India has long been a country with vast solar energy potential, given its abundant sunlight exposure throughout the year. Over the last decade, solar energy has gained substantial traction in India as a means to address the country’s growing energy demand, reduce greenhouse gas emissions, and promote sustainable development. In this context, examining the financial viability of solar energy projects in India is crucial for determining their feasibility and long-term sustainability.
1. Solar Energy Market in India
India has made impressive strides in expanding its solar energy capacity. The country is ranked among the top five nations globally in terms of solar capacity. According to the Ministry of New and Renewable Energy (MNRE), India’s solar energy capacity reached over 47 GW in 2023, with an ambitious target to achieve 500 GW of non-fossil fuel-based energy capacity by 2030. The government’s push toward renewable energy has significantly improved the investment climate for solar power.
The financial viability of solar energy projects hinges on several factors, including the cost of installation, financing options, government incentives, and the evolving energy market landscape.
2. Cost of Solar Energy Projects
The initial cost of setting up a solar energy system includes the cost of solar panels, inverters, batteries (for storage), land acquisition, and installation. However, the prices of solar panels have dropped significantly in recent years due to advances in technology and increased global manufacturing. For instance, the price of solar panels has decreased by over 70% in the last decade, making solar energy more accessible to a wider range of investors and consumers.
A utility-scale solar power plant can cost anywhere between ₹3-₹4 crore per MW of capacity, depending on location, land acquisition costs, and local regulations. For smaller projects, such as rooftop solar installations, the cost may vary between ₹35,000 to ₹60,000 per kW, depending on the technology used and available subsidies.
Though the initial investment may seem high, solar energy has a long lifespan—typically 25-30 years—and relatively low maintenance costs. The payback period for solar energy projects is generally 5-7 years, after which the system continues to generate power at minimal operational costs, making it an attractive investment option in the long term.
3. Financing Solar Energy Projects
Financing is a critical aspect of solar energy projects. In India, there are multiple avenues for funding solar power initiatives:
A. Commercial Banks and Financial Institutions: Commercial banks and financial institutions in India provide loans for solar energy projects. However, the interest rates may vary, with typical rates ranging between 9-12% for the financing of solar projects. The repayment period for such loans can extend up to 10-15 years, ensuring that the project owner can recover the capital invested within a reasonable time.
B. Green Bonds: Another option for financing solar projects is through the issuance of green bonds. These bonds are specifically earmarked for funding environmentally friendly projects, including solar energy projects. India has witnessed a growth in green bond issuance, and it is expected to become an increasingly popular method of financing solar energy in the future.
C. Power Purchase Agreements (PPAs): Power purchase agreements (PPAs) are long-term contracts between solar developers and power distribution companies (DISCOMs). Under these agreements, the developer agrees to sell electricity to the DISCOM at a pre-agreed price over a period of 20-25 years. PPAs provide a steady cash flow and reduce investment risks for solar developers, making them an attractive financial instrument.
4. Economic Impact of Solar Energy Projects
The economic impact of solar energy projects is significant, both in terms of job creation and rural development. The solar industry in India has created thousands of jobs in manufacturing, installation, and maintenance sectors. According to industry reports, the solar sector is expected to create over 100,000 jobs by 2030. Additionally, rural areas with large amounts of unused land are ideal for setting up utility-scale solar farms. These projects contribute to the local economy by providing jobs and boosting ancillary industries, such as logistics and materials supply.
Furthermore, as the cost of solar power continues to decline, the economic benefits will be more widespread. With improved energy access, small and medium enterprises (SMEs) in rural and remote areas can reduce their energy costs, resulting in higher productivity and lower operating expenses.
5. Government Schemes to Promote Solar Energy in India
The Indian government has launched several initiatives and schemes to promote solar energy across the country. These schemes aim to reduce the financial burden on project developers, facilitate the growth of the solar sector, and help achieve the country’s renewable energy targets.
