In July, 2010, the Indian federal government released detailed guidelines for new grid connected solar power projects as part of India’s Jawaharlal Nehru National Solar Mission. The issuance of these guidelines marks the beginning of a six month process for solar project sponsors to submit applications and exit the process with a power purchase agreement (“PPA”) signed by the relevant government agency. These PPAs are highly coveted and ought to be printed on gold leaf paper. The feeding frenzy over Indian solar has begun in earnest.
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India’s National Solar Mission sets an aggressive goal of achieving 20 GW of solar power generating capacity by 2022 from nearly zero today. By comparison, India today has about 150 GW of total installed electricity generating capacity (across all fuel sources),and Canada, the United States and China have 125 GW, 1,000 GW and 750 GW, respectively.
The opportunities within the Indian solar power space are several. While the grid connected national solar plan has received the most recent media attention, there are initiatives and government support for off-grid solar (rooftop and other micro power plants for neighborhoods, buildings and small manufacturing units), State-level grid connected programs (Gujarat, Punjab, others), supply of solar appliances and charging devices to households/cottage trades/small-scale retail establishments, and the manufacturing supply chain for all these applications. The investment potential and risk across these opportunities varies significantly.
Within grid connected solar, the national solar plan offers better terms under PPAs – 25 year agreements at a very reasonable tariff level – than any of the State level programs. In fact, several projects planned for their respective State programs chose instead to resubmit under the national program. Some projects that had already been awarded PPAs at the State level are grandfathered into the national program. Most industry players expect applications for Stage One of the national solar mission to oversubscribe the PPA capacity that will be issued (total of 300 MW). Where is the opportunity? – Several prospective applicants are seeking investors and joint venture partners to make sure they can meet the minimum financial benchmarks under the application guidelines. Lest you fear that you are ruled out if you are not in the solar industry already, take note that many project sponsors have already secured key suppliers and engineering expertise and have other power project experience, so they seek only financial support, which can be provided by direct investment or balance sheet support (JV), and can be done through a corporate entity or individual. For a 5 MW project (the maximum any one entity can win), the sponsor and its investment partner need to show only a $3.5 million net worth, which is well within reach for any medium size business or some high net worth individuals. With a federally backed PPA, these projects face significantly reduced risk and are expected to provide a relatively high ROI.
Many project sponsors who are unable to win a PPA under the national solar mission may revert back and apply under State programs. Projects issued PPAs under some state programs have a higher risk profile, as subsidized tariffs provided under the State PPAs are generally lower and for shorter periods. Nevertheless, many projects sponsors will choose to proceed under State programs to ensure they can claim to have an operating project when it comes time to award the next set of PPAs nationally or to reallocate Stage one PPAs from failed projects (under the national plan, you must have an operational solar farm within 12 months or face stiff penalties).
Small-scale off-grid solar power, such as rooftop installations and micro power plants that can service small neighborhoods, buildings and small manufacturing units and the residential/retail market for solar-powered products provide another opportunity. The big player within this space is Tata BP Solar, but many small and new players have entered the space with aggressive growth plans. And….a theme is emerging here…are seeking investment to drive such growth. The most successful players here will be those who (a) have a well-researched consumer needs driven product offering, taking into consideration the various needs of rural and urban households across all rungs of the income scale; (b) provide a financing mechanism for purchases, including to low income households; and (c) have the ability to build out and manage a robust retail distribution channel that can get the product into not just the cities but also into India’s rural villages. There are a few management teams in India which have built or are building business models that pass these tests. Unless a foreign player has significant resources with which to hire its own team to accomplish the same, the better investment potential is in seeking out one of the local players seeking growth capital. There is room for small investors who can provide $1M-$10M over time, including angel investors.
In my view, manufacturing of solar products and components carries the largest risk in India’s solar space from an investment perspective. A year or two ago, many manufacturers emerged with proposals for solar cell and module manufacturing, which in part was the result of fairly stringent Indian content regulations in the face of huge demand under the prospective national and State-level solar plans. These Indian content requirements have since been relaxed, but many of those manufacturing proposals remain on the books and new projects continue to emerge too. While there may remain room for small manufacturers and assemblers of retail solar products, there is a significant risk that solar cell and module manufacturing will become the purview of larger entities that can sustain the big price and profitability swings that will accompany a sector that may quickly succumb to commoditization, contract manufacturing and stiff international competition, like much of electronics manufacturing. Be wary as a small investor.
Disclosure: The author is engaged in various aspects of the Indian solar power sector.
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