Solar poised to be India’s shining glory in the energy sector

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Solar poised to be India’s shining glory in the energy sector
Solar power cost in India has more than halved in the last 6 years from Rs 4.53 per unit in 2015. This has put other sources of power in the shade - solar power now costs over 30 percent less.Courtesy: Getty Images

India’s unrivalled position as the lowest cost producer of solar power in the world is not only a testimony to Atmanirbhar Bharat but also offers a chance to solve the problem of massive distress in the domestic power distribution sector.

In the latest solar auction in December last year, India’s solar power cost, which was already the lowest in the world, hit a fresh new low of Rs 1.99 per unit. Just a month before, prices had come down to Rs 2 per unit but this time it breached even that level.

State-run NTPC, Torrent Power, Saudi Arabia-based Al Jomaih Energy and Water Co and Aditya Birla Renewables quoted the lowest tariff for building 200MW,100MW,80 MW and 120MW solar projects. It is being bought by Gujarat.

With this, solar power cost in India has more than halved in the last 6 years from Rs 4.53 per unit in 2015. This has put other sources of power especially thermal, in the shade--solar power now costs over 30 percent less. A number of factors have combined to make this possible. The assurance of a buyer with more and more state distribution companies opting for solar power has encouraged producers to bid aggressively. Low cost of interest and hopes of further decline in solar panel prices have enabled companies to do so.

It is the latter that merits some attention. In July last year in the backdrop of worsening relations with China, India extended safeguard duty on Chinese solar power equipment by a year till July 2021. This was in conjunction with a host of other measures where the government discouraged power companies from using any kind of imported Chinese equipment. At the same time, the broader Atmanirbhar Bharat Abhiyaan with an aim to make the domestic economy as self-reliant as possible was launched.

Investors flock to the sector

India was at that time, and even now to an extent, a big importer of solar panels from China. The move had taken some experts by surprise who felt it would lead to an increase in solar power cost and harm distribution companies already laden with heavy debt. Yet, as the auctions in November and December showed, costs have only gone down as more investors have flocked to this nascent but fledgling sector. The signal that the government sent to domestic players to start investing in manufacturing within the country also helped.

“Under the ‘Atma Nirbhar Bharat Abhiyaan’ or Self-Reliant India reform announced by Hon’ble Prime Minister Narendra Modi, our country has received proposals from various players for over 10 GW of fresh solar equipment manufacturing," said Dharmendra Pradhan, minister for petroleum and natural gas at the first World Solar Technology Summit in September last year.

Those tariff measures were followed by the announcement of production-linked incentive (PLI) scheme for solar manufacturing and fresh imports tariffs in the union budget this year. The PLI scheme for the sector has a corpus of Rs 4,500 crore over five years. At the same time, basic customs duty of 25 percent on cells and 40 percent on panels will come into effect from April next year.

The PLI scheme for solar manufacturing has a corpus of Rs 4,500 crore over five years. At the same time, basic customs duty of 25 percent on cells and 40 percent on panels will come into effect from April next year.

A low-cost robust solar panel manufacturing industry in India will go a long way in solving one of the country’s major problems--distress in the power distribution sector. Straddled with legacy issues like high transmission and distribution losses and an inability to reduce subsidies for households, means state distribution companies owe crores of rupees to power generation firms.

Low cost of solar power provides a relief. As its share increases, the cost for discoms comes down which in turn contributes towards a narrowing of ACS-ARR.
Low cost of solar power provides a relief. As its share increases, the cost for discoms comes down which in turn contributes towards a narrowing of ACS-ARR.Courtesy: Getty Images

Reducing the costs

Added to that is the practice of cross-subsidy wherein industrial consumers are charged high tariff so that residential consumers can pay less, is stretched to the limit. As a result, the lockdowns last year in the wake of the coronavirus pandemic that saw consumption among the well-paying commercial customers dwindle while that on the subsidised residential side go up, led to a further spiral in the debt. As of March 2021, distribution companies owe Rs 67,302 crore to power generation firms.

As more low-cost solar power goes on stream, it brings down the cost for distribution firms. The gap between average cost of supply (ACS) and average revenue realised (ARR), a key parameter that reflects the health of discoms, went down from 0.84 in fiscal 2013 to 0.17 per unit in fiscal 2017 after the implementation of UDAY scheme in 2015, but has gone up again to 0.44 per unit in fiscal 2019. One of the main targets of UDAY scheme was to negate it completely by then indicating that the scheme has failed. It is believed it has gone up further due to the pandemic in fiscal 2021, though numbers are not out yet. Going forward, low cost of solar power provides a relief. As its share increases, the cost for discoms comes down which in turn contributes towards a narrowing of ACS-ARR.

The benefit to the environment--more solar power means less need for dirty coal based thermal power, is a bonus. When a tool to fight climate change also makes better business sense, it is a win-win. India’s quest for more solar power is one such proposition.

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