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FiT and 20-GW National Solar Mission Lose Value in India

India faces yet another game-changer: Feed-in-tariffs and the ambitious government-sponsored 20-GW National Solar Mission (NSM) have lost value in India.

The existing conventional power cost ranges from Rs 7.00 to Rs 12.00 (US$0.13-0.23) per unit for industrial and commercial users, and the new solar power benchmark price is Rs 7-7.50 per unit. Many solar project developers are losing money by selling power to the government at this new price through power purchase agreements (PPA) that are mutually obligatory for 25 years. 

Instead, it makes more sense for an investor or a project developer to shun 25-year-long government PPAs and use the "Open Access" system to sell power to industrial and commercial users directly. Such users are paying more than Rs 7.00 per unit for existing erratic power supply and will likely be keen to pay more for reliable supply. Developers can also exercise an option to raise the cost of power supplied at regular intervals over the 25-year lifespan of the project.

That surely raises questions on the significance and value of various state governments’ policies as well as the ambitious National Solar Mission of the central (federal) government of India. If the state governments’ policies and the NSM have to remain significant, the price offered by the government to solar power project developers will have to become variable over the entire duration of the PPA. If not, it may be a losing proposition for a solar power project developer/investor to commit power at such low rates for 25 years.

The "Open Access" system enables power producers to sell power to users across the country via the national grid by bearing the cost of transmission, distribution losses, and wheeling and banking. These costs may affect the profitability of the power project initially, but committed higher billings over the next few years could provide much higher returns compared to current PPA fixed rates.

The success of the "Open Access" system will also depend on the “minimum committed load,” which calls for an industrial user to pay a minimum monthly fee to the local distribution company, irrespective of how much conventional power it consumed.

Various regulations in the country have already cleared the way for other precedents where large industrial units set up gas- or coal-based captive power plants. A similar arrangement for solar power will ensure that the end consumers and solar power project developers will be able to build mutually-profitable relationships.

While state government policies were expected to boost the solar power sector in the country, the captive or end-user segment offers a much larger market of at least 25,000 MW over the next five to seven years. 

Even if the benchmark PV project cost falls from the current Rs 9 crore to Rs 7 crore, it promises to be a market with a value of Rs 175,000 crore (about US$35 billion). 

The rules of the game in India have surprisingly changed despite it's current low installed capacity nearly 1,000 MW, which is far below government-targeted capacities to exceed 30,000 MW over the next decade. 

But if all solar developers were to go for the "Open Access" system, what will happen to state government policies and the National Solar Mission?

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