Waiting for the sun

22. October 2013 By:  Akhilesh Magal

Challenges in India's private PPA market

Akhilesh Magal, Bridge to India

The private PPA market in India (also sometimes called the OPEX model) is often suggested to be the next wave for solar PV in India. Under this model, the developer directly signs a power purchase agreement (PPA) with the consumer. This approach is attractive because it is independent of unpredictable government policies and offers flexibility in approaching consumers.

For the consumers, this model presents an opportunity to lower their energy costs, secure energy supply (especially if it is a captive power plant) and meet renewable energy goals (if any) without investment. What sounds like a great all-round proposition has, however, not yet translated into many projects. Why?
There are currently several constraints that are holding this market back.

1. Consumers think they can get a better deal by waiting. Although falling costs for solar PV technology have created this market, they are also preventing the market from taking off. Economics tells us that if people expect a commodity to rise, they would buy and if they expect the price of a commodity to fall, they will hold-off buying it. The same argument can be extended to the private PPA market in India. With every new government auction creating new record low FiT prices, there is a sense among consumers that prices of solar PV will continue to fall. In the short term, this is actually not the case. Module prices have largely bottomed out and the falling rupee against the dollar is making imports far more expensive.

2. Not all states and consumer categories have reached grid parity with solar PV. The market is limited to a handful of states and consumer categories in those states where grid parity has been achieved. In other states the national Renewable Purchase Obligations (RPO) and state specific Solar Purchase Obligations (SPO) (ex: Tamil Nadu) are drivers for this market. My recent travels in Tamil Nadu show clearly that there is a significant appetite for solar in Tamil Nadu, but most players are holding off until the government agencies get serious about the implementation of RPO/SPO. When this happens, Tamil Nadu could become the largest market for private PPAs in India.

3. There is no overarching policy aimed at facilitating the private PPA market in India. There are four independent policies that regulate private PPA models (see our October 2013 India Solar Compass for more information):

  • Open Access (OA) mechanism for independent sale of power using the existing transmission and distribution facilities.
  • Captive Power Plant (CPP) regulations as per the electricity act – wherein a consumer owns 26% stake in the project and consumes equal to or more than 51% of the energy generated.
  • Renewable Energy Certificates (REC) regulations that mandate connection to voltages above 11 kV. REC regulations also state that no concessions from the OA charges can be availed (see our India Solar Decision Brief on RECs from 2012).
  • Net metering and connectivity standards: although not present in all states, this policy enables power to be injected back to the grid when demand is absent and consumed from the grid when demand for power exceeds generation. Additionally, net metering policies govern the interconnectivity standards.

4. Solar PV projects are long-term infrastructure projects. PPAs, typically, have a tenure of 15-25 years. Although one can take a call that energy costs in India will continue to rise for the next decade or so, many consumers are uncomfortable being locked in for such a long period. This is especially true if the solar plant is a rooftop installation and the consumer does not own the building. Typical lease agreements tend to be of three years. And a typical longer lease period is ten years. This can add significant risk to the business case, unless an alternative off-taker is identified.

5. Legal contracts in India are not very robust. And it is common even for reputable firms to flout contracts. Legal proceedings in India are a long drawn affair. This is one of the biggest deterrents to this model.

The private PPA market can revolutionize the way India thinks about energy security. Large-scale power projects in India are most often than not mired in delays resulting from socio-economic problems, environmental clearances and center-state politics. Most consumers in India have already taken things into their own hands by setting up diesel generation sets or captive power plants.  With costs of conventional energy skyrocketing, solar PV can easily serve as a complementary source of energy to lower energy costs. Developers and investors are willing to step in and finance these projects, as they are relatively free of government regulations. The irony in this case is that a lack of clear regulation is preventing the market from taking to the sky. When will the sun rise on the private PPA market?

India will be among the countries of focus at the upcoming 14th Forum Solarpraxis, taking place Nov. 21-22 at the Hilton Berlin in Berlin, Germany.

About the author:
Akhilesh is the Head of Project Development at Bridge to India. He has a Master of Science from Carnegie Mellon University, USA, in environment engineering. He has expertise in the areas of sustainable development, energy technologies and energy policy. Akhilesh is interested in energy policy and its role in promoting sustainable development, particularly in developing nations. He has considerable prior experience in a multi-national company in the area of international project development and managing multi-site projects.

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