In India’s Hot Summer, the Solar Market Overheats

The land rush in the India solar power market has officially begun. This year analysts expect India to add two gigawatts of solar capacity, more than double the total added in 2014. Under the National Solar Mission, which calls for 100 gigawatts—about the total electricity capacity of Spain—of new solar power generation to be built by 2022, the government has begun to auction off 15 gigawatts of solar power projects across the country.

Early results from those auctions are striking. In Madhya Pradesh, Canadian developer Sky Power won the bidding with an offer of 5.05 rupees (about $.07) per kilowatt-hour. That auction, intended to bid out 300 megawatts of solar generation, attracted bids totaling 2,200 megawatts, at rates below six rupees per kilowatt-hour. That is well below the 7.04 rupee per kilowatt-hour that the Central Electricity Regulatory Commission has determined is the threshold of viability for solar PV projects.

Earlier, U.S. provider First Solar bid 5.25 rupees ($.08) per kilowatt-hour for a solar project in Andhra Pradesh.

These below-cost bids “show [that] large-scale solar is slipping further down the price-ladder,” wrote The Climate Group, meaning that “power generation from solar plants in India is now cheaper than indigenous or imported coal.”

Unfortunately they also demonstrate that solar builders in India are bidding unrealistically low prices for these projects, counting on the Indian government to make up the difference. The government has initiated a “viability gap funding” scheme for public-private infrastructure projects, which will provide grants to solar developers “to support infrastructure projects that are economically justified but fall short of financial viability.” That means that developers can afford to bid on projects at rates they know will not provide a viable profit margin going forward.

“Current economic conditions, solar irradiance, and off-taker creditworthiness do not look to be reflected in these bids,” said financial analysis firm Mercom Capital in a report on the solar market. And relying on the government to shore up financially untenable deals has long been risky in India: “The success of these projects would depend upon the Solar Energy Corporation of India’s payment track record,” which has yet to be proven out, according to equities analysis firm India Ratings.

Nevertheless, the solar balloon in India continues to ascend. U.S. solar company SunEdison has been particularly aggressive, signing memorandums of understanding for several giant projects including a five-gigawatt solar and wind farm in Karnataka and a five-gigawatt solar plant in the desert state of Rajasthan, as well as a $4 billion plant to build solar equipment in Gujarat.

Whether these will ever turn into functioning power plants remains to be seen. To summarize, India is seeing very aggressive, often below-cost bidding on projects based on unrealistic financial projections, backed by massive government subsidies and political support. That’s a recipe for a bubble, not a boom.