Economics of solar power in india

1. CASE STUDY
GROUP N9 –
ECONOMICS OF
SOLAR POWER IN
INDIA
MANAGERIAL ECONOMICS (8103)
GROUP N9
N004 - AMRESH KUMAR
N006 - ANKIT BANSAL
N026 - KASHI PRASAD PANDEY
N029 - KUNAL PAREEK
N033 - MANISH SHARMA
N046 - PRABHAT CHAURASIA
N051 - RANJEET KUMAR GUPTA
N064 - VENKATA NAGA SRIDEEPTI
PISIPATI

2. Economics of Solar Power in India
Abstract
In the current scenario, renewable energy has established itself as the technology of choice
for new power generation capacity and India's recent status of lowest-cost producer of
solar power further reflects an ongoing shift towards renewable power as the driver of
global energy transformation. Recently an analysis by IRENA found that the costs for
setting up solar PV projects have dropped by about 80 per cent in India between 2010 and
2018.
Prof. Gregory Mankiw has listed seven microeconomic principles that describe the market
forces based on individual economic actors considered as people and firms and their
corresponding interactions in markets. The seven principles are:
1. People face tradeoffs.
2. The cost of something is what you give up to get it.
3. Rational people think at the margin.
4. People respond to incentives.
5. Trade can make everyone better off.
6. Markets are usually a good way to organize economic activity.
7. Governments can sometimes improve market outcomes.
The case study examines the success factors behind Solar Power Market in India based
on above principles that effect the demand & supply, production and pricing strategies.
Introduction
India’s solar story through its compelling business case is maximizing the falling renewable
technology costs as the key to future energy decarbonisation. The country has realised
that it is cheaper to build and operate solar farms than to run existing coal-fired power
plants. Renewable energy also has significant environment benefits making it the single
biggest driver to help us meet our carbon emission reduction targets in our fight against
climate change. With India being a growing economy, power consumption is only going to
rise, so adoption of alternate forms
of energy is the ideal way forward to
manage balance between economic
growth and sustainable
environment.
Having recognised this as early as
2010, the Government of the
country has taken steps to ensure
consistent growth in the segment. In
this case study, the various

3. interventions of Govt. along with other factors impacting the economics of Solar Power in
India have been analysed critically.
Market Overview
The India solar power market is expected to grow at a CAGR of more than 40% during the
forecast period 2020-2025. Major factors driving the market studied are the declining cost
of the solar module and the government policies like allowing 100% FDI under automatic
route for renewable power generation and distribution projects which is expected to
increase the participation from global players into the Indian market. Moreover, the sharp
decline in prices of solar technologies in the recent years by about 52% between 2010 and
2015 (in kWh terms) has been one of the biggest drivers in the adoption of solar PV in the
country. However, the cost of modules produced in China is 8-10% cheaper than the one
manufactured in India and about 80-85% of the solar modules used in India are
manufactured in China. Therefore, the huge dependency on imports has affected domestic
manufacturing in the country, which is further expected to hinder the growth of the market.
• The solar PV segment dominated the market share in 2019 and is expected to be
the largest segment during the forecast period, owing to supportive government
policies to penetrate clean energy generation in the country's energy mix.
• India has abundant availability of solar irradiance and receives solar energy
throughout the year. This has created enormous opportunities to exploit solar
energy from the sunniest sites in the country, especially, Rajasthan, Gujarat and
Andhra Pradesh. The aforementioned factor clubbed with foreign investment and
extensive R&D projects provides an opportunity for the growth of the solar energy
market in India.
• The Government of India has taken several initiatives with the Ministry of New and
Renewable Energy (MNRE) drafting plans and putting out tenders, which in turn is
expected to drive the market during the forecast period.
Recent Trends
The average large-scale solar system cost was approximately ₹35 million (~$0.46 million)
in Q1 2020, 12% lower compared to ₹40 million (~$0.53 million) during Q1 of 2019,
according to Mercom’s report. Costs were down by 3% compared to Q4 2019.

4. The average rooftop solar system cost was ₹37 million (~$0.49 million) in Q1 2020, 9%
lower compared to approximately ₹40.6 million during Q1 of 2019. Rooftop solar costs
declined by 3% compared to Q4 2019. Like large-scale projects, the decline in system
costs is mostly a result of lower module prices.
Key Success Factors (based on Prof. Mankiw’s Micro-economic Principles)
In 2010, the total installed solar capacity was 10 MW and in 2016, the installed capacity
stood at 6000 MW - a steep climb of 600 times in just 6 years. As of March 2019, the total
installed solar capacity stands at 30 GW, accounting for an increase of 5 times in 3 years.
Today, solar has reached 30% of the 2022 target of 100 GW contributing 38% to the
renewable energy mix. The numbers are a testament to the focused approach of the
Government and the positive response from solar developers leading to exponential
growth. Solar power consumers in India today enjoy better energy security by locking in
the cost of solar electricity for a period of 25 years, thereby can hedge against variations
in grid electricity prices, which are tied to fossil fuel costs.

