Caution on solar power

Low tariffs conceal major evacuation challenges

The price of solar power has steadily declined ever since the launch of the Jawaharlal Nehru National Solar Power Mission five years ago. From nearly Rs 18 a unit in 2010, rates have plummeted to below Rs 5 in the latest bids. The drop is sharp in the past few months. This is attributable partly to aggressive bidding by solar power producers and partly to improved technology and a decline in equipment prices because of intense competition in this field and subsidies elsewhere. However, for a sector which is yet to blossom, a steep fall in output prices is not an unmitigated blessing. On the upside, low tariffs impart the much-needed grid parity to renewable energy - suggesting solar power may sooner than expected offer serious competition to conventional power produced from gas or even coal. But, on the downside, they make investors nervous about the returns on their investment. They also fear that big players in the power sector, such as the National Thermal Power Corporation (NTPC), which have the capacity to bundle solar power with conventional energy, may bring average rates down to below even Rs 3.5 per unit, which they may find difficult to match. There is, thus, a danger that prospective investors may turn wary. This would endanger the ambitious target of 100,000 MW of solar power, including 60,000 MW of grid-connected power.

The solar sector also needs to overcome some other formidable challenges to get into a fast-growth trajectory. For one, the evacuation of power from solar plants to feed it into the grid, an essential prerequisite for ensuring their viability, would need greater attention and investment. Once the cost incurred on the evacuation infrastructure is built into the tariff, the economics of solar power production may change. The lifting of solar power by the distribution companies is also a question mark because of their poor financial health, and because renewable energy purchase obligations may not be effectively enforced.

Many investors are asking deeper questions about viability. Nearly one square kilometre of land is needed to put up a 40-60 MW solar plant. Such large chunks of land are not readily available except in isolated areas from which evacuation of power becomes even more difficult. As it is, the track record of capacity addition in this sector in recent years is far from satisfactory. The bulk of the liberal investment commitments - amounting to over $200 billion (approximately Rs 13 lakh crore at the current exchange rate) - made during the global renewable energy conference convened by the government early this year, are yet to fructify. The Centre and state governments cannot be lulled into complacency by low tariffs. Sustaining investor confidence could be an even harder task.