Rooftop PV in India holds enormous promise. Yet, as of May 2015, there is only a cumulative installed capacity of around 400 MW. He discusses the state of the market, listing the current business models used, market innovation and policies.
High irradiation levels, falling solar costs, high and rising power tariffs, power cuts, net-metering regulations and a government target of 40 GW by 2020 are ideal conditions for the rooftop solar market to take off. However, while there are big installation promises, the sector still represents a small market share. Industrial consumers are currently leading the way, with residential consumers lagging behind. Overall, the market is surprisingly slow to take off.
What business models are currently in the market?
Capex model: Some industrial consumers buy their own plants. This may simply be the easiest and fastest way for them to go solar. It may also be tax driven (accelerated depreciation, AD). In some cases, consumers still distrust power purchase agreements (PPAs). About 40% of distributed solar plants follow this model.
Tax driven, third-party model: In this case, a third party offers to build a solar power plant, but the AD benefit is passed on to the power consumer. This usually involves some transfer of plant ownership. It is in a legal grey area because it might well violate the ‘intent’ of the AD benefit. About 20% follow this model.
Straight third-party model: Here, a third party offers to build the plant and sell solar power to the consumer under a PPA. AD usually does not come into the picture. PPAs are structured in different ways with respect to tenure, starting tariff and escalation. About 40% follow this model.
Lease/loan model: A third party might invest into and build a solar plant and then, instead of offering a PPA, offer a consumer to lease the solar plant, or give them a loan to buy the plant. In either case, there is a recurring payment that is quite similar in nature to the PPA model. This is not done much as yet.
Are power plants always on-site?
The majority are on-site. Mostly on the roof, but sometimes ground-mounted. Solar parks are increasingly popular: a dedicated plant within a solar park delivers power to a specific customer. The driver for this model is grid reliability and cost of grid usage in a state/area. In rare cases, a separate micro-grid is built – either for individual plants, more likely for group captive plants.
Which developers are offering solar PPAs in the market?
The market is crowed with new players, many of them start-ups. Over a 100 companies position themselves in this market. Many of them are actually installers that just want to get a customer conversation started by offering a PPA. Only 20-30 have a track record and team to speak of; even fewer actually have the funds to invest into solar plants.
Where is the innovation in the market?
Overall, the market is still quite unsophisticated. Innovation concentrates on ways to maximize the use of subsidies or tax incentives. There is some technological innovation. PV-diesel hybridization, for example, is implemented in a few sites. There is little financial innovation, however. There are, for instance, no real “green” bonds or crowd-funding solutions. There is also little innovation in business models, with few efforts to bundle customers or plants together effectively. Meanwhile, value propositions and marketing tools are simple and unsurprising.
What policies are effective?
Hard to say. The most effective policy is probably accelerated depreciation. While this limits the addressable market, it has driven projects. Some policies, such as the MNRE empanelment, the REC mechanism and the subsidy mechanism have actually been harmful to the industry. Net metering is theoretically available in most states now, but so far ineffective, because of implementation lags and unresolved technical questions. It could become a key driver in the future, however.
The most useful policies – although their effect will be long-term – might be the efforts to restore financial health to the energy sector. That includes increasing power tariffs and discontinuing diesel subsidies. It will make solar more competitive. Discoms will be more credit-worthy and able to invest into the grid infrastructure.
What would make the market take off faster?
Today, solar is a very competitive distributed power supply option. Hence, whatever increases demand for power and makes India an investment destination will help solar disproportionately. Key measures include those that improve contractual security, make international investment easier, make the setting up of new businesses easier and further improve the health of the power sector, including raising power tariffs.
A key driver will also be the development (or non-development) of coal-fired power generation in India. In the past, bottlenecks around railway and port infrastructure, and the mining and procurement of coal have led to shortages that in turn make distributed, privatized solutions around solar more attractive. Also, realistically pricing in the dramatic environmental and social costs of fossil fuels would make solar much more attractive by comparison.
What would help more directly, would be the introduction of a tradable REC certificate or tradable tax credits. It would be important to keep the regulations around them to a minimum. No predetermined price band, no empanelment, free tradability of credits, etc.
Further reduction in solar costs is a global development. India should make sure not to artificially increase the cost of solar through, for example, import tariffs or domestic content requirements. More consumer awareness and education will also help. Distributed solar needs to become an “off-the-shelf product.” A game changer will, of course, be cheaper battery storage. This will unlock the large diesel genset market for more hybridization.
We think that the savings have to be at least 20% as against the current tariff to make companies and households go through the trouble of switching.
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