The India Solar Market: How Big and How Soon?

In India, solar project and policy announcements are piling up, but predicting market growth can be tricky.

Depending on who you talk to, India will either be the next major solar market or it 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. Coupled with frequent blackouts in cities and a need to rapidly scale up electricity production in rural areas, India looks like an attractive market for solar. Indeed, India's solar potential has been looking up over the past three months, as a flurry of solar-related announcements has 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 announcement from Indian Prime Minister Manmohan Singh. The NSM is designed to be implemented 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 MW

To reach these lofty goals, the Indian Ministry for New and Renewable Energy plans to implement three broad incentives. First, the NSM sets up a solar energy purchase obligation for utilities, like a Renewable Portfolio Standard in the U.S. and Europe. Utilities will be required to 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 Central Energy Regulatory Commission (CERC) has indicated that FIT rates in 2010 will be 18.44 Rupees/kWh (~$0.40/kWh) with 25 year terms.

In contrast to feed-in tariffs in most of Europe, which are must-take for utilities, the Indian feed-in tariff will be implemented through an RFP process with projects selected based on financial and technical feasibility. Developers expect the first RFP for feed-in tariff projects to begin around March, with PPAs to be signed by the end of the year.

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

Third, the government will provide direct subsidies for off-grid residential projects through the Remote Village Electrification Program (RVEP), which will offer rebates of up to 90 percent of system costs up to 18,000 Rupees ($385) per household. There may ultimately be additional 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 capacity by March 2014. Of this, 111 MW would be PV and the remainder would be solar thermal. Three Indian states, West Bengal, Gujarat and Rajasthan announced plans to produce 345 MW of solar capacity under the NSM: 110 MW in West Bengal, 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 Industries Ltd. 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: As noted above, India's National Solar Mission comes with an estimated $19 billion price tag. The Indian government has committed to funding the $900 million needed for the first phase, but it is counting on UNFCCC funds (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: Indian project developers have suggested that the biggest barrier to near-term growth will be the willingness of Indian banks to finance solar projects, which are still a relatively unfamiliar proposition to most domestic financiers. Interest rates for solar projects are reported to be around 13%, with relatively short maturities. Traditional energy developers with large balance sheets may be able to leverage existing relationships 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 many of the bureaucratic hurdles he'd faced. These included prolonged negotiations with various village, district and state officials, as well as questionable consultants offering to streamline the process for a fee.

2010 will be a crucial ramp-up year for the Indian solar market. As NSM implementation begins over the next few months, we'll get early indicators of the severity of project financing and development barriers. But if funding remains available and early projects show success, India could quickly emerge as a vital solar market.

Source : Greentech, 14/01/10