India Solar Market: When Will New Policies Turn Into Panels?

Dependingon who you talk to, India will either be the next major solar market orit will never get off the ground.

The underlying conditions are sound;India has high insolation throughout its territory and an energy deficit of 10 to 15 percent,leaving over 450 million people without access to electricity. Coupledwith frequent blackouts in cities and a need to rapidly scale upelectricity production in rural areas, India looks like an attractivemarket for solar. Indeed, India’s solar potential has been looking upover the past three months, as a flurry of solar-related announcementshas emerged. But each one has arrived with caveats from developers,financiers and analysts.

The first, and most important, announcement came in November 2009, when India announced its Jawaharlal Nehru National Solar Mission (NSM), a comprehensive, $19 billion plan with a goal to reach 20 gigawatts of installed solar capacity by 2020. The program was confirmed last week with an official announcementfrom Indian Prime Minister Manmohan Singh. The NSM is designed to beimplemented in three distinct phases, each with its own targets:

Application Segment

Phase 1 (2010-2013)

Phase 2 (2013-2017)

Phase 3 (2017-2022)

Solar Collectors

7 million sq. meters

15 million sq. meters

20 million sq. meters

Off-grid solar applications

200 MW

1,000 MW

2,000 MW

Utility grid power, including rooftop

1,000-2,000 MW

4,000-10,000 MW

20,000 M

To reach these lofty goals, the Indian Ministry for New and Renewable Energyplans to implement three broad incentives. First, the NSM sets up asolar energy purchase obligation for utilities, like a RenewablePortfolio Standard in the U.S. and Europe. Utilities will be requiredto source 0.25% of their electricity from solar energy by 2013,increasing to 3% by 2022. The NSM calls for a credit trading mechanism(like SREC markets in the U.S.) to reach these goals more efficiently.

Second, India will set up a national feed-in tariff. The CentralEnergy Regulatory Commission (CERC) has indicated that FIT rates in2010 will be 18.44 Rupees/kWh (~$0.40/kWh) with 25 year terms.

In contrast to feed-in tariffs in most of Europe, which aremust-take for utilities, the Indian feed-in tariff will be implementedthrough an RFP process with projects selected based on financial andtechnical feasibility. Developers expect the first RFP for feed-intariff projects to begin around March, with PPAs to be signed by theend of the year.

NTPC, the power trading and utility arm of the CERC, will bundlesolar with traditional thermal generation and re-sell the package tolocal and state utilities at a lower rate than was paid in the feed-intariff. Conversations with project developers in India suggest that thebundled rate to utilities will be around 5 rupees per kWh, in contrastto the 2.5-3.0 rupees per kWh for traditional thermal generation.

Third, the government will provide direct subsidies for off-gridresidential projects through the Remote Village Electrification Program(RVEP), which will offer rebates of up to 90 percent of system costs upto 18,000 Rupees ($385) per household. There may ultimately beadditional off-grid subsidies for larger systems as well.

Since the introduction of the NSM, the announcements have kept coming. NTPC announced that it would construct 301 MW of solar capacityby March 2014. Of this, 111 MW would be PV and the remainder would besolar thermal. Three Indian states, West Bengal, Gujarat and Rajasthan announced plansto produce 345 MW of solar capacity under the NSM: 110 MW in WestBengal, 130 MW in Gujarat, and 100 MW in Rajasthan. Topsun Energy Ltd.announced plans to construct a 5 MW grid-connected PV system in Gujarat.And a number of companies including Moser Baer and Reliance IndustriesLtd. have expressed interest in PV module production within India.

But lest we get too excited, there are three major barriers to market growth in India:

1)      NSM Program Funding: Asnoted above, India’s National Solar Mission comes with an estimated $19billion price tag. The Indian government has committed to funding the$900 million needed for the first phase, but it is counting on UNFCCCfunds (the ones that raised such a fuss in Copenhagen) to cover the next two phases. This casts significant doubt on longer-term market growth.

2)      Project Financing: Indianproject developers have suggested that the biggest barrier to near-termgrowth will be the willingness of Indian banks to finance solarprojects, which are still a relatively unfamiliar proposition to mostdomestic financiers. Interest rates for solar projects are reported tobe around 13%, with relatively short maturities. Traditional energydevelopers with large balance sheets may be able to leverage existingrelationships with banks to bring these rates down somewhat.

3)      Permitting and Project Development: Some reports have indicated the difficulty in attaining permits and land for solar projects in India. In the Wall Street Journal, Inderpreet Wadhwa, founder of Azure Power,the developer of India’s first privately owned utility-scale PV project(a two megawatt system that came online in December 2009) detailed manyof the bureaucratic hurdles he’d faced. These included prolongednegotiations with various village, district and state officials, aswell as questionable consultants offering to streamline the process fora fee.

2010 will be a crucial ramp-up year for the Indian solar market. AsNSM implementation begins over the next few months, we’ll get earlyindicators of the severity of project financing and developmentbarriers. But if funding remains available and early projects showsuccess, India could quickly emerge as a vital solar market.

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