The recently-concluded bidding process for supplying solar power under the Jawaharlal Nehru National Solar Mission (Phase 1, Batch 2) has seen aggressive bids as low as Rs 7.5 per unit, bringing the long-anticipated ‘grid parity' — matching the cost of solar power to conventional power costs — much closer than even the most optimistic projections two years ago. The sharp drop in prices of photo-voltaic (PV) modules, by as much as 50 per cent in the last one year, and anticipation of a further drop in PV prices, has been the key driver for this unprecedented development.

PV MODULES

The drop in price of PV modules is triggered by the European financial mess, forcing Germany, Spain and some other European countries to withdraw fiscal concessions for the solar industry. Germany accounted for more than 50 per cent of new capacity addition in 2010, and the rest of Europe a further 30 per cent; the anticipated slowdown in this key market was the immediate reason for the drop in price.

Huge capacity additions in China and some other Asian countries for solar-grade poly-silicon refining, coupled with European slowdown, has led to sharp drop in prices — from USD 450 per kg in 2008, to as low as USD 40 per kg now — with a target of reaching USD 20 per kg in 2012 by major Chinese manufacturers. A similar capacity addition in the solar cell manufacturing, again led by China, has resulted in the crash of PV module wholesale prices from more than USD 3.5 / Watt in 2008 to USD 1.2 / Watt currently, with a further fall expected in the coming quarters, due to economies of scale in production.

GOVERNMENT INITIATIVES

The Indian Solar Industry is also witnessing tectonic changes in line with these global developments. The government initiatives — through JNNSM as well as the subsidies at central and state levels — have also given a significant fillip to this industry, thereby making solar power a competitive alternative to some other high-cost power alternatives. The impact this could have on various industries is significantly higher than what most of us can envisage at the moment.

Cost of solar power in India is already well below the cost of power generated through diesel generators; this is likely to impact the growth of DG set manufacturers, who thrived on the huge demand-supply gap in the power sector. Similarly, other fossil energy sources — naphtha, fuel oil, etc., could soon become more expensive than solar energy, which can be used not only for power generation but also for thermal applications such as steam generation.

In the medium term, if the current pattern of price fall continues, several other sources of power generation, such as biomass, wind power and nuclear energy could turn more expensive than solar power. Companies dependent on these sectors, such as equipment and component manufacturers, should take cognisance of such a development on their future prospects.

(The author is ex-Director Ratings, CRISIL and Co-founder, RiverBridge Investment Advisors.) >http://ChaseCut.blogspot.com

comment COMMENT NOW