A good starting point,but…

As we focus on the details for this short analysis,there are six areas that stand out in the guidelines which cause us concern about their potential negative impact on the eventual success of the Solar India programme.

Photovoltaic (PV) & concentrated solar power (CSP) ratio: In dividing the allocation of 1 gw of solar projects at a 50:50 PV-CSP ratio,JNNSM is trying to encourage the use of both technologies. By allotting specific quotas,the JNNSM 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. On a global scale,PV installations exceed CSP installations by a ratio of over 20 times.

Phasing allocations: Taking a lesson from Spain,JNNSM is trying to avoid a ‘rush’ by controlling allocation,which means solar PV is only allocated 150 megawatts (mw) for 2010-2011. This 150 mw for solar PV is a disappointment. When you take into consideration the 50:50 ratio between PV and CSP,the capacity size is too small to bring down costs and increase efficiencies and could cause investors to take a wait and see approach without knowing the eventual market potential.

Restricted number of applications: Restricting the number of project applications to one per company with a cap of 5 mw for PV is a big blow to serious project developers with long-term growth strategies to develop projects under JNNSM. This policy could slow down capacity addition. It could also make it difficult for these project developers to raise capital as growth will be limited and uncertainty will continue over allocations in the next phases of JNNSM. Solar India needs large-scale capacity development and caps and restrictions need to be lifted to achieve 20 gw by 2022.

Domestic content: The domestic content guideline looks better than what was originally proposed. Only crystalline silicon (c-Si) modules are mandated to be procured domestically for 2010-11,and both cells and modules for 2011-12.

Developers are not allowed to procure the cheapest and most efficient c-Si modules available anywhere in the world. This raises the risk and uncertainty for investors as they have to spend approximately Rs 84.5 crore ($18.8 million) for a 5 mw project,about half of which will go toward the purchase of c-Si modules. Ontario,a province in Canada which has tried a similar policy, is facing the prospect of action by the European Union and Japan in the World Trade Organisation. JNNSM is putting Indian manufacturers in a difficult situation. The allotted capacity per year is too small and manufacturers will have to depend largely on export markets,while avoiding unwanted attention from trading partners and countries. Promised efficiencies due to economies of scale will not be realised at such low levels.

Selection of projects (bidding): By introducing bidding,the JNNSM makes the feed-in-tariff (Rs 17.91) immaterial as it becomes just a starting point to bid (after a 15% discount or more,state feed-in-tariffs start to look attractive.) There are no qualifications or expertise needed to be a PV developer. As evidenced in Spain and other countries,‘project applications’ do not always necessarily mean that these projects will be successfully developed. Aggressive bidding often leads to unrealistic financial assumptions and poorly executed projects with cheap material,resulting in projects producing electricity at much lower capacities. Further,allowing project developers to take a discount on feed-in-tariff while also telling them not to buy the cheapest and most efficient panels available is a contradictory policy.

The other side of the argument is that project owners get paid for only what they produce. However,with India’s unique power situation and severe power shortages,the goal should be to maximise production.

Role of states: States have a vital role when it comes to facilitation of projects,as they handle the important areas of land,water,access to sites and connectivity. States’ ability to resolve issues related to land,water and transmission will decide whether projects start on time. States that can cut bureaucracy and make it easy and expedient to implement projects will end up with a lion’s share of solar project investments.

The formula for success lies in realising what needs to be rectified and taking timely action. It all comes down to execution. Looking at India’s history of only achieving about 50% planned power capacity in the last 15 years and considering India needs approximately 15-20 gw of new power capacity every year to keep up with the demand,there is no margin for error.

The authors are Raj Prabhu,managing partner at Mercom Capital Group and Alfonso Velosa III,research director at Gartner.