India has installed around 356 GW of power generation capacity, as of March 2019. Of this, the share of renewables is over 20 per cent. Growing at a compound annual growth rate of 54 per cent in recent years, the installed solar capacity has reached around 28 GW, which roughly translates into 8 per cent of the total installed capacity mix. According to KPMG estimates, the solar energy potential is 749 GW, which is over 27 times the current installed solar capacity.
Growth drivers and opportunities
The growth in solar power capacity has been possible on the back of highly competitive tariffs in the segment vis-à-vis conventional power sources as well as other renewables. In 2018, discoms’ average power purchase cost hovered around Rs 3.92 per unit. Meanwhile, the lowest tariff discovered during bidding (for the Bhadla Solar Park) was Rs 2.44 per kWh. During February 2017 to December 2018, solar power tariffs remained in the range of Rs 3.48 per kWh to Rs 2.84 per kWh, which is significantly less than grid tariffs. The primary reason for the fall in tariffs has been the declining module prices. Module prices comprise almost 60 per cent of solar project costs, and decreased from $1.78 per W in 2010 to $0.26 per W in September 2018. Another key driver has been the availability of low-cost financing, which has been possible due to increased funding from lending institutions such as the Indian Renewable Energy Development Agency, and pension and private equity funds, and the use of innovative financial instruments like green bonds and masala bonds. Moreover, the government’s support in setting up solar parks, provisioning of fiscal and regulatory incentives such as accelerated depreciation, viability gap funding and the exemption of several charges have given a fillip to the segment. The solar energy segment has already attracted over $6 billion of equity investments to install 28 GW of capacity. In order to install 72 GW more to achieve the 100 GW target by 2022, $12 billion of incremental investment is required.
The current installed capacity of rooftop solar systems is 1.8 GW and it is estimated that by 2022 the installed capacity will reach 5 GW. By 2022, the share of the industrial, commercial, public sector and residential segments in the total rooftop solar market will be 38, 18, 21 and 23 per cent respectively. The commercials will remain the key driver of this segment. Rooftop solar systems have already achieved grid parity for commercial and industrial consumers, and are slowly becoming attractive for large residential consumers. Among the states, Andhra Pradesh, Rajasthan and Gujarat are the emerging markets in the rooftop solar segment. Despite the huge potential, the availability of finance remains a key constraint.
With 2.7 MW of operational projects, the floating solar segment in India is still at a nascent stage. Over 1.5 GW of projects are under development. However, this number is still low considering the 10 GW target to be achieved by 2022. It is expected that in 2020 over 5 GW of floating solar projects will be bid. These projects can serve as a solution to the land acquisition constraints in India. Evacuation of electricity from these projects is easier due to their proximity to hydropower projects. Moreover, due to the cooling effect of water, there is a 3-5 per cent increase in power generation. However, higher degradation due to exposure to ultraviolet rays and the high cost of floats are major bottlenecks. Going forward tariffs could go up marginally but would follow the larger declining trend.
Positive trends to watch
There are a number of positive trends emerging in the solar energy segment. One, the recent tendering trajectory indicates a huge potential for the industry. The country will auction 40 GW of renewable energy projects, comprising 30 GW of solar, every year for the next 10 years till 2028. This will be a huge opportunity for domestic manufacturers and developers. Two, the bidding cap for solar projects is steadily increasing, reaching around 2 GW. Three, with amendments to solar bidding guidelines, the land acquisition time has been increased to 12 months from 7 months, and the commissioning deadline has been increased to 21 months from 13 months (for projects set up inside solar parks). And four, the waiver of interstate transmission system charges and losses for solar projects commissioned up to 2022 is attracting investor interest.
Based on a presentation by Rohit Kumar, Director, Corporate Finance, Deal Advisory, KPMG India, at the Renewable Watch conference, “Solar Power in India”.