Rooftop Solar Power Projects - Are Good Investment Option?

Posted in Finance Articles, Total Reads: 7413 , Published on 02 January 2014
Advertisements

India had a peak power shortage of 9.3% during the five years ending in 2012 when over 50,000 MW new generation capacity was commissioned. A key cause of India’s power deficit is a shortage of coal, which fuels 57% of the country’s power plants. Importing coal is also getting more difficult Indonesia, South Africa and Australia who are the key exporters to India, are becoming more protectionists about their resources.


Image Courtesy: freedigitalphotos.net, photoraidz


Taxes on exports from these countries have been increased, making import of coal more expensive. All above factors also lead to increase in thermal power tariff.



Source- http://en.wikipedia.org/wiki/Electricity_sector_in_India


One way to get rid of power deficiency is development of renewable energy which includes solar power, wind power, hydro power etc. Among all, solar energy is best suited for India because India is endowment with abundant irradiation, with most parts of the country enjoying 300 sunny days a year. Current solar power generation in India is 1416.8 MW. India expects to install an additional 10,000 MW by 2017 and a total of 20,000 MW by 2022.


Rooftop is one of the emerging solar power technologies in world. Many countries have already started installing rooftop power plant. Japan which is one of the major solar power producer introduced new FiT regime aims at driving the solar industry from residential rooftop installations to larger ground mounted installations. Australia had an installed capacity of 1,298MW by 2011. The installations in the country are mostly rooftop installations, with over 500,000 solar PV systems on the rooftops of homes and schools. China has successfully installed rooftop solar panels in domestic area.


Though the solar rooftop segment in India is relatively nascent, it is developing fast, and has a strong growth potential. While it is difficult to accurately estimate the potential for RTPV in India, recent estimates indicate a potential in the range of 20 GW to 100 GW. The JNNSM mission document refers to both forms of commercial arrangements for rooftop PV, namely net-metering and sale to utility through preferential FiT.



Government initiatives for rooftop solar projects

National Solar Mission Policies (JNNSMP) introduced “ROOFTOP PV & SMALL SOLAR POWER GENERATION PROGRAMME (RPSSGP)” especially for rooftop solar projects. The target capacity of rooftop projects under JNNSM Phase II is 200 MW (100MW for2013-2014, 100MW for 2014-2015). Main features of this programme are: - 1. Generation Based Incentive (GBI) for distribution utility 2. Financial support through a combination of 30 % subsidy and/or 5% interest bearing loans 3. Capital subsidy of 90% of the benchmark cost would be available for special category states, viz. NE, Sikkim, J&K, Himachal Pradesh and Uttarakhand. Other incentives are ARE Voucher/Stamp, Viability Gap Funding, Green Energy Bonds etc.


Different state’s rooftop solar policies

Parameters

Kerala

Gujarat

Karnataka

Tamil Nadu

Type of system

Off grid

Grid- connected

Grid- connected

Grid- connected

Capacity addition

10 MWp

30MWp

1.3 MWp

350 MWp

Rooftop segment

Only residential

80% government building and 20% residential

Any building

Government building

Incentive for rooftop owner

30% capital subsidy+ Rs. 39000

Green incentive to rooftop owner (INR 3/ kWh)

Monthly payments based on contract

Generation based incentive

Incentive for project developer

Same as above

FiT

30% capital subsidy from MNRE

Same as above


Comparison of solar tariff and grid tariff (Present as well as future)

Due to interrupted power supply, consumers use multiple backup solutions. Captive diesel power generation, kerosene-based power generation and battery-based backup are some of the common options. These backup sources increase the LCOE for the consumers. For analysis purpose, we will compare solar power to just the grid power in terms of parity. In parity terms, use of the backup options can only improve the case for solar power. By definition, grid parity occurs when LCOE for solar power generation is less than or equal to the price of purchasing power from the grid. According to a report by ‘Bridge to India’, Commercial consumers in India will be the first to adopt rooftop solar power as parity for them will be reached the earliest. Solar power is already cheaper than grid power for commercial consumers in Maharashtra, Delhi and Kerala even without the subsidy. If we take subsidy into consideration then more states will have grid power parity with solar rooftop power.


Current Commercial tariff parity across different states in India:


Source- Bridge to India_solar compass_april2013


Considering an annual tariff increase of 6% p.a. and solar LCOE drop at the rate of 5% p.a. we have forecasted the shift in parity scenario in 2016. Andhra Pradesh, Odisha, Tamil Nadu, Gujarat, Karnataka, West Bengal, Uttar Pradesh, Rajasthan, Punjab and Madhya Pradesh will reach commercial parity without subsidy. Uttaranchal, Bihar Goa and Tripura, Mizoram, Manipur and Jharkhand will become viable if capital subsidy is still available. Commercial tariff parity across different states in 2016 is shown below:


Source- Bridge to India_Solar compass_april3013


Similar comparison can be done for industrial tariff and residential tariff.


