Will India be the solar opportunity of a lifetime? Or are we just hearing a lot of noise? To some extend, it comes down to what one believes in: Will India develop as a country? Will its government be part of the solution or part of the problem? I can’t answer these questions for sure, of course. Although I do have my views, expectations and hopes. Just to lay out the scene: There are three ways of looking at this market: The “Vision”, the “Reality” and the “Need” perspective.
1. The Vision
Let us first consider the “Vision” perspective. Prime Minister Modi has, on several occasions, stated his commitment to make India a 100 GW solar market in five years’ time (with 40 GW of that coming from distributed generation). Compare that to the German market, which is only 38 GW to date. Overall, if one adds the supporting grid infrastructure and auxiliary services, this would translate into a $ 100+ billion market opportunity. This vision is enough to make every investor and bank around the world listen up, which is already a success of sorts.
In line with this goal, the government is currently pushing through parliament an amendment to the Electricity Act (2003) to increase the solar renewable purchase obligations (RPOs) of the discoms and other obligated entities to 10% in five years – roughly in line with the 100 GW target. However, the implementation of the RPO targets will have to be done at the state level. And this is one of the key political limitations to the government’s vision: it needs the states to cooperate. Predictably, there is a sharply divided response from states based on whether they are BJP/NDA ruled – as the central government – or not. Even, if the solar RPOs were pushed through (which will take time in any case), given the bad financial state of the discoms, it is still an open question whether it will drive the kind of solar adoption the government envisions. In addition to these RPOs, the government is pushing some public sector companies to build solar plants (hardly a sustainable approach), ruminating about large numbers of solar parks (good idea, but where is the execution?) and accepting “commitments” from various private sector companies (???). Overall, this currently does not add up to a credible roadmap to reach the 100 GW target in five years.
2. The Reality
The second perspective is to look at the reality of the market today. Currently, India has around 3 GW of solar installed, supplying less than 1% of the required power. Over the last two years, India has been a 1 GW per year solar market. This seems to now be ready to rise to around 3 GW. This is still far less than what would be required for the 100 GW, but it is a highly respectable growth rate nevertheless.
Altogether, there are around 10 GW of solar projects under development: some through central schemes, some through state schemes, some driven by government-owned enterprises and some by private investors. Margins in the market are still fairly low (EIRR of 15%) and debt costs are still very high (12.5%). The government wanted to reduce the cost of financing and increase the amount of available financing through various channels, but on that front, the market was disappointed. The distributed solar market continues to under-perform at no more than 10% of new capacity, its share actually falling. This is a far cry from the 40% share that the government has in mind. The good news is: India has built an excellent ecosystem of market players: Especially EPCs and developers/investors. Banks and regulators are catching up.
3. The Need
The third perspective is to look at what India needs. It is clear that India needs enormous amounts of power in the future. In 2012, its total electricity generation was 1,050 TWh. Let us be optimistic and assume that India will develop, that it will experience high economic growth, will industrialize more, will electrify the hundreds of millions still without grid power and will close its grid power deficit. Then, despite efficiency improvements in generation, transmission, and consumption of power, India will, according to BRIDGE TO INDIA modeling, need around 7% more power every year for the next 20 years, bringing the total generation to almost 5,000 TWh. That would be approximately what China generates today. On a per capita basis, it would take Indians from the tiny 800 kWh per capita today to around 3,000 kWh in 2035 – which is the current global average.
What options does India have to meet these requirements? My guess is, it will come down to a “coal-heavy” or a “solar-heavy” scenario. Both have their challenges. Building several 100’s of GW of new coal would be immensely polluting, require huge investments into rail and port infrastructure, pollute very large amounts of India’s fresh water, weigh heavily on India’s import bill, drive up global coal prices and quite possibly bring the global climate to the brink.
If you think about the solar-heavy scenario, consider this: if India were to supply 60% of its 2035 electricity from solar, it would need to build 1,600 GW of solar plants. From today’s base, that would require a 35% growth rate every year. At today’s cell efficiencies, this would require around 1% of India’s total landmass. There would have to be a lot of investment into the grid (balancing, spinning, storage, smart supply and demand management). Of course, if India were to build anywhere near that much in solar (around 4 times the total global installed capacity), then you can expect the cost of solar and of storage to fall by, I would guess, 50-80%. It could then well be the cheapest option.
Both options sound staggering – but that is the task before India. And if you put your faith in the solar scenario, you realize that the 100 GW target is not what this game is really about. The question is: which energy system will India – by 2035 the most populous country on the planet – build for itself? China was at that junction 20 years ago. They chose coal. Back then, solar was still much more expensive and thus not really an option. That is a key difference to today. Also, China now better understands the huge environmental and social costs associated with that choice and tries to mitigate them. India has a chance to do things better.