidence to all the stakeholders in the entire value chain, leading to rapid deployments.
Emergence of opex model: Historically, the capex model has been more popular. Now, the opex model is gaining more prominence in the C&I rooftop solar segment, resulting in the rise of a large number of players that work specifically on the opex model. Hence, C&I consumers are increasingly moving to a set-up where they no longer have to invest money or be involved in the operations.
Financing options: The availability of financing options and innovative funding structures through channel partners with lending support from banks has improved access to finance for this sector. Consumers with limited funds have benefited from the credit-linked business model. Meanwhile, developers have benefited by receiving assured payments from clients.
Power supply situation: The power supplied by discoms continues to be erratic, though the all-India average duration of power cuts has reduced from over 19 hours per month in June 2016 to 8.6 hours per month in June 2018. C&I establishments need uninterrupted power supply to ensure continuity of their business operations and mitigate revenue losses, which can be provided by rooftop solar systems.
Risks and challenges
C&I consumers with large rooftop projects have to deal with various conflicts. According to the open access regulations of some states, rooftop solar projects of more than 1 MW are automatically classified as open access projects. Any plant above 1 MW of capacity may not be eligible for net metering benefits but would rather have to bear open access charges pertaining to the third-party power sale model.
Uncertainty in regulations: There is a high degree of uncertainty regarding future open access charges. Hence, developers and consumers are unable to plan in advance and sign long-term agreements. Most states have provisions such as exemption from wheeling charges, cross-subsidy surcharge (CSS) and additional surcharge, and provision of the banking facility for solar open access transactions. CSS has seen a variety of concessions across states, ranging from full waivers (Andhra Pradesh, Telangana and Haryana) to 50 per cent waiver (Tamil Nadu), while in states like Gujarat and Rajasthan, CSS for solar projects continues to increase.
However, certain states have started changing their stance about concessions. With the cost of solar power coming down, there will be no rational business case for providing any exemptions from solar open access charges. Given the price-sensitive nature of the market, these charges can adversely impact the final cost of power, and hence, the viability of open access-based rooftop projects.
Challenges in obtaining licences: Obtaining open access licences from discoms is a key challenge. As most discoms do not want to part with their high-paying C&I consumers, they often make the approval procedure convoluted and delayed in order to discourage consumers from moving away from their network.
Changing industry structure and emerging business models
Like other consumers of rooftop solar, C&I consumers also adopt the capex and opex models, and use net and gross meters. Under the net metering arrangement, the solar energy generator feeds the excess power after captive consumption into the grid and gets compensated by the discom. Under the gross metering arrangement, all the energy generated is fed into the grid at a predetermined tariff. Under the opex model, the leasing model or the power purchase agreement (PPA) model can be used.
Leasing model: Under this model, the developer leases the premises and pays a fixed lease or rent to the owner for the duration of the lease period. The solar energy generated is fed into the grid at a predetermined tariff approved by the regulator. This model is beneficial for large building owners without much power consumption. These consumers can get a fixed income per month without being affected by the changing tariffs.
PPA model: Under this model, the solar energy generated is sold to the owner of the premises by the renewable energy service company (RESCO) developer as per the tariff decided in the PPA. The owner sells any excess power over and above the personal consumption to the utility through the net metering system. The PPA model helps the consumer both save and earn. The solar tariff paid to the RESCO developer is much less than the C&I tariff, resulting in cost savings. The consumer earns by receiving payment from the grid for selling the excess energy leading to additional income.
Aggregator model: There are models emerging in the C&I rooftop space, that combine the characteristics of both the opex and the capex models. One of these is the aggregator model. In this model, discoms undertake demand and capacity aggregation of willing C&I consumers in a particular area. The C&I consumers finance and own the solar plants. These plants can then be installed at a lower capex owing to economies of scale. The power is sold to discoms by developers at a PPA tariff, and developers pay a fixed tariff to consumers. The aggregator model is becoming popular especially in large cities due to increasing demand for cheaper power, lower risk of project failure owing to multiple consumers, better credit profile of C&I consumers and active participation of discoms.
Aggregator and service model: In this model as well, a discom undertakes demand and capacity aggregation of willing C&I consumers in a particular area. The discom then selects a developer to set up the project. However, unlike the aggregator model in which consumers own the project, in this model developers finance, own and install the solar system and sell power to the discoms at the PPA tariff. The C&I consumers pay the solar tariff to the discoms. In a slightly different version of this model, the discom’s role of aggregating the demand is done by the developers.
The way forward
Going forward, the demand for rooftop solar is likely to increase significantly with increasing industrialisation and rising conventional fuel costs, thus improving the project economics. Discoms would hopefully be a part of this transition and promote grid integration of such projects. In the emerging business models, discoms are taking initiatives to promote rooftop projects in the C&I segment. All in all, growth in the C&I segment will significantly contribute to the achievement of the 40 GW rooftop solar capacity by 2022 target.
By Sarthak Takyar