Solar Energy – An Investment That Can Skyrocket Into Profits

Around 300 million Indians, i.e., roughly a quarter of the country’s population, do not have access to electricity. With an installed electricity generation capacity of 245.393 GW at present, achieving parity between supply and demand seems to be a distant dream... - Anuj Mahajan

Electricity starved India is primed to be the next red hot market for solar energy generation. Since it is blessed with clear sunny weather up to 250 to 300 days a year, the total theoretical solar power reception, on only its land area, is about 5000 trillion kilowatt hours per year. The daily average solar energy incident over India varies from 4 to 7 kWh/m2 with about 1500 to 2000 sunshine hours per year, which is more than the current total energy consumption. Considering the huge potential that the country holds due to its advantageous location, landslide profit in solar energy generation is but a vision away.

India accounts for more than 17% of the world population. It required an estimated 968658.543 GWh of electricity during 2011 – 12, which is projected to go up to 1392066.048 GWh by 2016 – 17 and 1914508.233 GWh by 2021– 22. According to International Energy Agency, around 300 million Indians, roughly a quarter of country’s population, do not have access to electricity. With an installed electricity generation capacity of 245.393 GW at present, achieving parity between supply and demand seems to be a distant dream.

Despite being located on the equatorial belt and receiving abundant sunlight, solar energy contributes less than 1% towards the total demand. Given the insatiable demand for electricity, a strong business case can be made to invest in solar electricity generation technologies as they have a promising payback. As this sector is largely untapped even now, it provides tremendous advantage to the first movers to reap maximum benefits.

The question which we therefore must ask ourselves is why hasn’t solar energy captured the fascination of India Inc and foreign investors till now? The major stumbling point for the investors in the past has been the high payback period of 15 to 18 years. Today, however, a far rosier picture for investors can be painted. With improvement in technology and reduction in prices of PV systems due to growing competition, the payback period has reduced by one third to 10 to 11 years and is projected to go down even further in the coming years. Following is a snapshot of anticipated cost per MW of setting up a solar power plant.

PV equipment for generation of 1MW electricity costs almost ` 6,14,00,000. The civil and commissioning cost, along with land and miscellaneous cost, works out to ` 1,92,00,000. Taking an interest of ` 2,56,00,000 for every MW of installed capacity, the total cost per MW of setting up a solar power plant works out to ` 10,62,00,000.

The estimated payback period, returns and lifecycle cost for a 10 MWp solar power plant have been tabulated assuming the average life of PV modules to be 25 years. From the previous table, the cost of setting up a 10MWp solar power plant is ` 1,06,15,00,000. The O&M cost for the estimated life of PV cells has been worked out to ` 61,34,72,340, which has been calculated assuming an escalation of 5.72% in O&M cost every year.

The estimated payback period, considering all the above stated factors, works out to 10.25 years, which is substantially less than what it used to be a few years ago.

How can India Inc and foreign firms capitalise on the vast ocean of opportunities that solar energy generation presents in India? The government, under the aegis of National Action Plan on Climate Change, has started Jawaharlal Nehru National Solar Mission, which aims to increase the country’s grid – connected solar power generation to 20,000 MW by the end of 2022 – and to formulate policies aimed at reducing the cost of generation through increased research and development. However, this target was recently revised and the Prime Minister of India, Narendra Modi has set an ambitious target to achieve 100 GW of solar power generation by the end of 2022.

According to the government’s calculations, if this plan hits the ground, India would need investment to the tune of around $110 billion, including transmission capacity. Also, the government, through National Tariff Policy 2006, has instituted Renewable Purchase Obligation (RPO) mechanism, which makes it mandatory for State Electricity Regulatory Commissions (SERCs) to purchase at least 3% of their total electricity purchase from renewable sources. Plans are afoot to modify the policy to compulsorily include a minimum percentage of solar energy in the purchase. Central Electricity Regulatory Commission (CERC) has stipulated that Power Purchasing Agreements (PPAs), which the state utilities sign with the solar power developers be for a period of 25 years. Apart from this, various states have their own targets under Renewable Purchase Obligation and individual policy of Power Purchase Agreements. For example, Government of Karnataka plans to achieve minimum of 3% solar energy out of total projected electricity consumption and proposes to install 2000 MW solar power by 2021. Moreover, the government is looking at the possibility of raising solar bonds to boost investment and helping foreign firms raise rupee bonds to cut costs.

Although the financial factors affecting solar energy investment are being taken good care of, several other factors impede the penetration of more investors into this sector. First and foremost is the difficulty in finding land where solar farms can be set up without opposition from the locals. Since India is an agrarian economy, due care has to be taken to ensure that the land being acquired is infertile and unsuitable for agricultural purposes. This leads to delay in acquiring land and affects the scheduled implementation of the projects. Another problem affecting solar plants set up in remote areas is lack of infrastructure to ensure evacuation and transmission of generated power to sub – stations and grid. Yet another problem is lack of single–window clearance for projects due to which investors and developers have to approach various government departments to get the required clearances, leading to further delays in the project. Bureaucratic red tape compounds the problem further and deters investors from putting their investments in the projects in India.

To combat these problems and to ensure that more and more investors are attracted towards investing in this sector, the government has taken steps to ensure hassle – free acquisition of non–arable land. It has also started strengthening infrastructure near areas where solar farms are proposed to come up. Companies interested in setting up solar power plants in the country can claim the benefits of Accelerated Depreciation Benefit mentioned in Section 32 of Income Tax Act. It allows companies to claim 80% depreciation of its assets (plant and machinery) in the first year and 20% depreciation in the next year, thereby avoiding taxes and leading to savings. There are also plans to require new thermal plants to have 10% renewable mix, which they can generate or buy from solar companies as credit.

Additionally, all the states have been asked by the government of India to come out with their individual solar policies in a time bound manner so as to bring more clarity for investors and enable easy flow of capital towards development of both solar farms and rooftop solar projects in the country. Also, RE – Invest summit was recently held in New Delhi to showcase Government’s commitment to the development and scaling up of renewable energy in India – and bring all the existing and potential investors on a common platform and connect them with renewable energy stakeholders in India. Since solar energy forms a major part of India’s renewable energy ambitions, the opportunities and participation in this sector are bound to increase manifold in the near future.

Slowly but steadily, solar energy generation is gaining traction and various corporations are coming forward and investing in solar power generation. As the Indian policy makers announce big ticket projects and set ambitious targets, the investors are shedding their inhibitions and becoming a part of India’s success story. Adani Power plans to invest
` 3000 crore in two years to add 160 MW of solar power to its existing capacity. Moser Baer India has commissioned a 30 MW solar power plant in Gujarat at a cost of ` 465 crore and further plans to add 150 MW in the coming years. Goldman Sachs, which invested about $375 million in Sumant Sinha promoted ReNew Power, is looking to make more such new investments in the clean energy space. Other financial investors such as Morgan Stanley, IFC and Standard Chartered also plan to make investments in the solar space in India, particularly in projects over 100 MW.

With a platter of benefits on offer, corporations need to leapfrog and grab the opportunity with both hands and ensure they do not miss the bus. It is evident that despite the requirement of huge capital in the beginning, the solar energy sector has a lot to offer in terms of both money and ensuring energy security of the country in the long run.
The challenge remains to create awareness among the corporations about the opportunity, and time slipping by and to provide necessary assistance in planning and advice on adopting strategies that can help them identify viable solar technologies and plan their investment in the right direction.

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