Where is the money in solar?

 Indian policymakers have created a grand plan for solar power in the country, and the rubber is about to hit the road. In the first phase of the Jawaharlal Nehru National Solar Mission (NSM), about 650 MW will be distributed to the 40 most aggressive bidders from over 350 aspirants. Of this, 150 MW is solar photovoltaic (PV), which will go to the winning 30 participants from 300+ aspirants. Bids are due on November 16.

The Central Electricity Regulatory Commission (CERC) has set a price of Rs 17.91 per unit of PV power. In the NSM process, bidders have to indicate how much of a discount off this price would they be willing to accept for their projects. Those who are willing to take the biggest discounts will win.

The word on the street is that the bidding is going to be aggressive. With some bone-chilling numbers being bandied around informally in solar circles, the solar gold rush many had anticipated is fading fast like a desert mirage. Many cross-sectoral hopefuls, with little prior exposure to anything remotely connected to energy generation, had jumped onto the solar bandwagon, convinced that solar offered disproportionately high and stable 30-year returns. Now that they are faced with the reality of tariff bidding, most are wondering, where is the money in solar?

Let’s take a quick look at what drives PV economics. Since solar is considerably more expensive than conventional power, it requires a subsidy to drive demand and capacity. Once a subsidy mechanism is established (as it is with the NSM), allocations are awarded to developers, who in turn contract with manufacturers and EPC contractors to build the solar power plants. Once built, these plants need to be operated and maintained for 25-30 years. The economics of solar projects is driven by some select parameters: how good is solar radiation, how much does the power plant cost, what is the efficiency of the power plant, what is the cost of the financing and, of course, what is the tariff that supports all of these costs and leaves enough for a decent return?

Now let’s turn our attention to the varying objectives of the companies in the fray. Some companies very clearly want to be one of the five largest solar players in India over the long haul and have the financial capital to get there. Others are looking to build a decent-sized business that they could...