Focus on India’s solar policy framework


Since the announcement of the JNNSM guidelines, there have been some significant changes to India’s solar policy. Most notably the feed-in tariff (FIT) was scrapped – due to overwhelming response, according to the government – and replaced with an auction where photovoltaic projects go to the lowest bidder.

The original FIT was announced at 17.91 Indian rupees (Rs.) (40 U.S. cents) for photovoltaics and Rs.15.31 (34 U.S. cents) for concentrating solar power. The auction of Phase I projects resulted in 37 winners, or 620 megawatts (MW), out of which 30 projects (150 MW) were photovoltaics and seven projects (470 MW) concentrating solar power. The lowest winning bid for photovoltaic projects came in at Rs.10.95 (23 U.S. cents), which is a 40 percent discount on the original FIT. Meanwhile, the highest winning bid came in at Rs.12.76 (28 U.S. cents), thus representing a 30 percent discount on the original FIT.

Financially feasible

The auction system raises a somewhat controversial question: are these projects financially feasible at such discounts? It is certainly going to be a challenge to finance them with unattractive returns, especially when the high borrowing costs in India are considered, and the fact that foreign banks may deem the market too immature and risky for such low returns.

Solar project experience was not a criterion to win – it was just a matter of who submitted the lowest bid. This has resulted in companies with questionable qualifications selected as winners, including such examples as an animation company, a wool yarn maker, a pipes supplier, and an auto dealer.

In addition to feasibility, the system also raises the question: can the Indian solar industry take off under the policy framework of JNNSM, with this no-experience-required-lowest-bid-wins approach? That remains to be seen.

Furthermore, Mercom stands by its previous analysis, as published in September’s 2010 pv magazine, which states that the mandated 50:50 split between photovoltaics and concentrating solar power is not a good idea. JNNSM is trying to encourage the development of both technologies by giving each equal weight. However, by allotting specific quotas for each technology, the mission is dictating the ratio of technology that can be built, rather than allowing the market to select the most efficient and cost effective technology for India.

As a prime example, water shortage is an important issue in India. A recent Rajasthan State report concluded that the water status in the state is "critical", yet 86 percent of Phase 1 JNNSM CSP projects are located in Rajasthan.


With the FIT system gone under the JNNSM, the next viable option for developers will be with state-level solar policies. Most states have implemented their own variation of the FIT, but many, following JNNSM’s lead, may opt for an auction system in the future.

The main concern with states is that most state-owned power utilities are financially weak, with many already operating at a loss and depending on government subsidies to survive. This creates uncertainty for developers and investors, as they are unsure of if they will get paid on time after signing PPAs.

The State of Gujarat has the most aggressive solar policy, with announced projects of about 1,000 MW: this currently exceeds the number of announced JNNSM projects. In Gujarat, several developers recently missed the project deadline and instead opted to pay a fine of Rs.10,000 rupees ($222) a day per MW for the first 60 days and Rs.15,000 thereafter.

A one MW project, which overall costs millions of dollars to develop, will only be fined 15 lakh, 75,000 rupees (Rs. 51,75,000 or $115,000), if delayed for a year. If the fines remain low, developers may decide to take their time and wait for costs to drop so they can get better returns.

RPO’s and REC’s

In January, the government announced a Renewable Purchase Obligation (RPO) program with a solar carve out, which will benefit the sector. How they will enforce these RPO’s is an issue, due to the fact that most utilities are state-owned and they would become a self-imposed penalty if goals are not met.

A solar Renewable Energy Certificate (REC) mechanism was also announced with a floor price of Rs.12,000 ($269) per megawatt hour, and forbearance price of Rs.17,000 ($381) per megawatt hour. These prices may change considering this was announced before the FIT was eliminated.

The REC mechanism will help to ensure RPO compliance, as most solar projects are being developed in only a handful of states. Eighty percent of CSP projects and 72 percent of PV projects currently being developed under JNNSM are located in Rajasthan, as project developers try to maximize the capacity utilization factor due to the state’s high solar insolation levels.

India’s solar market is still in a nascent stage with both national and state policies only recently beginning to take shape. The second and third quarters of 2011 will be telltale quarters as financial and project deadlines become due.

About Mercom Capital Group

Mercom Capital Group is a clean energy communications and consulting firm with offices in the U.S. and India. Mercom consults its clients on market entry, strategy, policy, due-diligence and joint-ventures. For more information, visit: To get a copy of Mercom’s market intelligence reports, visit:

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