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Can Solar Power Remain Cost Competitive In The Long Term

Aided largely by a favourable regulatory and policy environment, solar energy in India is already on the growth path. However its trend that’s likely to be accentuated in the near future with the sector expected to achieve grid parity over the next two years driven by growing demand and falling costs of photovoltaic modules (PV), a key component for solar power generation.

Acknowledging this trend a recent report by ratings firm Icra states that the significant decline in domestic prices of PV modules and the competitive bidding route adopted by state distribution utilities have resulted in an improved cost competitive outlook for the domestic solar energy segment.

As per ICRA estimates, even assuming the energy demand growth at 7% on yearly basis and a hike in solar renewable purchase obligation (RPO) to approx 2.25% till FY 2022 (as against 3.0% outlined in the National Tariff policy), the combined incremental solar-based energy capacity requirements from 2016-2022 is approx 19 GW.

The report further adds that the cost impact of sourcing solar power incurred by distribution utilities to meet solar RPO level of 2% by FY20 on a pan-India basis is likely to remain limited based their average cost of supply and retail tariffs.

If solar RPO target levels were to increase to about 5% by 2020 on a conservative basis, the resulting incremental impact on average power purchase cost paid by distribution utilities is likely to be relatively higher, i.e. at about 14 paisa/kWh for 2020, which points to an increase of roughly 2.4% in the average retail tariffs across the country, the report explains.

It further states that the solar sector remains vulnerable to regulatory challenges arising out of inconsistency in the prescribed solar RPO norms and related issues of poor compliance by the relevant obligated entities.

At present, the RPO norms vary widely across states (0.2-2% against 1% for FY16 as recommended by the National Tariff Policy) with only a few states having specified plans in place till FY 2021-22, while the RPO levels for a majority of the states continued to remain lower than the suggested levels.

In view of the fact that state-owned distribution utilities are key obligated entities, solar energy projects remain vulnerable to credit risks, particularly since many of these utilities continue to have a stretched financial position.

The fundamental improvement in their financial position remains an area for concern in the long term, as this will also allow them to make payments and meet the solar RPO norms in a timely manner, the report concludes.

Welspun Renewables has a huge network of solar power plants spread across states like Gujarat, Rajasthan, Madhya Pradesh, Maharashtra, Karnataka, Punjab, Tamil Nadu and Andhra Pradesh.
About Author Nikhil Mehra :

Solar power generation and energy storage can contribute to India’s long term energy security and help achieve its climate change objectives.

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Article Added on Monday, January 25, 2016
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