5. India being the cheapest producer of solar energy is not a coincidence but a success story
of the effective public private partnership (PPP) model. The growth of the sector can be
accredited to the following:
1. Role of Government
The specialised bodies formed by the Government of India like the Ministry of New and
Renewable Energy (MNRE) and subsequently the Solar Energy Corporation of India
(SECI) have played a pivotal role in
helping India become one of the
fastest adopter of solar energy. The
journey of the country to become the
5th largest solar installer in the world
has been made possible by setting of
aggressive targets and implementation of policies through streamlined efforts. When the
National Solar Mission was launched in 2010, the cost of solar power was INR 17 per unit
in comparison to a latest bid of INR 2.44 per unit. This has been made possible by
competitive tariff-based bidding that SECI, State and Central Government have undertaken
through tenders. The MNRE has also made efforts in promoting solar energy through
various public awareness campaigns and events. Even state governments have
contributed to the accelerated growth of solar industry. Since electricity is a state subject
and stable state government policies are critical to accelerate adoption. For example,
Karnataka and Tamil Nadu promoted open access through concessional wheeling &
banking facilities for solar. This made the two states the highest solar power generators in
the country.
Recently, Haryana and Uttar Pradesh are following similar policy frameworks to accelerate
adoption in the commercial and Industrial segment. RPOs were imposed on State Discoms
as well large power consumers to buy electricity generated by ‘green’ sources, or buy
‘Renewable Energy certificates (RECs)’to substitute the same. While these RPO
obligations did help generate demand for solar energy but its weak implementation
especially by state Discoms hasn’t had the desired effect that was envisaged.
2. Incentives and Policies
The subsidies and incentives provided by the Government and Jawaharlal Nehru National
Solar Mission (JNNSM) since 2010 have been instrumental in adoption of solar energy.
The top segments that have seen
rapid growth are the utility scale and
open access solar farms coupled
with steady growth of rooftop solar
plants. Some of the key tax
incentives that contributed to the
growth are the Accelerated
Depreciation Benefit and tax holiday
announced under 80-1A in the initial
years between 2010 and 2015,
which provided a major relief to solar
developers by ordering necessary
tax breaks. While Government

6. subsidies up to 30% for all rooftop solar projects initially played a major role to develop the
rooftop solar market, now it has been restricted to only to non-profit and government
buildings. To propel the industry, the Government also allowed custom and excise duty
benefits to ensure high growth of the sector. But recently with GST imposition, some of
these benefits are not available and levying of safeguard duty has increased import cost
on PV modules. Most of these subsidies since 2017 have been reduced or discontinued
since Government has applied the right mechanism by withdrawing subsidies when the
cost of solar projects have seen consistent decline with improved performance and the
industry eventually has become self-sustaining.
3. Land Certainty
Historically land acquisition has always been a problem in India and is a major reason for
cost escalation in infrastructure projects. Since the cost of land constitutes about 7% of a
large scale solar project, in 2016, the MNRE Solar Park Policy introduced guidelines that
would lead state governments to identify
suitable large tracts of land with appropriate
insolation levels, and prioritise the use of
government waste/non-agricultural land in
order to speed up acquisition process for
setting up solar parks. One of the probable
reasons of the record low tariff of INR 2.44
was that the risk and uncertainty associated
with land acquisition was completely erased
from the project cost of large scale solar
projects. Due to the climatic condition of India with 240-300 sunny days in a year, land
availability for solar generation is easily found. Most draught prone zones in rural India are
arid with high radiation and are viable for setting up large solar parks. Hence, abundant
land is available for non-agricultural activities like solar power generation helps in local
employment generation.
4. Low cost of labour
India has the lowest cost of labour allowing solar industry to employ large number of people
resulting in speedy project completion at the lowest cost. For example, the cost of labour
in Middle East is 5 times higher than
that in India. The solar industry has
utilised the availability of affordable
labour to not only offer lowest cost of
power to consumers but also
creating ample jobs in the process.
So today solar projects can be
constructed with scale and speed
required to build power generation
capacities to support our ambitions
5 trillion economic goal. A large solar
plant for 500 MW capacity can be constructed within 18 months while a similar thermal or
hydro plant might take 2-3 times more. Construction of a solar plant requires only 20-30%

7. high skilled manpower, and the rest are semi-skilled or unskilled labour, easily available
and at affordable costs.
5. Price sensitivity
India is a highly price sensitive market and for any industry to make significant footprint,
price is a key indicator. This price sensitivity has helped the Indian solar market in two
ways - The first being availability of key
components like solar panels, inverters,
junction boxes, etc. at much competitive
prices than other countries; sometimes
even from the same international
vendors. This helped India achieve
lower solar tariffs as compared to other
countries. The second way the price
sensitivity has helped, is that once solar tariffs dropped below grid electricity tariffs, there
has been super quick adoption, which has furthered the economies of scale, diving prices
of components even lower.
Conclusion
The growth story of the Indian solar market being the cheapest producer of power is in
spite of challenges like absence of uniform & stable policies and high cost of capital
compared other South Asian countries. The country needs a National Solar Policy that will
remove bottle-necks at the state level and hasten further adoption. Also, reducing the
present cost of borrowing from the currently levels of 10-11% can boost the industry further,
urging developers to bid for and execute projects at lower costs. The cost of generation
of solar power is set to fall to as low as Rs 1.9 per unit over the next decade through 2030
in India with new technologies boosting efficiency levels, a joint study by TERI and US-
based think tank Climate Policy Initiative (CPI) has revealed.
With the Government’s support, developers getting long term visibility in terms of project
pipeline and actual off-takers witnessing value in adopting solar electricity, India is poised
to secure its renewable future.
References
1. International Renewable Energy Agency: IRENA - www.irena.org
2. Mercom India Research Mar 2020 - https://mercomindia.com/
3. The Economic Times - https://economictimes.indiatimes.com/small-
biz/productline/power-generation/how-india-in-a-short-period-of-time-has-become-
the-cheapest-producer-of-solar-power/printarticle/70325301.cms
4. Indian Solar Energy Market Growth & Trends –
https://www.mordorintelligence.com/industry-reports
5. The Energy World –
https://energy.economictimes.indiatimes.com/news/renewable/solar-power-cost-
will-fall-to-rs-1-9-per-unit-in-india-by-2030-teri-study/.