Problems of Tamil Nadu Solar Energy

In Greenworldinvestor, we earlier wrote about Tamil Nadu’s Solar Energy Policy which had generated huge investor interest. The main reasons about the huge enthusiasm seen for setting up solar energy in Tamil Nadu is that, the state is home to almost 60% of India’s wind energy capacity and suffers from a massive power deficit despite being one of the most industrialized states. The state’s mandate to enforce a 6% solar power obligation on industries has meant that almost 1000 MW of solar  capacity will have to be built from scratch every year for the next 2-3 years. Major TN manufacturers like Renault are planning to invest in captive Indian solar panel systems while solar developers are investing in setting up solar power plants to sell power to industrial and commercial consumers who do not have captive solar energy generation. A recent meeting held by Tangedco for solar energy developers saw attendance from top renewable energy developers in India as well as some unlikely participants like the South Korean steel giant POSCO which intends to set up a 200 MW solar plant. POSCO entered the global solar utility segment a year ago prodded on by the Korean government incentives for green energy.

However despite the enthusiasm some potential problems for solar energy in TN have cropped up and is bugging the solar developers. We have listed out some of the top issues being faced by the solar energy developers in the state there:

1) Timely Payment from electricity distributor – Distribution utilities in India are owned by the state and are heavily indebted loss making companies. This makes getting timely payments from them a tough task. Tangedco has recently been missing payments to wind farm owners in the state which is causing concerns for solar farm developers as well. They are worried that the Letters of Credit issued by the electricity distributor might not be enforceable.

2) Same Tariff for all Sizes – In general, the larger solar power plants are cheaper to construct than smaller solar power plants. This is because of economies of scale which allows cost reduction through procurements, EPC, regulation etc. However the government plans to award the same L1 rate to all bidders. This will tilt the game towards larger solar system owners.

3) Pro rate allotment – The state has seen a huge response for solar power allotment and it is expected that more than 1000 MW will be bid. The government plans to allocate the contracts on a pro rate basis. This will throw the plans of the solar developers for a toss and result in oversized bids by developers.

4) Power Grid Capacity – There is also a concern that the power grid might not have the capacity to transmit the solar power generated by the solar farms. There is also an issue of the availability of power transmission in different parts of the state.

While the above problems are specific to TN’s solar energy industry, solar projects in India tend to be riskier. Read our earlier post on the risks below.

Why Indian Solar Projects tend to be Risky

Indian Banks have raised concerns over lending money to Solar Projects in India. The main problem arises from the fact that State Electricity Boards (SEBs) are counter-parties to the P0wer Purchase Agreements (PPAs) signed by the developers. Most of the State Electricity Distributors are in poor financial shape and have been known to frequently default on their financial obligations. This means that the cash flows of the Solar Project will depend on entities with poor financial reputation. Note the debt financing of the projects is non-recourse which means that Banks have only the Financed Project as collateral. With the Solar Energy still being almost 3-4 times more expensive than normal Electricity Prices, it means the banks will  suffer a big loss. With almost 70-75% of the estimated $2.2 Billion in the first phase of the PV projects to be financed by debt, this represents a big hurdle for the success of Solar Energy. The government needs to come out with some sort of arrangement of guarantees for the smooth functioning of the Solar Mission and instill confidence amongst investors and Banks.

Delays are quite endemic to Indian solar projects with almost 65% of the projects  awarded in the desert state of Rajasthan getting delayed and being fined. According to Bloomberg, India’s state owned giant oil and gas IOCL too was fined. India’s electricity companies broadly are missing their deadlines as well with most of the larger thermal power plants being put in cold storage. The reasons for India’s project malaise are many including:

i) Bad governance and regulation

ii) Endemic corruption which involve both the government and the private sector

iii) Lack of quality

iv) High interest rates etc.

If you have not read it, you can also read our take on the Solar Energy in Andhra Pradesh. Also contact us if you wish to purchase the complete updated database of all Indian solar energy plants at a discounted price.