Modi's 3rd tussle with Solar
Modi's 3rd tussle with Solar
Part 2: Analysis of India's re-attempt for wider adoption of Solar Panels
On January 22, 2024, following the Ram temple ceremony in Ayodhya, Prime Minister Narendra Modi unveiled a groundbreaking initiative: a scheme aimed at installing rooftop solar systems in 1 crore (i.e. 10 Mn) homes.
The newly introduced scheme is named PSY - Pradhanmantri Suryodaya Yojana (Edit - Renamed as 'PM Surya Ghar Muft Bijli Yojana'), distinct from the existing National Rooftop Solar Scheme. Under the current i.e., the old scheme, the central government subsidizes 40% of the installation cost of rooftop solar systems, with the remaining 60% covered by the consumer. However, with the newly launched PSY, the government is stepping up its support by offering a subsidy to cover 60% of the capital cost, while the remaining 40% is financed through loans provided by government-owned Public Sector Undertakings (PSUs).
In essence, the shift means that previously, customers were responsible for 60% of the installation cost. But with the newly launched PSY scheme, households won't have to pay anything upfront for the installation on their rooftops. Additionally, once a specified amount of electricity has been generated from the rooftop over the years, legal ownership of the rooftop setup will be transferred to the household. This initiative aims to benefit 1 crore households identified by the government.
Note: If my emails end up in the ‘promotions’ tab, please move them to inbox so you don’t miss out. Don’t forget to subscribe and join 800+ active readers!
How big is the amount involved?
Here's a breakdown of the financing structure and the mix of subsidy and debt for the PSY scheme:
Government Subsidy Support:
The government has allocated a substantial amount of approximately Rs 75,000 Crores for the PSY scheme over the next 3 to 4 years.
For the Financial Year 2025, an initial allocation of Rs 10,000 Crores has been made, with the potential for further increases based on progress and requirements of the scheme.
Borrowing from PSUs:
REC, designated as the nodal agency for implementing the PSY scheme, along with 8 other public sector power companies, has approved a significant line of credit totaling approximately Rs 1.20 lakh crore.
Each of these 8 central public sector undertakings has been allocated letters of credit amounting to around Rs 15,000 crore each. These funds will be utilized to set up rooftop solar panels across various states.
This capacity through borrowing mechanism of Rs 1.2 lakh crore, serves as an upper limit for financing via borrowing under the scheme.
This financing framework combines substantial government subsidy support with borrowing from Public Sector Undertakings, ensuring sufficient financial backing from Central government for the ambitious rollout of rooftop solar systems under the PSY scheme. And I did some math to calculate the 2 possible scenarios how much amount is coming to be spent under the first leg of this scheme in coming 3 to 4 years:
The Scenario 1 takes the announced government’s budgetary allocation (60% of total spend) for installation along rest 40% coming from loan that the 8 selected PSUs will be taking with REC being the nodal agency for managing that. The Scenario 2 takes into account the total limit that PSUs can take in form of loan, where as the government subsidy remains the same, giving us a potential spending of Rs 1.95 Lakh crores the scheme. For comparison, India’s annual allocation to Ministry of Education is ~Rs 1.12 Lakh crores currently. It's important to note that these figures represent the first phase of the scheme. Prime Minister Modi has outlined even broader plans for the future, which we will delve into now.
What’s the big man thinking?
PM Modi’s government has planned a journey to revolutionize how Indian households access electricity. Currently, a staggering 70% of India's electricity needs are fulfilled through coal, with power generated at distant thermal plants and then transmitted to homes for consumption. This traditional setup entails a significant disconnect between electricity production and consumption locations.
With the inauguration of the Solar Rooftop scheme, the vision is to overhaul this traditional system. The aim is to generate electricity directly at the point of consumption by installing solar panels on household rooftops. This decentralized approach ensures that electricity is produced right where it's needed, eliminating the need for long-distance transmission. Under this scheme, if there's any shortfall in electricity generated by rooftop solar panels, households can seamlessly draw from the conventional grid supply to meet their needs. Conversely, if excess electricity is generated, it can be fed back into the grid. Homeowners stand to benefit financially from this surplus electricity fed back, receiving compensation based on the pre-decided price per unit of electricity.
Now, let's take a look at what our PM Modi plans to pursue:
As he mentions, his vision entails every household in India having its own solar rooftop, a battery for storing produced electricity, a clean cooking mechanism linked to the rooftop & battery, and an independent EV charging facility at each home. This decentralized approach to power management offers numerous benefits, but it also comes with a few obvious drawbacks:
High installation and maintenance costs: The need for separate rooftop installations for each house, along with individual EV chargers and clean cooking facilities, presents a significant upfront investment cost for the government. Additionally, ensuring the ongoing maintenance of these rooftops and chargers is essential to maintain their efficiency over time.
