Sun shines bright in India yet its gloom and doom for the Solar Energy Companies. Lack of policies to nurture and promote clean energy coupled with lack of funding opportunities from major financial institutions in the country have let to slow but certain decline in the interest of Solar Energy. Will Narendra Modi, the first energy literate Prime Minister, provide the much needed support for clean energy in times of dwindling natural resources and chocking pollution across the World ?
India, second highest populated nation, like any other developing nation has a huge thirst for electricity. Reports suggest that nearly 400 million people do not have electricity and nearly 84000 villages are un-electrified. Depletion of Conventional sources of electricity are faster than ever, yet the Government of India is in no mood to nurture and promote Solar Energy which is so abundantly available. Estimates suggest approximately 50% of India's land extent is suitable for production of Solar Energy receiving above 4.5Kwh/m2/day, reaching a maximum of 5Kwh/m2/day, for more than 300 days. During summer months 90% of India receives insolation above 5Kwh/m2/day with maximum recorded values of 7Kwh/m2/day. Now that we have established the huge demand and the potential to cater such demand let us look into the financial aspects for setting up a Solar Power Plant.
Solar policies vary from state to state with some offering goodies to setup and others scaring people away from investing. Most profitable being Gujarat Solar Policy which provides about 12INR / unit of electricity and the most notorious being Tamil Nadu with about 6INR / unit of electricity coupled with high charges for wheeling. With such variation in pricing one would assume Gujarat is power hungry and Tamil Nadu is power surplus, but its the other way round, Tamil Nadu has a deficit of about 19% and Gujarat is surplus by about 2%. Keeping aside the variations if we were to look into the financial viability of Solar Power one can safely expect about 11% returns even with prices on the lower end of the spectrum. Considering power purchase rate of 6INR / unit, average energy production of 1500000 Units / MW and capital expenditure 70000000INR / MW, a return of 9000000INR every year is a decent return on investment. Apart from revenues from Power Purchase Agreements, Government has come up with numerous schemes to promote Solar Power Like Renewable Energy Certificates and Tax benefits.
On papers Solar Power seems to be a pretty solid investment however, the ground realities paint a completely different picture. Land to set-up the the Power Plant is the most critical aspect and unfortunately it is also the most challenging. In the past five years land prices have skyrocketed with an increase of about 200%. This rise is party placated by the reduction in Solar Panel Prices. However the availability of land is a for more complex problem. With transmission lines costing upto 1000000 INR / KM the closer the land is to the feeding substation the lower the cost of Grid Connection. This being a well publicized fact only makes it that much more demanding to find land to set-up the plant. Once we somehow wade the complexities of finding a suitable land parcel, we face the challenges of getting the approvals from the nodal agencies to set-up the Plant. This becomes harder considering the prevailing massive corruption which is institutionalized to an extent where people no longer question corruption. Some are surprised when certain officials include their bribe when calculating the statutory fees! Land conversions for required permissions which can take anywhere north of 3 months, pollution and fire safety inspections take forever and it is hard to blame them considering such departments usually have 3 - 4 individuals inspecting 30 -40 factories a day!
When there is enormous potential to produce power and huge demand to consume power, general wisdom would suggest bank loans would be a cake walk! Unfortunately reality is far from that, many Public Sector Banks have clear policies not to fund Solar Power Plants, not because they are not profitable but because of the unique nature of business model. Infrastructure projects would be funded for a term of 7 years, Power Plants come under the broad umbrella of infrastructure projects tend to be funded for 7 years. 7 years is the average break-even time so Loans at 12%-14% for a term of 7 years is simply not viable. This is no way suggests that the Power Plant is not profitable, it is just various Tax benefits, depreciation benefits which does not post book profits. Unlike other infrastructure projects, The depreciation should be considered for a period of 20 years because the panels which is the major chunk of the assets comes with generation guarantees of 80% at the end of 20 years. Moreover history suggests that the Power Plants are functional even after with more than 50% efficiency even after 30 years!
Solar Power Plant is truly a revolutionary yet simple answer to all the problems of India's growing Electricity needs. When India has the potential to produce electricity on more than 60% of its land extent, it only makes sense to decentralize the power generation and promote free trade of electricity through open access mechanisms. Thousands of villages are not connected through Grid Infrastructure and the once which are are connected are plagued by problems caused by offline Grids. Investing on Grid would demand Thousands of Crores of Rupees which India cannot afford in the near future. With Solar Power every remote village can have constant supply of electricity, this would not only give light to their homes but also brighten their prospects of normal life entitled to human beings.
How can Narendra Modi help the revival of Solar Power? my next post will try to answer that question!
