India’s new government under NarendraModi wants to make the country a favorite destination of international solar investment. To that end, a heavily publicized “RE Invest Summit”will be held in Delhi in February (link). Most international and Indian investors understand well the underlying, strategic case for solar in India. The question is: when will the bright solar future arrive in the present? The current push by the government is good news. However, in order to create the upward inflection in growth that the market really needs, the government should help create a self-sustaining market place.. This could be done in the following manner:
- Reduction in the cost of solar to be the focal point
- Market risks are to be minimalized
- Well researched market analysis to be made widely available
- Distributed markets are to be prioritized
- Entrepreneurship and professional, financial investmentare to be encouraged
- R&D in solar applicationsare to be inspired
- Focus all efforts on lowering the cost of solar: It means that there should be no domestic manufacturing protection and no duties and tariffs on solar equipment or parts thereof. The Indian power consumer and the Indian tax payer will benefit from the lowest cost. The market will be a very scalable, parity driven market, in which solar competes with other sources of power (grid, diesel) on price and availability. Once the market is ramped up from the current 3 GW to e.g. 20-50 GW, manufacturing in India will follow naturally and competitively (at scale).
If, in addition to removing limitations, the government wants to actively push down the cost of solar, it should not do so through direct capital subsidies and tax benefits, which are prone to misuse and are thus often counterproductive. Instead, the government should focus on reducing the lending cost – either through direct loan subsidies or through reducing the risk (see next point). Lowering the cost of debt is the strongest lever for reducing the cost of solar.
- Build a stronger financing environment through reducing risks. There are two key risks at present: (1) The strength of the off-take (PPA). This, in turn, is related to the fundamental questions of who buys the solar power (bankability)?, for what reason (strategic alignment of interests)?, and at what cost (is it sustainable/attractive?). These points are particularly important in India, because of the limited enforceability of contracts. (2) Policy uncertainty around grid charges: Charges such as cross-subsidy charges, transmission losses, wheeling and banking charges, etc. can be changed potentially every year. They have a strong impact on the profitability of a project and their unpredictability is of great concern. Behind this is the larger question: what will be the future rules governing the Indian grid?
- Provide excellent market information. Despite the best efforts of a number of industry stakeholders, including governments and companies like us, this is still insufficient. The more transparent and easily accessible information is, on e.g. policies, land acquisition, debt conditions and options, investment (perhaps a market place?), generation of existing plants, technology options, etc., the more competition and professionalism will drive the market.
- Encourage the distributed solar market. So far, solar in India has seen mostly utility-scale infrastructure projects and current policies point in the direction of more and larger plants. That is fine. However, solar is also ideally suited as a distributed, consumer technology to power anything from factories to households, irrigation pumps, telecom towers, water purifiers, mobile chargers or lights. This market could grow in a more stable, sustainable waythan the infrastructure market, because it would not hit roadblocks such as land availability, grid access and local grid imbalances. Also, once the market is operational, new capacity could be added at a much faster rate, because it does not require allocation processes and policies. Additionally, the distributed solar market can make a real dent into India’s diesel consumption from gen-sets. The new net-metering policies are a step in the right direction. However, to take off, consumer finance solutions (such as equal monthly installments), certifications for suppliers to improve product quality and a revoking of existing malfunctioning subsidy schemes are required.
- Encourage entrepreneurship and international investment. In the 1990’s India has shifted from a state-managed economy to a semi-open economy, which in the infrastructure and energy business, helped especially large, Indian companies grow very rapidly. It is time to open up the market entirely: to entrepreneurs and to international investors. This requires – in a very general way – a simplification of procedures, such as company regulations, accounting and taxation regulations and financial regulations. Also, the government could set up highly service-oriented offices across the country to help entrepreneurs and investors. Taxation is another key lever. Accelerated depreciation benefits, for instance, hugely favor existing conglomerate businesses over professional, financial investors and start-ups (why not make them tradable?). On the other hand, more leeway in adjusting early losses against later profits would help the latter.
- Strengthen R&D in India. If India will be one of the leading solar markets, it should also become a knowledge and technology leader. So far there are very few investments by Indian companies into solar R&D and there is nothing comparable to the National Energy Research Lab in the US or the Fraunhofer Institutes in Germany. It would be wrong to spend research budgets on making better cells and modules, as this would require a huge amount of catching up with China and Taiwan. It would be much easier for India to ask leading cell and module manufacturers to set up shop in India once the market has gained a certain size. (Also: manufacturing is not where employment is generated. It is a highly automated process.) India’s edge could be in solar applications. It could become the most innovative place for developing the solutions the country needs: hybridization of solar with storage, diesel gen-sets and the grid; smart grid and metering technologies at the distributed level; new online and offline solar business models. For that to happen, India needs to put together the challenges (of which there are plenty), the industry (many are already in India), the research, educational and training institutions (starting) and a vibrant, early-stage financing network (mostly lacking).
Contributed by Dr. Tobias Engelmeier
Founder and Director, BRIDGE TO INDIA
Tobias.engelmeier@bridgetoindia.com
Twitter: @TEngelmeier
Dr. Tobias Engelmeier founded BRIDGE TO INDIA in 2007, as a strategic environmental consulting company, based in New Delhi. Since then, his focus has been on developing strategic business models for international companies looking to enter the Indian solar market. Tobias has had a very strong affinity for India for a long time and feels that this is a very interesting time to be in this country, where enormous challenges meet with talent, technology and capital. He is deeply concerned about the resource use of this rapidly growing economy and believes in finding India-specific models to cope with this. He is the lead partner for the Technical University of Munich in a long-term research project on “Adapting Renewable Energy Products to the Indian Market”. Tobias is also very interested in governance structures in India and their impact on market developments. He regularly liaises with the key political decision-makers. Tobias was awarded a doctorate in political science from the South Asia Institute of the University of Heidelberg, Germany for his thesis on the relationship between identity and strategy in Indian politics. Prior to his doctorate, he worked for a leading strategic management consultancy. During that time, he advised large European utilities on how to engage with the fast-rising market for renewable energies.