Smart policy, the right incentives and…China

In my previous blog post, I expressed: “Solar’s exponential growth in India over this past decade was caused by a few primary factors, and undoubtedly, its increasing economic viability is at the top of the list.” The International Renewable Energy Agency (IRENA) analyzed the decline in costs of setting up solar projects between 2010 and 2018. Across eight major markets including China, France, Germany, India, Italy, Japan, UK and the US—the costs were found to have dropped at the fastest pace – 80 per cent – in India. What caused this steep decline? My previous breakdown of the most used financial viability metric (LCOE)—see here—showed that there are four keys to making solar work.

  • Cheap solar panels

  • Cheap land

  • Cheap labor

  • Lots of sun

India largely has always had the last three, and the introduction of the solar park scheme helped augment the “cheap land” factor. Ultimately it were the solar panels that had to be fixed. And they were fixed thanks to a combination of smart policy, the right incentives and…China. Driven by subsidies, economies of scale, and capital, by 2012 China’s solar module manufacturers had developed the capacity to supply the entire world’s solar needs—significantly driving down solar module prices in the process. India was a huge beneficiary:

An analysis conducted by the National Renewable Energy Laboratory reflects that module prices have declined by 85% since 2010. Over the same period the average cost of electricity from large scale solar fell 85% in India. What portion of this 85% is attributed to the price decline of solar modules? According to a CEEW analysis, equipment related factors accounted for “73% percent of India’s solar tariff reduction.”

Ultimately the decline in solar equipment prices has helped make solar increasingly cost competitive, thus spurring this industry's growth over the past decade. China has played an important role in facilitating this economic viability.

This insight, however, begs the question—what will drive the economics moving forward, as the economies of scale factor stabilizes and as India places solar import tariffs on China?

One additional factor, reflected in the LCOE calculation through the discount rate, also has a tremendous impact on the financial viability of solar projects:

Cheap Financing

I believe that improved financing terms will drive the economics of Indian solar projects into the future. The next blog post will examine the breakdown of a solar tariff into its individual components, and show why favorable financing is the key to unlocking the Indian solar industry further. Stay tuned!

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