Most industrial and commercial establishments in India are today aware of the promise of rooftop solar as a potential component in their power mix.
As discussed in other posts, while rooftop solar today cannot take care of all the power requirements of a typical industrial or commercial unit, EAI’s work with prospects in the commercial/institutional (hotels, hospitals, colleges) and in the industrial sectors have shown that rooftop solar can replace anywhere between 20-70% of power requirements. The lighter your individual power load requirements, the higher the % replacement potential from solar.
| Overall, there is a significant interest among industrial and commercial segments to go for rooftop solar power.
But one key aspect that is stopping them from final commitments is the upfront capital cost. |
Let’s look at the math to understand the reason for this hesitation.
Let us consider the case of a software company we successfully worked with. The company, a prominent player in its niche market has about 250 employees at its Chennai office. The total load consumption for the company was about 32,000 units per month. After a detailed analysis of its rooftop area and their loads, it was decided to go for 80 kW of rooftop solar, which will successfully take care of all their non-AC loads.
So far, so good. Now comes the not-so-good part.
For the case referred above, based on their requirements that included battery back-up of up to 4 hours and high efficiency solar panels, we estimated that the total cost for a 80 kW solar power system could be come to about Rs 1.2 crores.
That’s a lot of upfront money for many small and medium companies.
Fortunately, in the case of the software company we worked with, they were OK with that expense owing to a number of factors. But in many other cases we consulted for, only one in five companies actually finalized a deal to have a rooftop solar power system, mainly owing to the upfront cost.
The show stopper is not just that there is a significant capital cost, but also that this gets paid back only after 6-7 years. While the cost of solar power continues dropping, it still hovers around Rs 7 per unit from rooftop systems; this could be about Rs 6.5 per unit for those who can take advantage of accelerated depreciation.
For many companies and commercial establishments, the blended cost of power (from grid and from diesel gensets), could be Rs 9 or above (depending on the extent to which they use diesel gensets). This blended cost will only increase in future with expected price increases for diesel and grid power.
An analysis of these costs suggest that for many industrial establishments, the payback period could be about 6-7 years on capital cost, and for commercial establishments (for whom grid tariffs are usually higher than for industrial), the payback period could be between 5-6 years.
| Payback periods of over 5 years on investments of 1 crore and above usually do not fly with many Indian companies, especially in the small and medium segments. |
Now it will be easy for you to appreciate why a number of companies start off investigating rooftop solar, but only a few actually invest in it.
A new business model has the potential to overcome this seeming “show stopper”.
Let me introduce to you the Solar PPA model
The PPA model (where PPA stands for Power Purchase Agreement) essentially turns a capital investment model into a recurring expenditure model, something most companies are more comfortable with, as that is the current process they are anyway following while purchasing power. Except those companies with their own captive power plants, all others essentially purchase power from a centralized utility (either a state or private utility) at a predetermined rate.
The PPA model essentially recreates the same model, albeit now for a decentralized system such as the rooftop solar.
Essentially, the following are what the Rooftop Solar PPA model means to you:
- You can have a solar PPA company install a solar power system on your rooftop without you paying any upfront cost (except for security deposits and such)
- The Solar PPA company will operate and maintain the solar power system
- You purchase the solar power from your rooftop at a predetermined rate from the solar PPA company for a specific duration (typically 10 years or more)
That’s pretty much it. Thus, instead of paying your utility (typically a state electricity board or a private power company such as Tata Power or Reliance Power), you now pay a Solar PPA company. There is little difference here. The difference of course is that in this case, the solar power is generated right on your rooftop!
Some prospect companies I talk to think it is too good to be true. It is almost like having the cake and eating it too, they feel.
That is not really the case. It is true because it is not too good. It is just another good alternative. The PPA model does not provide dramatically superior economic benefits compared to an asset ownership model. What it does is to decrease the risk of solar power for an investor; otherwise, over a project lifetime, the cost of power for a rooftop owner is not significantly different whether he owns the rooftop solar power plant or whether he purchases power from a PPA model. In fact, should the cost of solar panels decrease significantly in future, or the cost of grid power goes up dramatically in future (many PPA prices are tied to grid power price in some way), owing a rooftop solar power plant could actually turn out to be cheaper than purchasing power.
However, the reasons why the PPA model could prove significantly popular and accelerate adoption of rooftop solar are:
- It removes the capital cost burden associated with rooftop solar power plants
- It transfers the risk of operations, maintenance and decreased power production from the rooftop owner to the Solar PPA company
Summary
In summary, it can be said that the PPA model for rooftop solar is a game-changer. By removing one of the main challenges for rooftop solar adoption viz, the upfront capital cost, it has the potential to be disruptive. It made a significant difference to the adoption of rooftop solar in the US after SunEdison pioneered the concept a few years back.
There is a good chance it will make a similar difference to the Indian rooftop solar segment as well.
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