Friday, November 20, 2015

India's solar prices may fall 10% lower than coal by 2020, yet capital costs for solar plants will remain high: KMPG

By Our Representative
Even as the Government of India is all set to stick to its target of reducing emission levels by 35 per cent at Paris, where 190 countries meet later this month for a two-week climate change conference, a recent paper by a top international consultant suggests that Indian policy makers haven’t yet properly understand the implications of the possibility of solar power prices drastically coming down.
The consultant, KPMG, in a policy paper, “The Rising Sun: Disruption of the Horizon”, says that, already, “solar power price declines have beaten the expectations of most analysts since the beginning of 2015”, with the National Thermal Power Corporation (NTPC) solar park tender having “breached the INR 5/kwh and this is a landmark for the energy sector.”
“Today, in India, solar prices are within 15 per cent of the coal power prices on a levelised basis”, KPMG said, adding, “Our forecast is that by 2020, solar power prices could be up to 10 per cent lower than coal power prices.” It further says, by 2025, “solar is expected to have scaled up significantly to be a major energy source” and “coal would respond in order to be competitive.”
According to KPMG, “We forecast a solar generation price of INR 4.20/kWh by 2020 and INR 3.59/kWh by 2025 (at 2015 price levels). The market penetration of solar power could be 5.7 per cent (54 GW) by 2020 and 12.5 per cent (166 GW) in energy terms by 2025. Along with wind power, renewable energy could constitute a significant 20 per cent of our power mix in energy terms by 2025”.
While all this gives hope that things would move in the solar direction, KPMG believes, things would not be so easy, as it may seem on the surface. Thus, solar energy is capital intensive relative to other conventional sources.
Its “capital requirement of INR33 per annual kWh generation is comparable to INR9 for coal”, it says, adding, “Under scenario where capital availability is challenged due to global economic conditions could hamper the solar march.”
“This scenario would also likely correlate with a deep fall in commodities and prices of fossil fuels like coal and oil. Under this scenario, the achievement of the tipping points for the rise of solar would get delayed”, KPMG says.
Then, KPMG points towards possible of “disruption in Chinese solar manufacturing ecosystem”, which would affect the availability of low cost solar technology. This is especially important, as today “China and Taiwan account for over 69 per cent of global module supplies.”
“A hard landing of the Chinese economy, and a scenario where some of the large manufacturers go bankrupt and close down, could hamper global supplies and consequently impact prices of solar panels. In the same scenario, availability of resources for R&D for technological evolution could get hampered and delay further cost reductions”, KPMG underlines.
Then, there is a possibility of a “steep fall in the Indian currency”, affecting import of solar equipment. “A large part of the solar system cost is import linked. A scenario where the INR depreciates very significantly would lead to a rise in solar costs for India relative to coal”, KPMG says, adding, “This would delay the rise of solar.”
Against this backdrop, KPMG insists, the Government of India’s policy makers should “closely scrutinize” the cost structure of new capacities “before commitments are made” in the energy sector. “The coal sector is expected to start coming under significant pressure from 2022 onwards as solar would have achieved scale”, leading to a sharp fall in its prices because of stiff competition in solar technology.
Pointing out that imported coal prices would particularly come under stress, KPMG advises the Coal India Limited (CIL), the public sector undertaking which is the largest coal producing company, to “undertake a detailed study to address long run costs, and also bring flexibility into its operations to adjust to the different scenarios of demand and prices.”

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