Ever since Sun Edison of the United States bagged the 500 Mw Ghani Solar Park project in Andhra Pradesh by quoting a tariff of Rs 4.63 a unit last month, it is widely believed that solar energy is ready to take off in India. To put it in perspective, the first auction under the National Solar Mission in December 2010 for 150 MW witnessed bids of as high as Rs 12.76 a unit, though it was ultimately auctioned at Rs 12.16 a unit.
The union minister for new and renewable energy, Piyush Goyal, expressed his delight that "solar tariffs have broken the Rs 5 per unit level" in a tweet. At the conference on solar energy organised by Inersolar India in Mumbai a few days ago, this had fired the imagination of the participants. Speaker after speaker waxed eloquent on the reasons for the fall and the consequences.
KPMG in a recent report says that solar power prices are now within 15 per cent of thermal power, and by 2020, the prices will be approximately 10 per cent lower. Rooftop solar power is already competitive compared to grid power for many consumers, and could be cheaper for a large section of the consumers by 2022. A "solar house" that is self-sufficient in energy could be a reality within the coming decade."Solar energy is at an early stage both on the panel side and on balance of plant, and will see continued cost reduction for a while," says PwC Partner Kameswara Rao. KPMG Partner and Head (energy and natural resources) Manish Aggarwal estimates that solar tariff will settle at Rs 4.20 a unit by 2020, and thermal power generators may have to respond by reducing their costs.
According to Jayant Deo, a former member of the Maharashtra Electricity Regulatory Commission, the price of solar electricity has reduced to one-fourth in the last five years because costs have tumbled worldwide. It is estimated that by the end of 2017, there will be grid parity in 80 per cent of the world. "The fall is due to the shift of solar cell production to Asia which has lower costs. It is also because of the improved efficiency of the cells and the reduced weight of the materials used," he says.With greater adoption, production of solar equipment has reached a virtuous cycle: falling prices lead to more purchase, which in turn generates further economies of scale.
The fall in solar tariff also needs to be seen in the context of the regulatory changes proposed by the government. It has initiated an exercise to amend the National Tariff Policy of 2006 in order to give a boost to solar and other renewable power projects.
According to the proposed amendment, while putting up a thermal plant, it will be mandatory to establish renewable energy capacity equivalent to 10 per cent of the thermal capacity. This has been proposed in order to balance the environmental impact of coal-based projects. The power generated from renewable energy projects will be bundled together with thermal power for tariff determination and onward sale.
Moreover, the solar power purchased under the renewable power obligation is proposed to be increased to 8 per cent by 2019 from 3 per cent at present. Charges for inter-state transmission of renewable power will be waived.
Deloitte Touche Tohmatsu India Partner Debasish Mishra says: "Given the fact that the last auction had most of the leading players bidding less than Rs 5 per unit, it looks like a trend which is here to stay."
If the UDAY scheme (Ujjwal Discom Assurance Yojana) for distribution reform succeeds as planned by the government, one of the biggest impediments towards achieving these solar targets would be out of the way, Mishra adds. The success of this scheme is crucial for the power sector. All talk of more capacity is useless unless power can be evacuated efficiently.
One of the issues that have plagued solar power for long is the lack of funding. That problem got resolved to an extent when the Reserve Bank of India recently included renewable energy within priority sector lending for a loan of up to Rs 15 crore per project.
Tarun Kapoor, a joint secretary in the ministry of new and renewable energy, says: "The cost of money was quite high about five years ago when banks were reluctant to lend to the sector. That problem is not there today. Bankers have started understanding the sector. Money is available, but it is expensive; so getting money at the right price is the main challenge."
Following the Renewable Energy-Invest conference in February, the ministry had asked banks to give green commitments and it did get those from several banks. "We constantly talk to the banks to convince and motivate them. The good thing is that the message has come from the prime minister and finance minister, and there was some mention also in the Budget speech. Banks are becoming positive,'' says Kapoor.
To help matters further, the government has allowed tax-free bonds specifically for renewable energy. Rural Electrification Corporation, Power Finance Corporation, Indian Renewable Energy Development Agency and NTPC have already raised money through green bonds.
However, Tata International head (solar) Anjan Ghosh says finance is still an issue as banks are demanding the securitisation of revenue streams.
German bank KfW has recently sanctioned €1billion for the solar capacity addition between 2015 and 2020. This is in addition to the €1.3 billion that KfW has already provided for the "green corridor" project. However, Claudia Arce, South Asia head of KfW, strongly emphasises the need for India to address the issue of quality installations and take the distribution companies on board.