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By Bhupesh Trivedi

Feed-in-tariffs and the ambitious government-sponsored 20-GW National Solar Mission (NSM) have lost value in India.

The new solar power benchmark price, at which companies won recently bids under different government policies, is Rs 7-7.50 per unit. Compare this to the existing conventional power generation cost, which ranges from Rs 7 to Rs 12 per unit for industrial and commercial users, and it becomes evident that a 25-year PPA priced at Rs 7-7.50 per would leave developers out of pocket.

It would be more prudent for investors and project developers to shun 25-year purchase power agreements (PPAs) with governments, and opt instead for the ‘Open Access’ system to sell power to industrial and commercial users directly.

Responding to a call from several regulatory commissions, the Open Access system was launched in an attempt to overcome India’s shortfall in power supply. The system allows any large power consumer to establish a private power generation source for their manufacturing operations.

By allowing plant owners and developers to sell their entire or even partial unutilized power to other consumers through direct power purchase agreements, additional benefit was created. Currently, industrial and commercial users pay more than Rs 7.00 per unit for existing erratic power supply; they would readily pay more to secure a reliable power supply. As such, developers have the scope to raise the cost of power supplied at regular intervals over the supposed lifespan of 25 years of the power project.

This triggers questions relating to the significance and value of various state governments’ policies as well as the ambitious National Solar Mission of the central (federal) government of India. For state governments’ policies and the NSM to be viable, the price offered by the government to solar power project developers would need to vary over the entire duration of the PPA. If not, it would surely be a losing proposition for a solar power project developer/investor to commit power at such low rates for the next 25 years.

The ‘Open Access’ system, by contrast, enables any power producer to sell power to any user across the country through the national grid, by bearing costs of transmission and distribution losses, as well as wheeling and banking charges. These costs may weigh on the profitability of the power project for now. However, committed higher billings over the next few years could provide much higher returns, compared to fixed rates provided under the PPAs with different governments.

The success of the ‘Open Access’ system depends on the conditions of “minimum committed load” set by power distribution companies on large power consumers. This requires industrial users to pay a minimum monthly fee to the local distribution company, irrespective of how much of conventional power is consumed.

Different regulations in the country have already cleared the way for other precedents, where large industrial units set up gas or coal-based captive power plants. There are over a few hundred examples, in which industries set up their own captive power plants. One such plant is a 25MG coal-based power plant at Tarapur in the industrial complex of JSW Steel Ltd. A similar arrangement for solar power would ensure that end-users and solar power project developers could build a mutually profitable relationship.

Concurrently, with state government policies expected to boost India’s solar power sector, the captive or end-user segment offers a much larger market of at least 25,000 MW over the next 5-7 years. Even if the benchmark solar PV power project cost falls from the current Rs 9 crore to Rs 7 crore, it promises to be a market with a value of Rs 175,000 crore (about US$ 35 billion).

The rules of game in India have already changed, despite total installed solar power generation capacity in the country still falling shy of 1,000 MW, against state and national governments’ targeted capacities exceeding 30,000 MW over the next decade.

By opting for the ‘Open Access’ system, the solar power sector’s dependence on government schemes, subsidies and even the NSM, would naturally decline. The ‘Open Access’ system would enable solar power producers to continue raising power costs across the life-span of the power project.

Quick pay-back would be achieved through the high 80% accelerated depreciation. Thereafter, with marginal O&M costs, a power producer’s profit margins would remain high for as long as the plant produces power.

To respond to this article please write to:

Bhupesh Trivedi: bhupesh@reecode.in

Or write to the Editor:

Rikki Stancich: rstancich@csptoday.com