Solar Sector at the Crossroads

Sudeshna Das is director at ComConnect

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Energy demand in India is far outstripping the supply. Solar power offers a huge opportunity to bridge this widening gap between demand and supply. However, there are concerns over the solar industry’s readiness against the backdrop of a sleuth of changes in the business environment like continuous tariff falls, the slow pace of new tender announcements and the introduction of GST. Let’s delve deeper to get the complete picture.

India grabs the power baton

A survey by Wood Mackenzie on the global energy markets, which focuses on the upcoming market shifts, concludes that global energy demand will keep rising through 2035.

However, the nature of the energy mix, demand centres and key players will change significantly. The report also predicts that energy demand in India will grow the fastest, at an average rate of 3 per cent annually from now to 2035, by which time the country’s population will outgrow even China’s. Renewable energy sources will surge from 22 per cent to 54 per cent of the total installed capacity, while oil consumption will rise by 80 per cent. According to an Indian Brand Equity Foundation (IBEF) report, India ranks third among 40 countries in Ernst and Young’s Renewable Energy Country Attractiveness Index.

With a production of 1,400,800GWh in 2016, India is the third largest producer as well as the third largest consumer of electricity in the world. Although power generation has grown manifold since Independence, demand has been even higher due to accelerating economic activity. India has a diversified power sector with energy sources ranging from the conventional coal, natural gas, oil, hydro and nuclear power to renewable sources such as wind, solar and biological waste. According to data available from the Ministry of Power (Table), renewable energy sources accounted for around 17.4 per cent of India’s total installed power capacity in March 2017.

India's energy use pattern in 2016

Solar rising faster

Solar power has quickly become a sizeable part of India’s energy mix. According to GTM Research and a Bridge To India (BTI) report, the total solar PV capacity installed globally had surpassed 300GW by the end of 2016. Of this, 77GW was added in 2016—a year-on-year growth rate of 34 per cent. China led with 34.5GW, followed by the USA (14.5GW) and Japan (10.2GW), with India (5GW) in fourth place.

In 2017, India is expected to continue its rapid growth in solar power. With 8.8GW of projected capacity addition (a growth of 76 per cent over 2016), the country is set to become the third largest PV market in 2017, overtaking Japan (Figs 1 and 2). The GTM report also mentioned that, as of March 31, 2017, India had installed 12.2GW of utility-scale solar PV capacity. Till date, the southern states of Tamil Nadu, Andhra Pradesh and Telangana have taken the lead in solar installation projects (Fig. 3). This year, approximately 60 per cent of new solar capacity addition is expected to come from Telangana, Andhra Pradesh and Karnataka.

Tariff at stake

The wide-scale adoption of solar energy, coupled with the sharp decline in solar module prices in the global market by almost 30 per cent (a trend that is likely to continue next year also) due to a supply glut, has resulted in an abrupt fall of solar power tariff in India. In the last one year, the Indian solar sector experienced almost 50 per cent tariff reduction, with 25 per cent drop happening in just the last three months.

Fig. 1: Solar capacity addition in the leading countries (Source: BTI, GTM Research)

Fig. 1: Solar capacity addition in the leading countries (Source: BTI, GTM Research)

In May this year, India’s solar power tariffs fell to a new all-time low of 3.8 US cents (approx.₹ 2.40) per unit during the 250MW capacity auction at Bhadla in Rajasthan. South Africa’s Phelan Energy Group and Avaada Power won contracts to build capacities of 50MW and 100MW, respectively, at the Adani Renewable Energy Park Rajasthan.

Fig. 2: Global PV demand 2007-22 (Source: GTM Research)

Fig. 2: Global PV demand 2007-22 (Source: GTM Research)

Solar power prices have been falling

Falling solar power prices have prompted the Indian government to focus on renewable energy resources. However, new tender announcements from the government have slowed down, as it is encouraging greater private-sector participation. This has intensified the competition amongst developers. Interestingly, only a few new tenders are slated for the next year, and there is a complete lack of pipeline visibility over that period. Therefore it seems that the current tariff rates are hardly sustainable.

Falling tariffs are a double-edged sword for the solar sector. While these make solar power more attractive for consumers, investors and lenders get jittery. These tariffs are also creating uncertainty amongst policymakers, while causing new risks for older projects auctioned at tariffs that are two to three times higher.

The sharp reduction of tariffs may commoditise the Indian solar market rapidly and profit margins are bound to squeeze across the value chain. Therefore solar players need to innovate new technologies and business strategies to survive in this ultra-low-tariff scenario.

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