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What are the Problems Faced by the Solar Energy Industry in India?

Sep 8, 2020 7:13 AM 4 min read

India’s solar power ambitions may be staring at a prolonged sunset.

Two or three years ago, solar was the talk of the town. The Government has a goal of increasing the country’s solar capacity to 100 Gigawatt (GW) by 2022 from the present 37.9 GW. The long-term goal is to reach 450 GW by 2030.

India also took the initiative of establishing the International Solar Alliance (ISA) in 2015. Headquartered in Gurugram with 121 member states, the ISA is the largest international grouping after the UN.

But things have come full circle in the past two years. Capacity addition has stagnated. Project costs are increasing. Debt is climbing up. Two-thirds of tenders floated were cancelled, under-subscribed or delayed. And there are no buyers for nearly a third of renewable power projects.

Solar Power Challenges in India - What's Going On?

The troubles plaguing India’s solar sector are both macro and structural in nature. Broadly, issues with GST, COVID-19 and the economic slowdown that preceded the pandemic are to blame for the solar slump.

There are issues within the sector as well - from both the supply and demand sides.

But before diving into that, here’s a primer on how the Indian solar sector works.

On one hand, there are the power suppliers. These companies produce and sell power to distribution companies (discoms), which maintain the infrastructure that transmits the power to the consumers. Between these two is the Solar Energy Corporation of India (SECI), the Government’s aggregator of renewable energy and the only Central PSU dedicated to the solar energy sector.

Now, moving on to challenges for India's solar energy growth...


Supply Side Conundrums

Solar power suppliers’ main complaint involves the country’s dirt-cheap tariffs, which are among the world’s lowest. (Tariffs hit as low as ₹2.36/unit in July this year.)

Lower tariffs are good news for consumers but devastating for energy companies. State governments’ insistence that companies sell power to discoms at cheap prices hurts these firms’ profit margins and negatively affects focus on quality and innovation.

This also makes banks reluctant to lend to these companies, because they are unsure of profit sustainability. This sentiment has only aggravated due to the coronavirus pandemic, which has seen all lenders tighten their purse strings.

What’s also troubling is some state governments reneging on their contractual obligations or wanting to renegotiate their Power Purchase Agreements (PPAs) with power suppliers when tariffs fall further. Such decisions by states like Karnataka, Andhra Pradesh and Punjab endanger the rules-based regime and would invariably repel investors, domestic and foreign alike.

Then there are the delayed payments by discoms. We’ll get to the ailments of the country’s state-owned power distributors in a bit, but suffice it to say that as of July 2019 discoms owed a whopping ₹9,736cr ($1.3bn) to solar power producers.

Power suppliers also confront other obstacles such as unavailability of land, the lengthy and complicated land acquisition process, inadequate transmission infrastructure etc.


Demand Side Impediments

The problems faced by discoms are an age-old story, and are not limited to the renewable sector. These include:

  1. Binding agreements with non-solar energy producers - these tend to be long-term commitments, so if discoms make the transition to clean energy easy and seamless they would have to continue paying their obligations to these companies whilst not generating any revenue from non-solar energy. It’s a no-win situation for discoms.
  2. Stressed balance sheets - mounting debt and the lack of liquidity to address them.
  3. Old and ageing infrastructure.
  4. Lack of skilled manforce, which the renewable sector requires.  
  5. General operational inefficiencies.

The pandemic and lockdowns have only made matters worse. Energy demand is lower now due to decreased economic activity, offices remaining closed and millions working from home. Moreover, many consumers have not been able to pay their electricity bills or have delayed doing so in recent months. These have added further pressure to discoms’ books.

As such, there have been calls for the Government to disinvest its stakes in discoms or privatise them altogether.

To be fair, there have been many attempts made to fix the discom dilemma. Most notably the Ujjwal DISCOM Assurance Yojana (UDAY). It involved state governments taking up 75% of discoms’ debt and capital to absolve the remaining 25% to be raised by issuing bonds. But UDAY was beset with its own set of challenges and was not particularly a roaring success. 


Trial with Tariffs

The matter of solar tariffs is a head-scratcher.

Case in point: In 2019, SECI issued revamped manufacturing-linked guidelines wherein the maximum tariff cap was increased to ₹2.93 from ₹2.75. This evoked enthusiasm from developers and led to the tender being oversubscribed.

But discoms, expectedly, were not amused by the higher tariffs and were hesitant to buy. To overcome the impasse, the Centre today announced that it would bundle solar projects from different auctions with the manufacturing-linked ones so that the composite tariff would be cheaper than the latter.


Solar Energy Growth Challenges - Macro Level Ailments

The effects of the slowdown and pandemic on the solar sector have already been touched upon - and they are self-explanatory too.

As for GST: Its introduction in 2017 led to increased tax obligations for energy companies, which paid ₹8,000cr ($1.1bn) of the indirect tax between 2017 and mid-2019. To encourage the industry, the Government assured companies that the entirety of their GST payments would be reimbursed...but this is yet to happen. After being continuously delayed, solar firms reportedly received only about half the amount in reimbursement as of August 2020.

Additionally, in order to uplift domestic manufacturing, a 25% duty was imposed on solar cells and modules in 2018, but this has only increased domestic project costs. This duty was decreased to 15% but extended till 2021, in line with the Government’s push for an “Atma Nirbhar Bharat”.

So, that’s the current state of Indian solar. Sky-high ambitions coupled with structural challenges playing flip flop with supply and demand.

But the sheer gleam and scale of the world’s largest clean-energy expansion (for the time being) remains too bright to ignore.


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