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What drives profitability in the Indian solar sector?

As discussed in the earlier post by Manu Jindal, India has made great progress in making the solar capacity 3000x in the past 12 years which is no small achievement. But this should not cloud us of the gargantuan task of reaching 100 GW ahead of us. We cannot overcome the 100 GW wave without riding on the profitability of the individual solar developers.

In this post, we will go through the three most important factors that drive profitability in the space - price of panels, tariffs earned, and cost of borrowing, and look at the levers available to boost profitability and revive the space.

Factors driving profitability:

Price of panels:

The price of panels accounts for more than 60% of the capital expenditure (amount firms spend to build long term assets) to be borne by the solar developer making it the most significant cost. Thanks to the improvements in technology this cost has come down sharply, with China driving a bulk of the cheap supply. In early 2017, when China abolished the subsidies on solar power, the Chinese solar manufacturing industry dumped its produce outside China, especially in India. Due to this, the price of solar panels plummeted giving a good push for the solar developers by lowering the costs.

In an effort to protect local industry, the government of India slapped a 25% safeguard duty on imports to protect the local solar panel manufacturer which led to a sharp rise in the costs for the developer, squeezing their margins.

Tariffs in PPAs:

In solar agreements or regulated power agreements for that matter, the revenue is directly linked to the tariff price per unit as agreed with the state government-backed distribution companies (Discoms). In the early days to promote renewable energy, some state governments have signed PPAs (Power purchase agreement between generator and distributor) at tariffs as high as 15 INR per unit. Over the past couple of years, the tariffs in the PPAs have come down significantly to around 3-4 rupees per unit owing to lower panel costs and subsidies by the government to solar developers with Bhadla marking the absolute bottom at INR 2.44. With this, the Discoms in India started to face buyer’s remorse as they have paid too much for the power they bought earlier with some state government-backed Discoms mulling the scrapping of past PPAs.

This further led to the Discoms to halt the new PPAs. All the new tenders floated had reverse auctioning with a ceiling limit for the unit price. The ceiling limits for these bids ranged from INR 2.5 INR to 2.9 in line with the Bhadla bid. This has brought the industry to a grinding halt. The last 6 months witnessed 11 tenders floated by various state discoms and Solar Energy Corporation of India (SECI), of which only 2 were successful and rest were shelved. Only 34% of the tendered capacity has been allocated (20 GW). Of the allocated capacity, only a third has been commissioned which is the lowest in the past 3 years. Only 6 GW out of 64 GW has been commissioned. With the current tariffs of less than INR 3 per unit, India is the cheapest destination for solar power and the state governments trying to push these tariffs would only create a crippled industry with unviable unit economics

Financing Costs:

Financing costs form a major cost component in this capital intensive industry. Major financing has come from Private Equity or through Banks both of which remained low until 2018. Banking interest rates for renewable energy have dropped by 75 to 125 Basis points over the period between 2014 to 2018 and PE investment has improved significantly during this period.

All of this changed after 2018 after regulatory tightening through the tariff ceilings. Private Equity infusion into this segment has saturated with some of the PE investors looking for an exit. State-run banks like SBI are declining to provide financing to the projects where the unit costs are being bid at lower than INR 3 as they believe that the model becomes unviable at these sub-par prices(While this does hurt the sector, Banks are right to protect their own interests and lend to only financially feasible projects).


Looking at the levers available to make the industry more viable, panel pricing seems the toughest especially in the current enviroment, with the government having a strong incentive to protect local industry in a downcycle. The other two factors, however, are well within control, with a strong chance of reviving the industry with removal of the tariff ceiling. Fair price discovery for the PPAs will strengthen unit economics thereby improving private investment and making lending feasible. It also gives a push to solar developers and encourages more to embark this clean energy journey to help India realize its target of 175 GW of Renewable energy by 2022.

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The post is written by our EZPP partner Vamsi Gorthi with relevant edits and changes by our editorial team. Vamsi is a JBIMS graduate currently working with Ernst & Young.

Disclaimer: All views expressed in the post are personal, and not related to any organization to which the writer belongs.

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Feb 12, 2020

Article on solar profitability is conceptually well written with detailed research. Must read for all power sector enthusiasts.

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