Revolutionary – Indian Power Companies now Confidently Put up Solar Plants Without any PPA

Solar Without Subsidy

Indian solar power companies are now seriously contemplating putting up large scale ground-mounted solar power plants without a Power Purchase Agreement (PPA) in place. Typically almost all power generation plants in the world are built with a PPA from a buyer in place. The financing of the power plant only happens if there is a PPA from a legitimate buyer.

The reason is that developing a power plant is a capital intensive process which is generally financed 70%-80% from debt. The lender to the power project requires some sort of comfort that the future cash flows of the power plant are secure enough for the developer to pay back the interest as well as the principal of the loan from the cash flows. However, that paradigm is changing with the advent of super cheap renewable energy power from solar and wind energy. IRENA has in a report said that onshore wind and solar power prices fell by 13% in 2018 globally and are now cheap enough to displace coal power plants without subsidies. We all know that wind and solar prices have been setting new records for low prices all over the world at as low as 2-3 cents unit.

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Indian’s state-owned power generation company NTPC is considering to put up a solar power plant without a PPA. The company is confident enough now on the cheapness of solar power that it does not think it needs a long term power purchase contract to sell the power. As solar power is the cheapest source it should be able to sell the power without worrying about who the buyer will be. However, for this to become a reality for most of the new power plants using solar energy, there has to be a radical reform of the sector. Currently, state regulations in India make selling power tough on a pure market basis. There are lots of charges such as banking, wheeling, cross-subsidy charges, etc. that power generators have to pay the distribution companies if they want to use their wires for moving the power from the power plant to the buyer. These charges are sometimes so high that it makes it uneconomical to generate renewable energy even if the cost of renewable energy is lower than that of fossil fuel generated power from coal or gas.

Despite the short term challenges, solar power will increasingly be built without long term PPAs which are anyway dying a natural death with most distribution companies in India preferring to avoid them now. These PPAs were a construct of older times when power prices used to increase and technology used to be static. With the technology of power generation and consumption changing so rapidly, buyers are now reluctant to lock themselves for 25 years into buying a commodity whose prices are falling by each year.