Solar power gets unexpected boost at auction in India

India's move to reduce solar-power costs by forcing companies into auctions has paid unexpected dividends both for the government and for the renewable sector.

The cost of solar power broke the Rs 10/unit barrier in a reverse auction process conducted recently by the Government of India. Solar power is hurtling towards 'grid parity' - a concept which means parity in costs with conventional fuels.

This has significant implications for India - a country with a growing hunger for energy and faced with significant shortages in fossil fuels; blessed, however, with plenty of sunshine.

While still higher than conventional power cost, which is at Rs 3.50-Rs 4.0/kwh, this development is significant because it shows that prices have declined at a much faster pace than was initially anticipated.

Against the regulated tariff of Rs 15.39/kwh, the median price discovered for 350 MW of projects is Rs 8.5/kwh and the lowest is Rs 7.49/kwh.

Last year under a similar auction, the median price discovered was Rs 12/kwh and a lowest price Rs 10.9/kwh.

The steep fall in prices is a result of global demand-supply dynamics in solar panels, which have seen a slump in demand in Europe and new low-cost

supplies coming from China.

This combined with overseas export credit dollar financing at much lower rates as compared to rupee loans has led to this new price discovery in India.

In May 2011, KPMG released a report on solar sector, The Rising Sun, which projected solar power to achieve grid parity in the next five-six years.

Given such aggressive bidding by market players and such sharp fall in prices, it is likely that this expectation will not only be met but will be exceeded.

Most of the players who have emerged successful in this bid have some experience in developing solar projects, thereby giving comfort that the bids are serious.

The lowest bid went to a French company, Solairedirect.

Some of the prominent names among Indian companies that emerged successful with large project allocations are Mahindra, Welspun and Azure Power.

What this auction process has shown is that solar power can play a much larger share in India's energy mix in the next decade compared to what was previously thought possible.