Indian States try to Leverage Solar’s Rapid Growth to Milk Taxes and Increase Revenues

The Indian desert state of Rajasthan situated on the western part of the country is endowed with large solar resources. The state has a large land area that is soaked by the sun throughout the year. Given that a large proportion of the land is part of the desert, the prices, as well as the population density, is low. Rajasthan has been one of the leading solar-friendly states in installing solar power projects and solar parks. Many other Indian states also procure solar power from Rajasthan as it is much cheaper to buy land in that state compared to the other states. The solar insolation is also higher which makes the generation cost of solar energy much lower as compared to other states such as Bihar and West Bengal, where solar radiation is much lower.

With solar energy costs dropping like a stone and most of the new power capacity additions happening in solar energy, some states now want to milk the potential of solar to levy taxes and increase their revenues. Many Indian states have seen their tax revenues fall sharply due to a general economic growth slowdown. Rajasthan plans to increase the registration fees for solar power plants by five times and also wants to levy annual charges between USD 3000-7000 per MW for a solar power plant. This has made the solar developer cry wolf as they work on wafer-thin margins. The problem will be more for existing solar power plants who cannot pass on the increased charges to the buyer.

A change in law condiction will have to be used in order for the developers to pass on the costs. The total cost of the solar power plant will increase by around 5%-10% with these charges. I don’t think it is a bad move on the part of the state government as it should be allowed to gain some benefit due to its natural resources. Other states levy large royalties and cesses on mining of various minerals and it is right that Rajasthan benefits from giving cheap land with high solar radiation for setting up of solar power plants. While this will lead to a short term increase in solar power prices from Rajasthan, I don’t think the overall story will change as solar power costs are going down by around 5-10% every year due to scale and technology