There is so far, little to suggest how India is to grow from the current 1 GW per year market to a 10 GW a year solar market, in line with the government’s goals. This is disappointing, especially when measured against the large expectations this government has fuelled over the past months.
Here is our take in short. For a more detailed analysis, see the Bridge To India blog here.
Some promising developments:
- Overall, India’s economic policy seems to be sound and could bring India back to stable, higher growth rates (and hence rising power demand) and improve the business environment. There are no new, big and populist handouts (subsidies) and the government seems determined to keep the budget (and inflation) under control. The solar market will in future be driven mostly by India’s energy demand and overall economic performance. It has graduated from a niche to a mainstream industry.
- Instead of subsidising petroleum products, there is now a duty, effectively a “carbon tax” on them. This is hugely helpful. It might incentivise India’s 60-90 GW of diesel backup operators to consider solar hybridisation or replacement.
What seems to help but does not (really)
- Public sector projects: The government has asked public sector companies, especially NTPC, to construct solar plants. This will likely happen and boost India’s solar market by several GW over the next years. However, this is not a sustainable and value creating approach. Margins across the value chain will be slim. The bigger problem of low returns of solar projects remains unresolved.
- Coal cess: A tax on coal was raised from INR 100 to INR 200 per ton of coal used. This will build more funds in India’s “National Clean Energy Fund” and will lead to an increase in power tariffs of INR 0.04-0.06. The coal cess sounds like a good idea from the point of view of renewables, but it is worth keeping in mind that (a) domestic coal is given away to power plants at cost (rather than market prices) and that (b) the funds have so far not been spent on green investments. The underlying issues around power pricing remain unresolved.
- Priority sector lending to renewables: The Reserve Bank of India announced recently that renewables will now come under the priority sector lending section in India. That means that banks have set aside a certain amount of funds for lending to this sector. That would be good news, if Indian banks were in a healthier condition and if it would apply to all solar projects. However, the policy is capped to projects worth INR 100m, limiting project sizes to around 2 MW.
What is missing
- The main long-term driver will be real economic reform (land, labour, financial markets) in India. The solar story will be directly linked to India’s industrialisation and growth. Although the public reactions to the last budget were often ecstatic, the government has so far not unlocked India’s real growth drivers.
- One of the key reforms needs to be that of the power markets. There is too much subsidisation and cross-subsidisation happening. Coal producers don’t pay the real price for coal, consumers don’t pay the real price for electricity. As a result, utilities are broke and cannot provide bankable PPAs or invest into grid infrastructure.
- Where is the solar and wind plan?? The government wants to see 100 GW of solar and 60 GW of wind built in the next seven years. In addition, it wants to electrify 20,000 of grid villages. These are very ambitious goals and there is absolutely nothing in the budget or in a new policy to suggest how this might be achieved.
- There is no financing plan for renewables. There was much talk before the budget of initiatives such as currency hedging support, and interest rate subsidy. But none of these measures have been accepted.
- There are no grid investment plans. Evacuation of 100 GW of solar and 60 W of wind would require dedicated transmission infrastructure. Given that transmission lines take 3 years to build, the government would need to start now. There is nothing in the budget relating to that.
I would still argue that the Indian solar market will be very large, simply because it has to be. It is without alternative. Or, to be precise, the alternative is underdevelopment. However, the market will be a default, not a design market. It will be driven by consumer solutions and not by infrastructure plans.
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