Lesser overall utilization: In regions where sunlight isn't consistent throughout the year, having separate rooftops for each household will result in inconsistent & relatively lower generation of solar energy. Similarly, personal EV chargers may not be fully utilized, as they're only used by the household when needed, unlike public chargers that could serve multiple users throughout the day.
Modi's previous Solar Drives: More misses than hits?
There are 2 key schemes I shall discuss next with primary focus on latest one, which is also less discussed. The scheme, known as PM KUSUM, has unfortunately been a disappointment in terms of government implementation, despite its positive intent to support farmers' income through solar energy.
PM KUSUM, launched by the Government of India in March 2019 with a total outlay of Rs. 34,422 Crores, comprises three components, all aimed at installing solar panels. Here's a brief overview of each component:
Incase land is barren, a farmer/ land owner can setup solar panels over it with government subsidy, and sell the produced electricity to government at a fixed pre-decided rate.
Incase farm land is productive but without a water supply pump, the farmer can setup a solar pump for irrigation with assistance of government.
Incase land is productive and a pump already exists, the farmer can solarize the pump using government subsidy to promote clean energy usage.
The three components of the PM KUSUM scheme aim to achieve a total solar power capacity addition of 34.8 GW by March 2026. However, the implementation progress so far has been disappointing. According to a written response by the Union Minister for New & Renewable Energy and Power, Shri R. K. Singh, provided in the Parliament of India on December 21, 2023, the progress of the PM KUSUM scheme is as follows:
Component 1: Against target of 10,000 MW installation, 141 MW has been installed, implying a 1.41% progress till date
Component 2: Against target of 14 lakh solar pumps, 2.78 lakh solar pumps have been installed, implying a 20% progress till date
Component 3: Against target of solarization of 35 lakh existing pumps, just 4,594 pumps have been been solarized, implying a mere 0.13% progress till date.
Not only is PM KUSUM facing challenges, but let's also rewind to 2014-15 when the government launched an ambitious plan for 'Solar Rooftop' (SRT), aiming for a capacity of 40 gigawatts (GW) by 2022. However, as of December 2023, we've only achieved 11 gigawatts (GW) of solar rooftop setup, with residential spaces contributing a mere 2.7 GW, while the majority setup is over non-residential spaces. This means we've only met 26% of the target. You can read more about the shortcomings of the 'Solar Rooftop' initiative in a Finshots article here
Some of the reasons behind the failures of major initiatives in the past include the reluctance of banks to finance individual installation projects due to poor financial viability, concerns about payback and defaults, involvement of multiple stakeholders including state governments, high complexity, and lack of awareness among consumers.
Reviewing expert opinions on the reasons for these failures, it's noted that under PM KUSUM, Component B has seen relatively better progress. This could be attributed to the proactive involvement of central and state nodal agencies in driving the project forward. Additionally, farmers have shown keen interest in Component B installations due to the low penetration of water pumps, highlighting the practical necessity and demand for such initiatives at the grassroots level.
Will the 1 Crore Rooftop scheme taste success?
The government appears to be better prepared this time around, following the setbacks of previous schemes since 2014. Here are a few reasons why this time could be different:
No Need for Bank Financing: Previous schemes relied heavily on bank loans at subsidized interest rates, with farmers/consumer financing a portion of the solar installation and repaying the loan later. However, banks were reluctant due to the financial unviability of such projects. In contrast, the new scheme eliminates the need for the household to take bank loans. Instead, government-owned PSUs take loans covering 40% of the installation cost, with responsibility for repayment solely from electricity proceeds.
Involvement of Nodal Agency: REC, along with 8 CPSUs related to Renewables & Power Ministry, will oversee implementation in selected areas and households,
Less Dependency on State Government Support: In the new scheme, 60% of total financing comes from the Central government, while the remaining 40% is in the form of loans taken by CPSEs, which are centrally controlled. Previous schemes faced challenges due to the reluctance of many state governments to contribute in financing, including all non-BJP states, to contribute financially. For instance, despite West Bengal being sanctioned 10,000 solar pumps under Component B, none were installed as the state didn't participate in the scheme's implementation. See state wise data of PM KUSUM here
Certainly, there will be new challenges this time around, including identifying and selecting 1 crore houses suitable for installation, ensuring required maintenance over the following years, maintaining an adequate pace of implementation, and addressing issues such as corruption. However, despite these challenges, our objective remains unchanged: to leverage this government initiative and identify the company best positioned to benefit from the installation of over 1 crore rooftops and EV chargers. With this goal in mind, we have chosen to examine Tata Power next. Do note, it's not investment advice; kindly talk to your financial advisor.
