If India’s solar energy is cheaper than coal, why isn’t the industry thriving?

If India’s solar energy is cheaper than coal, why isn’t the industry thriving?

  • India wants to quadruple its current solar capacity to 100GW by 2022.
  • Protectionist duties and low tariffs threaten solar developers, making projects unviable.
  • Rooftop solar installation costs are still prohibitive.
India’s solar industry has grown at a rapid pace over the past few years with solar tariffs falling to record lows, even below the prevailing coal tariffs. However, a number of hurdles remain that is keeping the industry from booming.

India has an ambitious target to increase its solar power base – by 2022, it wants to quadruple its current solar capacity to 100GW. A number of industrial-scale solar energy plants have come up in the past few years, and the government-backed solar power company Solar Energy Corp. of India (SECI) and state governments have been auctioning solar energy capacity to various private developers using a bidding process that favours the cheapest tariffs.

Here are some of the recent trends that could slow down the solar energy sector in India:

Sustainable solar tariffs

After a period of setting record low solar tariffs resulting from a “reverse bidding” process, which selects the cheapest bidder, India is now said to be considering a ceiling on solar tariffs – a cap of ₹2.5 ($o.035) and ₹2.68 ($0.038) per unit – for solar power companies that use both domestic and imported equipment, the Mint reported earlier this week.

At that ceiling level, however, the tariff amount is still lesser than what was set during many auctions which many developers say may be too low for these projects to be viable. At the same time, if the tariff amount exceeds a certain threshold – ₹3 per unit – then the developers face the risk that state power supply distribution companies wouldn’t buy power from them, leaving these plants unsustainable.

Protectionist duties

India imports over 90% of solar equipment including cells and modules from overseas, mainly from China and Malaysia. Last month, the Indian government said it would impose a 25% safeguard duty on solar equipment imports to protect domestic manufacturers, which could further put pressure on the razor margins of solar developers.

While this duty has temporarily been put on hold following protests from a group of local manufacturers and a court order, concerns remain about future protectionist measures that could squeeze their margins further.

Concerns about quality

With steep drop in prices, there are also concerns about the quality of the equipment being deployed, raising questions about future regulation and related costs.

The infrastructure of many solar plants in India didn’t meet many environmental stress factors and technical standards, according to a study conducted by PI Berlin, a German consulting firm. According to the firm, rigorous requirements during the tender process that ask for certifies failure-free installation and durable products should become a must.

“Competitive reverse auctions that push down bid prices to extremely low levels, is a scenario where cutting corners in regards to quality may become a common practice,” said the PI report.

Rooftop solar math

India also has a target of increasing its rooftop solar capacity to 40,000 megawatt (MW) by 2022 similar to trends in many European countries. But, here too, prohibitive costs of solar equipment have kept many residential property owners from switching to rooftop solar despite a government subsidy on solar equipment and the potential for earnings by selling excess generates power back to the grid.

Meanwhile, coal continues to serve a third of India’s power generation but increasingly many coal power plants are running into difficulties because of commercial disputes, according to a report by HSBC, which added that in the long term, renewable energy sector should see strong growth.

"We think the economics will continue to shift in favour of lower carbon power in India, especially as it promotes solar," the report added.