A new tariff war is playing out in the Indian solar power space. Tariffs plunged to a new low of Rs2.44 per kilowatt-hour (kWh) last week during an auction for 500 megawatt (MW) capacity at the Bhadla solar park in Rajasthan. Tariffs in the solar space have declined significantly over the years and have come down from levels in excess of Rs10 per kWh at the beginning of this decade to the present record lows, as capacity is being added at a record pace. According to Bridge to India, a consulting firm, new capacity addition in the solar space is likely to touch 8.8 gigawatt (GW) in 2017—an increase of 76% over 2016—which will make India the third biggest solar market in the world. While the falling tariffs should be welcomed—it will make India’s energy consumption mix more environment friendly—the changing dynamics of the power sector could pose several challenges.
Multiple factors are at play in the sector, resulting in the decline in tariffs. For one, the government has set an ambitious target of attaining 100 GW of solar power capacity by 2022. Consequently, the total installed capacity in this space has gone up by over three times in the last three years. According to government data, the share of renewable energy in the total installed capacity was 13% at the end of financial year 2016. But it is expected to increase significantly in the coming years, with solar a big driver. Second, private sector participants want to be part of this big opportunity. It appears that they may be looking at scale even if it means lower returns on investments.
Third, developments in the sector, such as the fall in price of solar panels and the availability of finance, are also helping. State-owned power producer NTPC Ltd appropriately summed up the progress in the sector in a recent press statement: “At current rates, solar power generation cost is at par with that of thermal power generation. Solar power tariff has been declining on account of sharply declining prices of solar panels, better structuring of the project that reduces risk for project developers and better currency hedging deals that make financing available at competitive cost.”
However, as noted earlier, increasing solar capacity and a transition in favour of solar or renewable energy in general is not guaranteed to be smooth. The fall in tariffs may make adjustments difficult for conventional power producers. For instance, The Economist reported earlier this year that because of a slump in power prices between 2010 and 2015, utilities across Europe wrote off assets worth € 120 billion. The rise in cheap supply from renewable sources would affect the demand from conventional power suppliers in India as well. A hit in revenue will hurt the ability of thermal power companies to repay loans, which would mean more trouble for the banking sector.
That’s not all. Progress is also unlikely to be smooth for all solar power producers. We have seen aggressive bidding in the past in a number of sectors which has had an adverse impact on financials. The latest rates in the solar power space are among the lowest in the world; it remains to be seen if they can be sustained in the long run. Furthermore, as this newspaper has reported, the market is now concerned about whether distribution companies will be willing to buy power from projects with higher tariffs. It is possible that tariffs will be renegotiated and distribution companies will push for lower rates. This could mean that some producers would have to go back to the drawing board and reassess their capabilities. A lot will depend on the business plans of solar power producers in terms of access to capital and equipment, and their ability to operate plants efficiently.
The power sector is being disrupted and outcomes in the near to medium term will depend, to an extent, on technological progress and how well Indian power producers are able to adapt. A big breakthrough in storage capacity, for example, will change the dynamics for the sector and can make things difficult for conventional power producers.
Developments in the solar space will help India meet its energy demand in a more environmentally sustainable manner. The Narendra Modi government deserves credit for backing its ambitions with action. However, it remains to been seen as to how low the solar power tariff can go and whether producers are actually able to deliver at that rate on a sustainable basis. Meanwhile, the government would do well to ensure that adequate investment is made in the necessary infrastructure for handling intermittent supply from solar plants.