Why Tata Power could be biggest beneficiary?
Tata Power is the market leader in Solar rooftop installations in India for both commercial/group captives and residential space with overall market share of 18% in both segments combined. Well that one was obvious reason for it being the biggest beneficiary of the new PSY scheme, following are few different but key reasons I feel:
Experience matters, Boss!
Tata Power brings extensive experience in dealing directly with the Ministry of New & Renewable Energy and Power through its involvement in previous initiatives such as the PM KUSUM Scheme and the Solar Rooftop scheme. Notably, Tata Power has a track record of success, having installed the highest number of rooftops under the old Solar Rooftop scheme. Also, in the Component 2 of the PM KUSUM Scheme, which saw some success, Tata Power solely installed over 1 lakh pumps out of the 2.78 lakh pumps installed nationwide till December 2023, representing approximately 36%+ installations completed by a single entity.
Brand Tata - Naam he kaafi hai
Whether it's the construction of India's New Parliament or Ram Mandir in record time or the privatization of India's prestigious government airline, Air India, the Tata Group has consistently emerged as a key beneficiary of many of the Modi government's initiatives over the years. Solar energy has long fascinated Mr. Modi since his days in Gujarat, and it's evident that this time he is determined not to let this scheme be a flop show. With stakes high, reliability becomes paramount, and the Tatas are synonymous with reliability. Even during the PM KUSUM initiative, beneficiaries had the option to choose installation players other than Tata Power, yet 36% of installations were entrusted to a single player.
Let The Good Times Roll
Call it luck, call it preparation, call it prediction - the timing couldn't be more opportune for Tata Power's and India's largest Cell & Module Manufacturing Plant. With a capacity of 4.3 GW for manufacturing solar panels, it's set to kick off production at full throttle in April 2024, coinciding perfectly with the launch of the upcoming new Solar Rooftop scheme.
“In fact, we are the first one in the PLI scheme who have been able to start production and we do hope that 4.3 gigawatt which will become the single largest manufacturing of solar cell and module plant will not only get operational but will operate at a very high yields and throughput” - Dr. Praveer Sinha, MD & CEO Tata Power - shared in Q2 FY24 con-call with investors.
The key aspect of Dr. Sinha's statement is the ‘very high yields and throughput’ of this new production capacity, which will significantly boost output. Despite India's cell production reaching 6.6GW by March 2023, IEEFA & JMK’s annual report suggests that operational capacity was only around 50% or even less of the nameplate capacity. This implies that actual operational output was just under 3.3GW of cells. To put this into perspective, the new solar scheme requires solar panels, including module and cell output of approximately 25GW each over the next 2-3 years to meet the target of achieving installations in 1 crore households. As of March 2023, India's module production output potential stood at 38GW, but the cell potential was only 6.6GW. India is expected to have significant capacity expansion by 2026, with players like Reliance promising to add 20GW of cell and module manufacturing by then.
India currently relies on importing raw materials like polysilicon, ingots, and wafers for cell manufacturing which can’t be changed instantly. Given the government's focus on promoting domestic manufacturing and the "Make in India" initiative boosted by PLI for Solar Module & Cell manufacturing, it's unlikely that the government would allow solar modules to be used in the scheme if they consist of imported cells, effectively making them mere "assembled" panels, with low value add. My take is, government would only allow panels with domestically produced Cells + Modules, and relaxation on imports for raw materials mentioned above.
If you felt difficulty in understanding the last paragraph, I would highly recommend checking out my previous work - A deep dive on Solar Panel production in India here where I try to explain it in easier and detailed manner
Summary
Modi’s new Solar Rooftop scheme - PSY’s decentralized approach ensures that electricity is produced right where it's needed, eliminating the need for long-distance transmission. With not a single rupee spent by the beneficiary household, along with the learnings from past failures of PM KUSUM and old Solar Rooftop scheme, the probability of this initiative of tasting success is higher. Tata Power would probably be the biggest beneficiary in monetary terms if the implementation happens rightly. We shall closely track the scheme and its implementation in our future blogs. Thanks for reading till here, you can find me (Aditya) on Linkedin here.
Thanks to Priyansh Chanchani for helping in the research of this blog.
Wondering how you can support us?
If you find our content valuable & are willing to support, show some love here⬇️
Disclaimers-
I am not a SEBI registered advisor; personal investment/interest in the shares exists for the company mentioned above; this isn’t investment advice but my personal thought process; DYOR (do your own research) is recommended; Investing & trading are subject to market risk; the decision maker is responsible for any outcome.
 | A guest post by
|
Do check out -- free subscription -- https://bhaskarr.substack.com/p/big-solar-power-plans-announced-but?r=ni0hb&utm_campaign=post&utm_medium=web&open=false