Rooftop solar power project financials

Considering a typical rooftop solar power project of 100 kW will take 5 months, the total cost required to set up such plant will be ₹1.3 lakhs. Breakup of the cost is:

Plant Capacity

100

kw

S. No.

Cost Component

Cost in ₹.

1

Photovoltaic Module

325000

2

Inverter

125000

3

Module Mounting Structure

50000

4

Civil Work

50000

5

Isolation Transformer

30000

6

Wires & Electricals

5000

8

Project Execution

10000

9

Contingency (10%)

55000


Total

650000


Cost/ kw (Lakhs)

1.3
















Operations and technical details

Total capacity

100

kW

Yearly PLF

19.00%


Yearly Degradation

0.30%


O&M cost (pa)

0.63

lakhs

Maintenance spare

15%

of Op cost

Admin expenses

1%

of revenue

Insurance premium (pa)

₹0.438

lakhs

Annual increment in O & M Ex

1%

Per annum

Annual Increment in O&M Ex after

5

years














The EPC cost is inclusive of plant machinery cost along with mechanical, electrical & control requirements of a solar power project. In order to avoid possibility of cost over runs or any other unexpected situation a 10% contingency cost is taken in project cost. Preoperative expenses have been estimated at ₹0.2 lakhs. Interest during Construction (IDC) of ₹2 lakhs has been calculated and IDC would be a part of the Project Cost. The interest rate for the debt has been assumed at 11.00%. The working capital margin requirement of the project is estimated at ₹0.9 lakh for setting up of the plant.


Financial assumptions



Project cost (Rs Cr)

130.00

Lakhs

Debt Equity ratio

2.33


Upfront Equity (%)

30.00%


Upfront Equity (Amount)

11.70

Lakhs

Rate of Interest-TL

11.00%


Upfront fee

0.45500

Lakhs

Flat Tax rate

33.00%



We have assumed that the Debt Equity ratio for the project will be 2.33:1. In order to calculate total working capital we have assumed that days’ payable is 30. Days’ receivable is 60, current liability expenses are paid after 1 month and working capital margin is 25%. As per government norms, we can sell this electricity at a rate 12.5 per unit for initial 12 years and thereafter at a rate of 5 per unit for 13 years. We have assumed flat tax rate of 33%.


Based on above criteria it has been estimated that the debt service coverage ratio (DSCR) is 1.3 which is good for such type of projects. Equity IRR and project IRRare 13.08% and 22.8% respectively.


Risk and its mitigation for such projects

S. No.

Risk

How to mitigate it?

1.

Management Risks

Proper procedures and documentation with experience contractor will reduce risk of failure of project.

2.

Market Risk

Contactor and distribution company should enter into long term PPA agreement with government to reduce market risk.

3.

Pre-Completion Risks


a)

Building Structure

The structural integrity of the roof needs to be examined by a qualified professional engineer.

b)

Regulatory Risks

The contactor company should obtain all major regulatory approvals and sanctions. He should take legal steps to take necessary approvals.

c)

Leasing Roof to a Third Party

Home owners should enter into a formalized agreement with contractor regarding leasing so that home owners risk can be mitigated.

d)

Cost Overrun/ Time overrun

A contingency cost (5-8% of project cost) has been taken.

4.

Technological risks


a)

O&M

The contractor company should enter into a Comprehensive Operations and Maintenance long term arrangement.

b)

Plant Performance / Technology Risk

There are many PV technologies and mounting systems available on the market. We should select the best solution for roof. That requires the right technology, for the right roof, at the right price.

6.

Other Risks

Generation from rooftop might suffer due to unforeseen circumstances like fire etc. So, adequate insurance cover should be taken to reduce the risk.


As per our study, we conclude that solar rooftop financing is a very attractive sector for investment. Considering the return figures of this sector and the source of energy being a sustainable one, the government should promote the sector with higher subsidies.


This article has been authored by Sudhansu Dutta and Mamata Madhumita from IIM Kozhikode


References:


  • Garg, H. P. (2000). Solar Energy: Fundamentals and Applications. Tata McGraw-Hill Education.
  • IRDEA. (2012). Proposed Guidelines for Small Solar Power Plants connected to 11 KV Grid. JNNSM India.
  • CERC. (2010). Terms and Conditions for Tariff determination from Renewable Energy Sources.
  • EPRI. (2010). Addressing Solar Photovoltaic Operations and Maintenance Challenges. India.
  • Articles from monthly, weekly or daily publications
  • Akhilesh M. (2013, February).Bankability and Debt Financing-1. Bridge to India
  • Akhilesh M. (2013, April and January). India solar compass. Bridge to India
  • http://www.icom.org
  • http://www.wikipedia.org.
  • http://bridgetoindia.com
  • www.solarenergyexplorer.com




Advertisements


If you are interested in writing articles for us, Submit Here


Related Business Articles You May Like: