India released a draft policy with the goal of building 9,000 megawatts of grid-connected solar plants by 2017, more than eight times its current capacity.

Plans include auctioning 1,650 megawatts of photovoltaic capacity by the central government in the next financial year, grants to cut project costs and loosening curbs on the purchase of equipment from overseas, according to the draft published on the website of the Ministry of New and Renewable Energy.

The policy would for the first time fund the solar industry with direct grants covering as much as 40 percent of the upfront cost of building projects. That model has previously been used to build roads, ports, railways and fossil-fuel plants in India.

This “will certainly increase investment in solar energy in India,” Mohit Anand, a senior consultant at New Delhi-based advisory firm Bridge to India Pvt., said today by e-mail.

Developers including Leon Black’s Apollo Global Management LLC-backed Welspun Group and billionaire Vinod Khosla’s Sunborne Energy Holdings LLC have so far built 1,045 megawatts of solar capacity and cut average costs of photovoltaic power 51 percent since India began its so-called National Solar Mission in 2010. The program has sought to drive down the cost of solar power to the level of other forms of grid-supplied electricity by 2017.

Private lenders have been slow to fund solar because of a lack of confidence in the technology, according to the draft. Upfront investment costs and fixed returns “make it essential that the government supports infrastructure financing.”

Funding Costs

Higher interest rates and the short-term lending available for renewable projects in India add as much as 32 percent to the cost of clean power compared with similar projects in the U.S. and Europe, according to a report released today by the Climate Policy Initiative and the Indian School of Business.

Developers submitting bids that need the least funding will win solar auctions, according to proposed rules. Grants would be paid in stages as projects reach milestones to prevent developers from bidding too low and ignoring plant performance.

That approach seeks to avoid the large, drawn-out subsidies taken on by European governments that pay fixed premium tariffs to clean-energy plants for as long as 20 years. Germany, Italy and the U.K. have rolled backed support as the cost of their subsidies ballooned as installations boomed.

The grants would be financed with revenue from the National Clean Energy Fund, which has been taxing coal producers 50 rupees (92 cents) a metric ton since July 2010 and was expected to raise 25 billion rupees in its first year.

Domestic Content

The draft raises the possibility of doing away with a rule that requires projects to buy crystalline cells and panels from local manufacturers such as Indosolar Ltd., Websol Energy System Ltd. and Jupiter Solar Power Ltd. Those companies have filed a complaint alleging foreign competitors are dumping equipment below cost in India after most projects circumvented the local sourcing rule by importing cheaper panels using an alternative thin-film technology from suppliers like First Solar Inc.

The government may help cut the cost of Indian products or require projects to source only part of their equipment locally to promote domestic manufacturing, according to the draft.

The responsibility for building 60 percent of the targeted 9,000 megawatts will be shifted to individual states. Solar- thermal technology, using sunlight to heat liquids to produce steam for generators, would provide 30 percent of the total and photovoltaic panels, turning it directly into power, the rest.

Funding Hurdle

Relying on states’ programs may pose a funding hurdle as “investors have in the past preferred the central government’s solar program over policies of many state governments” because of a greater willingness of banks to lend, said Bharat Bhushan, a solar analyst for Bloomberg New Energy Finance in New Delhi.

The central government’s first auction will be for 1,650 megawatts of photovoltaic capacity to be built in the financial year starting April 1. The following year it will award 870 megawatts of photovoltaic capacity and 1,080 megawatts of solar- thermal capacity, according to the draft. It didn’t provide a time line for how individual states would award 3,780 megawatts of photovoltaic and 1,620 megawatts of solar-thermal capacity.

Copyright 2012 Bloomberg

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