Mr. Gautam Das, Co-Founder/Director, Oorjan Cleantech Pvt. Ltd.
Solar as an alternate asset:
Many of you must be tracking developments around investment in solar projects and ever declining PPA (Power Purchase Agreement) rates. However, many of the project bids and their returns are not fundamentally sustainable.
A significant number of projects are either never born or never operational, or prices are renegotiated. Aggression of building larger portfolio and compromised hardware quality is not healthy. We need to build solar assets which should work for 25 years and investor/ consumer enjoys sustainable return from sustainable energy. Reduction is PPA bids can’t outpace enhancement in technology and reduction is cost without compromising project quality.
Return from traditional investment underlying like equity, commodity, real estate and bonds have witnessed extreme volatility and investors are looking for alternate assets. Investment in solar is one of the important underlying which is expected to provide a healthy double digit return on investment. However, investment in solar and it’s return primarily depends on how does investor assess and mitigate following risks -
- Risk associated with evolving solar ecosystem and policies are yet to mature
- Credit risk on the counterparty and power buyer’s ability to pay on time
- Technology and operations risk associated with investment in solar
India is one of the evolving countries which is promoting solar energy and intend to meet its INDC (Intended Nationally Determined Contributions) target of achieving 40% of the energy need through renewable energy by 2030. This herculean task and requires structured and favourable policies to achieve the target. Secondly it requires an investment of close to
2.5 billion US dollar to drive the mission. This kind of achievement can only be met when policies and ecosystem are investor friendly and public -private partnership works towards common goal. Central and state governments are working hard but the policies at times are not well aligned. Solar adoption by both end consumer and investor requires support on net-metering, transmission, easier approvals etc. An uniform and transparent policies across the country would boost participation by private investors, banks, Overseas fund etc. Ecosystem is evolving fast and better than ever before. Journey is long and requires faster pace to promote solar investment.
Building awareness on solar has come a long way and governments across states are doing a great job. Many young companies like Oorjan are using innovative technology to build the awareness, offering “digital test drive of solar”, remote monitoring tool to build trust and promote solar.
Financial Risk and Return
Investment in solar can provide return up from 10-30 percent to end consumers and PPA investor to can get a healthy return as high as 20%. These numbers are anyway much better than the return from traditional assets lime fixed deposit, equity, commodity and real-estate. High return comes with higher risk which needs to be assessed and mitigated.
End consumer’s return on solar project is so healthy that not adopting solar is like losing out on opportunities to save money and reduce cost. However, adopting solar is capital
intensive although the project break-even is 3-5 years against a project life of 25 years! Banks and private investors are coming forward to offer loan and/or Opex solutions to end consumers. Oorjan offers both loan and Opex financing options to consumers as part of our offering to end consumers. We too are supported by banks, NBFC and private investors who in turn enjoys a healthy return on investment.
Assessing customer credit worthiness and taking necessary precautions to protect the investments is important for sustainable investment in solar and maintaining comfort to the investors. Hence, a thorough credit assessment is essential to ensure that customer would be capable of paying back the liability either from saving or existing cash flow from regular income. It might be necessary to take a part of the investment as collateral or bank guarantee.
Technology and Operation Risk
Solar technology across the world is improving at a very fast pace and cost per megawatt has significantly come down over the last few years. Solar plants are expected to operate for about 25 years and quality of system and design are important for higher generation and minimize unproductive down time. The best way to mitigate technology and operation risk is to adopt premium hardware, well thought through design and implementation by quality installer. Plant should be insured against unfortunate eventualities and under generation risks which is available in market now. Developers are also advised to consider the cost associated with the replacement of hardware like inverters, junction boxes, cleaning etc. so that the cost lines are not surprised as and well required. In short, I would recommend to adopt the best technology and price in costs in advance to minimize technology and operation risks.
Solar is a long-term investment and associated with a few risks. Hence, return has to justify a risk premium over lower risk asset categories. Continued and ever declining PPA prices over the last few years are a concern for sustainability of the investments and there are solar assets are fetching as low return as 5-9% in many cases due to aggressive bidding. The developers should have a long-term view on hardware quality and project cost. We can’t afford to reduce cost and compromise on hardware quality - the cheapest on day one could be the most expensive within a few years if the power generations are healthy!
Declining PPA rate can’t outpace the enhancement in technology and fundamental reduction in cost for premium hardware. We at Oorjan constantly promote and offer only premium hardware, reliable technology and not in battle to build a short term focused portfolio. We need to build a solar portfolio which should work for 25 years and investor/ consumer enjoys sustainable return from sustainable energy.