July 28, 2015

Deutsche Bank report: Make way for the sun – India solar power investments could surpass that of coal

India has made an exceptional commitment to solar energy by raising its 2022 target five-fold to100GW and its renewable energy target to 175GW. The government has announced an unprecedented policy push and states are providing the necessary infrastructure. Annual investments in solar could surpass investment in coal by 2019 – 2020, with USD 35bn committed by global players.

For local IPPs, solar has to be an inherent part of their expansion strategy, as Reobligations become strictly enforceable and cost of coal power increases.

We raise our solar power forecast by 240%

Global majors have committed USD 35bn+ to the Indian solar sector. By 2020, annual solar power capacity additions and investments could surpass those in coal power projects. We are raising our solar power forecasts by 240% to 34GW by 2020. This is on the back of strong commissioning (4.5GW), even stronger pipeline - under construction (~5.1GW), and new projects (~15GW). By then, renewables could account for a significant 20% of power capacities in India, per our forecast. Private sector interest is decisively moving towards solar from coal power, and we foresee numerous opportunities of fund-raising, yieldco structuring and M&A activity.

Renewable energy can reach 20% of capacity but we see challenges to higher penetration

  • Transmission constraints and integration of diurnal power into the grid are risks, without peak-load management capability. Solar absorption in Rajasthan could see challenges like wind in Tamil Nadu, given policy target of 25GW solar vs. peak-demand of 11GW.
  • A further risk is the enforcement of Renewable energy purchase obligations (RPOs) given weak finances of state distribution costs, and hence large-scale absorption of solar could be a concern (INR 170bn additional burden by 2020E).
  • Other issues include financing, land acquisition, limited domestic manufacturing, and returns/reliability of baseline data.

Impact on the thermal power producers

Solar could have a significant impact on day power rates, given that generation peaks between 9am and 6pm. In turn, this could reduce the coal requirement by ~8% or 70mnt by 2020E, largely impacting the highest cost of power, i.e., imported coal – leading to large savings (~USD 17bn/pa).

Companies to play the theme

Indian IPPs have started adopting a solar growth strategy, given competitive pricing which may restrict conventional power growth. Additionally, cost competitiveness is at risk, as the possibility of further cess cannot be ruled out to fund RE subsidies. Utilities- NTPC, Reliance and Adani - are early adopters and making large-scale commitments – resulting in ~5% incremental growth and 10-15% impact on target price. PV manufacturers and EPC service providers will also see benefits, although the majority of PV cells are likely to be imported given the small scale of domestic PV industry.

Click here to read the full report

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