India’s Solar Industry at Risk

It was a very surprising (maybe shocking also) news for the global solar industry when solar projects under the JNNSM went for reverse bidding; reaching feed-in-tariff rates as low as Rs.10.50 per unit.

The question we are facing is “Will the Indian solar developers be able to construct quality solar plants or will we see some corner-cutting?”

We will be talking of the 40-50% of the JNNSM projects that will be seeing the light of the day; others probably will struggle and die out (depending on Government’s stand on projects that are not able to raise funds).

A German Solar Developer (lets call him “GD”), an Indian Solar Developer (under JNNSM) (lets call him “IDJNNSM”) and an Indian Solar Developer under Gujarat policy (lets call him “IDG”) will have the following scenario:

1. GD and IDG will mostly buy solar panels at nearly similar rates from China, Spain, Germany, etc.  This constitutes 60%-70% of the project costs.

Whereas IDJNNSM will need to procure panels from India; where panels are still being manufactured at slightly higher costs with reasons being nascent stage of the sector in India, teething problems, no scale.

In a thin film solar plant, the cost of all developers will be nearly the same since the panels will be procured from outside India.

2. The BOS costs of all developers will be nearly the same with most of the equipments supplied from outside India; except if the Indian Developers comes up with some innovation and to produce good quality product at lesser costs (we have done so in other industries).

But not to forget that we can see the other aspect also where low quality products at lower costs are used.

3. Nearly all the engineering work for most of the grid connected solar projects  will be done by companies outside India (most of the Indian developers will appoint experienced foreign EPC player or Indian EPC players having foreign partners for Engineering part).

4. The construction costs of the 3 developers will differ. GD will ofcourse have higher construction costs due to higher labor costs and material costs but will also be able to achieve higher efficiency and productivity due to maturity of the industry.

On the other hand, IDJNNSM and IDG will be able to do the same work at a much lesser costs.  Since the industry is new and we have no experience; the costs will not be as less as expected.

5. The land costs and the earlier process cost (till PPA is signed) will not cross beyond a certain % (well within 5%) of the total project costs in all the cases.

Based on the above points; it will be interesting to understand the minimum feed-in-tariffs that each developer can work on. Based on most costs being similar, the difference in feed-in-tariffs cannot be huge.

Meanwhile, solar feed-in-tariff in India is now among the lowest. Now the question that arises is “How will Indian companies be able to maintain quality to last 25 years or will we see innovative ways to cut-corners (both in positive and negative sense) to be able to make profit of solar projects with tariff of Rs.10.50-Rs.12.50?”.

Indian investors are already not convinced about investments in the solar field when they can invest in any other Indian industry to earn higher returns in a more stable environment (mature and well understood sector).

MNRE Secretary Farooq Abdullah himself admitted that he was shaken when he first saw the bidding prices during the first round of JNNSM.  He had expected prices in the range of Rs.13-Rs.16.

Gehrlicher Solar, chief executive Klaus Gehrlicher, feels that these systems are under extreme high price pressure, which means they are being built at very low quality; where the scope for ­corner-cutting is not in solar panels but among other components and installation practices.

If Klaus’ estimation comes out true; the looser will be Indian Solar Industry with politicians pointing fingers at the failure and reasoning the need for sustaining a failing technology with huge subsidies.

Bankers will also step back; which can be a fatal blow for the sector.

We hope; for the sake of the Indian Solar Industry; that we do see good quality projects coming up in India to further boosting the investors’ confidence.

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2 Responses to India’s Solar Industry at Risk

  1. Gayrajan K. says:

    I am glad that someone’s finally put into words the worries of the Solar industry when we look into the Indian market. You may also want to put in the under-current concerns of corruption that investors face during the project approval process. Concerns mentioned by you coupled with those external factors, such as the aforementioned, do nothing but weaken the confidence of not only the bankers, but also of companies through out the world who want to enter the Indian Solar market. EPC companies, consulting firms (such as ours), training and maintenance companies, and resources manufacturers are also concerned by the lack of construction (not design) quality and durability. These projects are being built to last at least 20-25 years for any practical profit or business, and low construction quality means frequent repairs and added cost. You can say good-bye to your profit margins if your project repair and maintenance frequency cannot stay below the accepted risk range.

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