It’s heartening to see India’s recent boom in utility-scale solar. Governments have brought this about in two distinct ways: entice developers to bid aggressively on National Solar Mission’s (NSM) “reverse auctions” by successfully selling solar’s bright future and, in the case of Gujarat, by offering a developer-friendly off-take price.
The two approaches have led to the price discovery of 7.5 Rupees and 15 Rupees per unit of electricity respectively. Clearly, a sustainable market price is somewhere in the middle of that range.
Many states’ distribution firms (the generators’ main customers) are financial zombies. Today the cost of solar subsidies is hidden—pooled with the overall generation bill in states such as Gujarat or, for projects under the national scheme, buried in the finances of a big state-owned conventional power firm.
Generators/developers who won low-ball NSM bids have no option but to cut corners, thereby putting plant longevity at risk. Lenders’ recovery depends on the ability of the financial zombies, the deeply-indebted distribution companies that ultimately off-take the power, to actually pay for it. Moreover, as they continue down the path of ever lower bids, they are pursuing fool’s gold without any sustainable advantage or differentiation. That is, if they can win future bids at all.
We hold that a far more defensible way exists for the developers of solar plants. They can arrive at a fair market price through direct negotiations with the ultimate consumer of power, who also pays for it, by installing captive power plants. These users tend to be in the highest bracket for grid-power tariff so they will continue to realize more savings every passing year. This in turn significantly reduces buyers’ credit risk for renewable lenders.
The beauty of distributed generation lies in a business model that brings savings to the captive user and also improves project economics for better bank-ability.