In recent years solar has seen tremendous growth and reached to 1.5GW installed capacity. Despite the passive growth in last three years policy uncertainty has created standstill situation in further growth of solar PV projects. In medium term the growth in solar projects will remain sluggish and we expect investment slowdown in renewable sector.The below Figure shows VC/PE, public markets, and asset finance investment in renewable energy quarterly trend, Q1 2004-Q1 2013, $bn.
Global investment in renewable energy in the first quarter of this year was $40 billion, the lowest in any quarter since Q1 2009, at the lowest point of the recession that followed the financial crisis. The Q1 2013 outcome was down 36% on the final quarter of last year and 24% below the first quarter of 2012.
The first quarter has often been the weakest of the four in recent years, reflecting the fact that subsidies tend to expire at the end of December, so developers rush to complete in time for that, and then pause. In addition, banks strive to complete loan deals in December, to meet their annual targets, and then start with new transactions in the New Year.
However the weakness in Q1 2013 was more than just seasonal. Figure 10 shows the trend for three categories of investment – asset finance of utility-scale projects, venture capital and private equity investment, and public markets investment. The combined investment in these three was $21 billion in the first quarter, down more than a third from the equivalent in the first three months of 2012.
While electricity from solar is projected to reach by 10 GW by 2017. It is not visible that how the project development process will remain sustainable in spite of regulatory uncertainty at central level in terms of enforcement of RPOs as well as state level in terms of honouring PPAs. Recently Gujarat government has requested the regulatory commission to cut down by 3.54 Rs/unit which is under eyebrows of many investors who have invested heavily considering as their prime investment.
Investment in solar projects in India is primarily driven by increase in electricity demand and fiscal incentives such as AD. While India has reached to top 5 COUNTRIES having solar capacities above 1GW. It is expected that the policy uncertainty in terms of REC and RPO will lead to non-availability of financiers to invest, which will slow down the investment in this sector.
The major reason of policy uncertainty is due to sharp decline in the cost of PV and many policy makers find it difficult to justify the economic incentives for solar projects in the following cost trend. The utilities in Gujarat believed that the investors in solar have been profited heavily due to the fact that projects were commissioned at far lower cost as compared they perceived while fixing FIT to these projects.
Another challenge for slow growth of solar PV is the grid integration and power evacuation issues due to which projects in some of the states such as Rajasthan and Tamil Nadu facing challenges to evacuate their power to grid.
The policy uncertainty in solar will destroy investors’ confidence and will leave to higher interest rates to avail investment in these projects which will subsequently increase the tariff in short term. Policy makers should understand that LCOE in solar projects is heavily dependent on Interest component and the investment will only happen if the government polices are transparent for long term to develop investor’s confidence. Policy makers should understand that lack of enforcement of their policies will also invest risks, higher capital cost, more difficult for financing and ultimately will lead to higher tariff which may differ the solar grid parity.
There is a need to develop transparent and certain cash flows for a safe and secured investment in capital incentives technologies like solar. We believe that solar is increasingly becoming affordable, the technology has become matured. The only thing investors need is right policy frame work and support strong grid network so that solar still remains a preferred destination of investment in India.
Dr Sanjay Vashishtha & Rishikesh Muthyal
Data and Image source: Bloomberg,UNEP