A. Pradhan Mantri Kisan Urja Suraksha Evam Utthaan Mahabhiyan (PM-KUSUM) Scheme: The PM-KUSUM scheme, launched in 2019, aims to promote solar power generation in rural areas by providing subsidies to farmers. The scheme has three components:
- Installation of solar pumps: Subsidies are provided to farmers for setting up solar-powered irrigation pumps.
- Solarization of agricultural feeders: Solar power will be used to energize the feeders for agriculture.
- Decentralized solar power generation: Farmers can set up small solar power plants on their land to generate and sell electricity.
The PM-KUSUM scheme is expected to enhance rural income and reduce dependence on grid electricity for irrigation.
B. Rooftop Solar Program: The government has rolled out the Rooftop Solar Program to incentivize individuals and businesses to install rooftop solar panels. Under this program, the government offers a subsidy of 40% for residential buildings and up to 70% for government and social sectors. The subsidies vary based on the size of the installation and are intended to make rooftop solar systems more affordable for urban and rural populations.
C. National Solar Mission (NSM): The National Solar Mission, launched in 2010, was one of India’s first significant initiatives aimed at expanding solar energy capacity. The mission’s objective was to install 20 GW of solar power by 2022. However, India exceeded this target, achieving over 45 GW by 2023. The mission also promotes research and development in solar technologies and the manufacturing of solar components within India. This has not only reduced the cost of solar power but also helped create a domestic solar industry.
D. Solar Parks and Ultra Mega Solar Power Projects (UMSPPs): To facilitate large-scale solar power projects, the Indian government has developed solar parks in various states. These parks provide developers with ready-to-use land and grid infrastructure. The Solar Park Scheme is designed to reduce the challenges related to land acquisition and electricity connectivity. The UMSPPs, on the other hand, are large-scale projects with capacities exceeding 500 MW. These projects have been instrumental in driving down solar energy costs due to economies of scale.
E. Performance Linked Incentive (PLI) Scheme: The PLI scheme, introduced in 2020, aims to incentivize the domestic manufacturing of solar photovoltaic (PV) modules. Under this scheme, manufacturers of solar modules are eligible for financial incentives based on their production capacity. This initiative seeks to reduce India’s dependence on imported solar panels and promote self-reliance in the solar manufacturing sector.
F. State-Level Policies and Initiatives: Apart from central government schemes, individual states have also implemented policies and programs to encourage the adoption of solar energy. For example, Gujarat, Rajasthan, Maharashtra, and Tamil Nadu have set up state-specific solar policies offering incentives for developers, subsidies for rooftop installations, and tax exemptions.
6. Challenges and Risks in Solar Energy Projects
While solar energy projects in India offer great potential, several challenges must be addressed for them to remain financially viable:
- Land Acquisition and Regulatory Issues: Securing land for solar farms can be a lengthy and complicated process, especially in densely populated states. Land disputes and regulatory hurdles can delay projects, adding to the cost.
- Grid Connectivity and Storage: Many solar farms are located in remote areas, far from major consumption centers. The lack of adequate grid infrastructure for power evacuation can lead to delays. Furthermore, energy storage is a critical factor in making solar energy more reliable and reducing dependence on the grid.
- Financing Challenges: Despite the availability of loans and financial incentives, the high initial investment required for solar projects can be a barrier for smaller developers. Additionally, the long payback period may deter some investors.
7. Conclusion
The financial viability of solar energy projects in India is promising, thanks to declining technology costs, government support, and growing demand for clean energy. With the right combination of subsidies, financing options, and policy reforms, solar energy has the potential to become a major contributor to India’s energy mix. However, addressing the challenges of land acquisition, grid infrastructure, and financing remains crucial to unlocking the full potential of solar power in the country.
The government’s various schemes, including PM-KUSUM, the Rooftop Solar Program, and the National Solar Mission, have laid a strong foundation for the growth of the solar sector, driving down costs and facilitating a greener, more sustainable future for India.
