Over the last few decades many businesses have been affected by disruptive technologies which have delivered the same products as theirs at much lower cost and in an easier way. Be it telecommunication, computers, taxi operations, hospitality or travel, all have faced the brunt of technological disruption.
The power sector is also facing the impact of developments in solar and wind technology, both globally as well as in India.
Wind power has still not met as much success in India as abroad because of a lack of clarity on policy issues and restrictions in adapting new technology. What has brought India onto the world map is solar energy.
From a figure of 2,650 MW, capacity has increased to 10,000 MW in just over two years. This is important as the increase has taken place when tariff rates had crashed over the years. From a tariff rate of around Rs 12 per unit in 2010, solar power touched a tariff of Rs 2.62 per unit in the recently auctioned Bhadla Solar Park, Rajasthan.
It’s worth noting that there were 27 bidders for Bhadla Solar Park and many bid near the lower price range, thus highlighting the interest the sector is generating. The present price is lower than India’s largest thermal power producer NTPC’s average coal-based power tariff of Rs 3.20 per unit.
There are many reasons that the cost of solar power has come down in India and cheaper solar panels is only one of them. Solar panel prices have fallen by 85 percent over the last five years.
There have been more structural issues that has led to the sharp drop in power tariff. Top of the list is the decision of the government to provide security to bidders that the solar power generated will be bought by the government and payment will be ensured. This has been done by setting up the Solar Energy Corporation of India (SECI) under the ambit of the Tripartite Agreement for payment security against defaults by state distribution companies.
This single move has transformed solar power from a power sector play to a financial one. Investments are based on how much internal rate of return (IRR) the project can generate. Many investment companies and banks are partnering with companies who understand the solar sector to invest in India as the risk has been taken care of by the government, making the project as good as a financial instrument with visible cash flows.
A double-digit IRR is good enough for most foreign players.
Apart from ensuring purchase and payment, the government has also taken care of the next big issue, land. Solar companies were finding land acquisition one of the biggest hurdles in setting up solar power plants. The government has now allowed companies who specialize in land acquisition, and state governments, to allocate land which can be leased out to parties interested in setting up units.
Currency fluctuations also play an important part as most of the panels are imported. In the case of Bhadla Solar Park rupee appreciation helped bring down cost of power purchase further.
Finally, it is the way in which solar power farms are constructed that has helped in bringing about a boom in solar power. Most players, rather than purchasing solar panels, enter into a long-term lease with the supplier.
This way the buyer does not have to shell out a huge amount while at the same time the seller is ensured about payment as all payments are backed by requisite guarantees. Thus, cost of funds plays an important part in arriving at a tariff. With low interest rates globally, solar tariff can continue to remain low.
The next leg of disruption could come in from Tesla which has launched its ‘solar roof’ at a lower-than-expected price. In India, roof top solar power generation has not yet caught on, but given the way it has been adopted world over, it is just a matter of time.
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