The banking system in India is not well developed compared to other countries: Gautam Mediratta, Manager-BD, Rays Power Infra.

RPIPL is one of the snowballing EPC Companies of India. The company leverages Consulting-Engineering-Contracting-Commissioning services with practicing expertise in the renewable power plant and transmission industry. Gautam Mediratta, Manager-BD, Rays Power Infra takes us inside the Industry’s temporal lobe.

1. What is stopping us from building a Truly Massive solar power plant in India when this country is reiterated as one of the most conducive ecosystem for solar plants?

One of the challenges in the Indian solar sector is that the banking system is not as well developed as it is in other countries. Its time consuming and laden with bureaucratic hurdles.

Another factor is that the Grid infrastructure in India needs to be improved to absorb the 100 GW capacity injection. We need to work on improving evacuation, introducing Smart Grids and Smart Metering to meet this target. This would involve developing an intricate forecasting schedule to assess the Solar injection.

2. How profitable is setting up solar business in India?

Depends on where you are in the value chain.  Manufacturing in India has been given a push recently, but the market is still heavily dominated by Chinese players and international players operating out of China with centrally planned economies of scale. So manufacturing would have to be heavily incentivized if we have to make profits.

EPC has also seen a lot of competition lately, and margins have been driven very low with competitive bidding. However, if you introduce a value add to traditional offerings like developing innovative models of co-developing Solar Power Plants then you can make a profitable business out of Solar.

For investors, Solar represents a relatively risk free investment in their investment portfolio – primary resource is the Sun which is as predictable as predictable can be. The rest of the plant engineering, design, equipment etc. has become relatively standardized in the last few years and quality plants meeting predictable payment schedules to investors are being set up these days

3. Early this year in May World Bank approves $750 Million loan to Support India’s Grid Connected Rooftop Solar Program. Now the Bank has approved loan of USD 1 Billion. Between 2015 and 2016, the Group lent around $4.8 billion to India, what does it mean for the Indian solar market?

These funds have been used to provide subsidy to residential and non for profit (schools, colleges, NGOs etc.) customers. They have also been used to provide viability gap funding and feed in tariffs to achieve parity between renewable energy sources and traditional sources on the power plant level.

In the future, these funds would be used by through SBI to provide soft loans to rooftop customers as well.

While such funding has been helpful till now, the way its been disbursed has much to be desired for. Subsidy disbursement at the rooftop level has been huge question mark, especially if subsidy is being disbursed through State Nodal agencies. There’s a huge time lag in the process which makes the end customer distrustful of the process and unwilling to commit.

4. Is the sanctioned loan for green energy reaching out to developers/aggregators and derived business associates? Any specific hurdles individuals have to face to gain the ordained benefit?

If you’re talking about the 5% soft loans which the government had announced in 2012, they never came through. It’s in the works now through SBI  – lead time for policy development will take at least a year though.

5. How do you think International Bank for Reconstruction and Development (IBRD), Climate Investment Fund (CIF)will back the existing solar PV business models and also help expand the reach of rooftop PV systems to the intrigued customer base?

Sustainability initiatives ring a bell with international businesses with their carbon-reduction agenda. Even if you look at German or Japanese companies in India, their primary goal for going solar is the reduction in their carbon footprints.

However, Indian businesses don’t move beyond the economics of solar power. Consequently, PPAs are the need of the day for Indian businesses to consider solar power on their rooftops and there are plenty of investors willing to back such businesses already in the market.

The real role of IBRD, CIF and such organizations could be to fund sustainable energy solutions for the people at the bottom of the pyramid – there’s a lot of scope to work on rural electrification projects if one can come up with the right business model involving all stakeholders like villagers, panchayats , local entrepreneurs and NGOs. A steady stream of funding with the right business model is the need of the day.

6. What is the role of tariff for large scale solar power plant and rooftop? How does it decide your profit?

Tariffs for PPAs for large scale solar plants directly decide the return on investment for investors. Higher the tariff, the more profitable the proposition for the investor.  Lower tariffs like the recently quoted Rs. 4.34.unit often push developers to lower quality of execution.

On urban rooftops, high existing tariffs from DISCOM act as a mover to adopt solar solutions. In Delhi, the residential tariff top slab pushes high at Rs. 8.75+ taxes (approx. Rs. 9.5/unit), which means that every unit of energy the home owner generates from Solar, he saves Rs. 9.5 in bill payments. Hence, hedging of volatile and ever increasing electricity tariffs for 25 years is the value which rooftop solar provides to rooftop customers.

7. Amidst growing efficiency and vigorous innovation in solar panel, the prices are also slumping apparently. Hence, do you think solar power projects here in India will be ever able to generate electricity at Rs 2.2 per unit like Dubai?

After the inflection point in price reduction in 2010-2011, Solar panel prices have been falling by 4-6% year on year. However, other costs like price of land or labor increase year on year. Hence the net balance of prices has been shifting downwards slightly, but not enough to warrant the recent tariffs of Rs. 4.34/unit (Fortrum, SunEdison), and definitely not the Rs. 2.2/unit tariff as was seen in Dubai.

Dubai is a much safer bet for investment than India for various reasons – better sovereign guarantees (India has involvement of states with bankrupt DISCOMs), better Solar irradiation and better investment environment – that is to say it is less risky to invest in Dubai than in India hence the prices can be lower.

In India, at present, the reasonable solar tariff with considerable returns is close to INR 5.10 per unit and above. The solar tariffs of INR 5 per unit and below would find it very difficult to get financial closure for these projects as the banks are very skeptical of funding power projects with low rate of returns. Even if they get foreign funding, the same will be subject to hedging and other costs which would increase their cost of funds. To maintain the margins and to justify the viability of the projects, there may or may not be some cost cutting in the execution of these projects which might have a direct impact on the long term sustainability of these solar power plants. Therefore, it is too soon to comment on such tariffs. We should wait and watch the execution and thereafter the operational working of these projects so as to provide a justification of these projects and their tariffs.

8. When you hawk at the future, what are the development do you foresee in the EPC segment of solar business?

In large scale power parks, EPC companies have to add more value to the process. They can’t remain pure play EPCs if they are to grow. This means taking a more proactive approach when pitching their services to not only bigger EPCs but also to investors of all kinds.

Otherwise, the future is rooftops. 75% of the buildings that will be in India by 2030 are yet to be built. Even on exiting rooftops, Solar power can be accommodated seamlessly. I can foresee every fourth rooftop having solar panels by 2020 – and that’s a huge number!