The Jawaharlal Nehru National Solar Mission was started in 2010 with the target to achieve 20 GW of solar power installed capacity by 2022, which was later increased to 100 GW by the Modi government. The mission was to start major opportunities for investors and developers to help the economy and environment by getting into a sector with predictable and consistent returns.
The Central and State Governments provided Power Purchase Agreements (PPAs) mostly by tender, which allowed investors and developers to set up Solar PV power plants and sell power to the Electricity Distribution Companies, (DISCOMs) with projected returns ranging from annual equity IRRs (Internal Rate of Return) post tax of 14% to 20% over a 25-year period with PPA tariffs, ranging from Rs 18 per unit to Rs 4.5 per unit from 2010 to 2017. This is compared to a fixed deposit today at 6% return pre-tax and 4% post tax depending on the organisation.
Policies for solar PV plants
Since the recent crash in government, Solar PPA tariffs last year with Solar Energy Corporation of India (SECI) bid closing around Rs 2.50 per unit (one unit is 1 kWhr of power) The low tariffs present very low returns compared to the sector from earlier and make it uncompetitive for smaller players to enter the sector of government PPAs. These plants are generally very large with economies of scale for installation in their benefit, supported by very low cost of funds not available to all companies & complex structures to prolong payments to project equipment suppliers.
The reduction in installation costs from approximately Rs 5 Crore per MWp DC a year ago to about Rs 3.7 Crore per MWp DC in large ground based solar plants with no trackers has resulted in new opportunities for corporates to invest in solar power. The government has introduced policies for net metering and open access for solar PV plants. In net metering, the plant is installed at the company’s site and electricity generated is banked and offset against power utilised from the grid. In open access, generally the plant is located in the same state and same distribution network and power generated at the plant is banked and offset against power utilised by the company’s factory and operations units.
Companies with large electricity usage and tariffs from their DISCOMs above Rs 6 per unit, have an immediate arbitrage to invest excess cash liquidity in their own captive solar power plants. Below, 4 options, immediately available to companies, have been explored, though there can be variations and large power consumers can benefit from plants without net metering or open access.
• OPEX rooftop model with an external investor: An external investor invests in a captive solar plant or rooftop plant and offers to sell power at a lower tariff than the DISCOM. The company may only invest in an initial deposit with the investor and enjoys the benefit of lower tariffs for a period based on the private PPA signed between the parties. The company gets a net metering permission from the DISCOM. This is subject to due diligence of the company from the investor. The selling rates vary at around Rs 5 per unit. Based on the state, the capacity of the plant varies and is mostly limited to 1 MWp AC.
• CAPEX rooftop model: The company invests in a rooftop installation with net metering and enjoys the generated electricity at no additional costs. The Return on Investment is calculated over the 25-year period and further enjoys a 40% accelerated income tax depreciation, saving on tax. Banks provide support to set up such units. The Equity IRR on such an investment can range over 15% post tax on electricity bill savings for a company paying Rs 5 per unit to their DISCOM. Higher DISCOM tariffs will result in more savings and a higher equity IRR.
• Captive ground-based solar PV plant with an investor: Ground-Based plants above 1 MWp AC can be installed in the same state as the location of the company’s factory or electricity consuming unit with open access permission, which attracts wheeling charges, transmission charges and cross-subsidy charges. Such plants need large amounts of land at a thumbrule of about 5 acres per MWp DC of installation and a transmission line from the power plant to a substation with all necessary approvals. The location is generally chosen in rural areas with very low land costs.
While the rules vary state to state, such plants can be set up in an Special Purpose Vehicle (SPV) in Joint Venture (JV), with an investor in equity holding ratios of 26% to 74%, with 26% held by the electricity buying company. Such a JV ensures discount of cross-subsidy charges and the company invests in lower equity. The power is sold to the company at various transmission charges, with additional fee to the solar plant per unit. The company does not need to take a loan on their books and worry about interest and loan repayment but also loses out on depreciation benefits. The implementation risk of such a project is greatly reduced by having an experienced solar power investor as JV partner, who can manage the project debt and project installation, permissions, etc.
• Captive ground based solar PV plant: In such a plant, the company has the plant as an asset in their company books. The capex requirement is higher but keeping the benefits of the plant in mind, which include only paying transmission charges for open access, they have to cover interest costs, project debt repayment, plant operations and maintenance expenses and slightly higher tax due to savings, while getting large income-tax depreciation Rs 6 per unit) to even higher, based on the power tariff from the DISCOM. Such projects benefit from longer loan tenors (assuming cost of equity is above cost of debt). The implementation risk is higher as the company depends on their EPC and consultants for project commissioning.
Benefits of a solar EPC company
The company will have to consider the financial implications of each model before deciding on the right model for them. In each model, the savings in electricity expenses result in higher EBITDA and more tax, but a higher net profit and cashflow after tax for the company. Plant depreciation results in increased tax benefits.
Generation from a solar plant varies from location to location and can be determined by simulation software, such as, PVSyst. A solar EPC (Engineering, Procurement and Construction) company can provide such simulations based on plant components and design. The solar panels generally come with a warranty of 25 years from the manufacturer. The EPC company will provide technical assistance and consultancy on feasibility of plants in a particular location and the optimal size of such a plant as government regulations and DISCOMs describe various constraints, state by state.
Making the right decision
The returns on solar projects no longer warrant subsidies at the corporate level as the savings justify expenses. The company needs to make a decision on how involved they will be with the solar plant, as it may involve some diversion of attention for the management from their core business.
The Solar PV industry is at a mature stage and a company should consult EPC companies and local state laws with regard to capacity and other constraints applicable to them. In states such as Maharashtra, the overall transmission charges per unit are approximately Rs 2.3 per unit if an external investor (independent power producer) sells the power, but reduces once a 26% to 74% JV is created with the company. The solar plant owner is applicable for Renewable Energy Certificates (REC), which can be sold for additional profits, which again varies based on the DISCOM’s and the state’s terms and conditions. One REC is issued for every 1 MWhr power generated and fed into the grid.
Government regulation is a risk in such plants as they are impacted by policy changes. Increase in transmission charges can impact returns, which again vary from state to state. States, such as, Karnataka and Andhra Pradesh, are offering transmission charge holidays to encourage companies to venture into solar power.
A detailed study in making the right decision would go a long way in reducing expenses. A plant, once set up, is generally insured every year and the O&M companies maintain the plant daily or weekly, based on their contracts. Once the debt on the solar plant is repaid, the rest of the years result in optimal savings. Post 25 years, the savings in electricity bills justify any repairs that the plant may need, making it an ideal solution for cash surplus companies using large amounts of power.