The Key Factor that Enabled India’s Solar Boom

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 next few blog posts will form a series that examines these factors, and the decline in solar costs over the last decade. This post introduces the basic structure of the electricity system, and shows the calculations that determine the cash flows and economic viability in this space.

At a basic level, electricity flows from a generation plant to a distribution (utility) company through a transmission network. The utility company then delivers the electricity to an end consumer—primarily a residential unit, a commercial unit or an industrial unit.

Meanwhile the cash flows in reverse—from the end consumer to the utility company via a tariff price, and then commonly from the utility company to the generation plant via a pre-determined bid price.

The different revenue streams are broken down accordingly:[1]

Tariff = Bid Price + margin of DISCOM

Bid Price = LCOE + profit margin (developer)

*LCOE = levelized cost of electricity

Ultimately the levelized cost of electricity (LCOE) is the most commonly used metric for assessing the financial viability of energy projects. It represents the value that a project developer would need to charge per unit of electricity to break-even across the full life cycle of a project.

For Solar PV projects, the capital cost constitutes most of the investment required and also generally provides the largest opportunity for cost reduction. The other important components are the opportunity cost of capital (discount rate), the O&M costs and the amount of solar resource– as depicted in the LCOE calculation below.[2] Further, the capital cost has two main components—the modules and balance of systems cost.

In its essence, the deconstruction of the LCOE calculation shows that, there are four things that make solar energy work:

· Cheap solar panels

· Cheap labour

· Cheap land

· Lots of sun

The next blog post will show how these characteristics have translated to India’s decade of solar growth. Stay tuned!


[1] Anatomy of a Solar Tariff, CEEW

[2] IIT Delhi Class, Economics and Financing of Renewable Energy Projects

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