Indian Solar Rooftop PV Projects: A Bright Investment - RESCO vs. CAPEX

Rooftop PV Market Outlook

Solar PV Energy is a blooming market. The country has seen sceptical growth of sector as additions of MWs scale in utility as well as rooftop market are huge in last 5 years. As on Sept 2018, overall Renewable Energy (RE) capacity has reached approx. 70.6 GW, out of 175 Gas per the NSM target. The country has achieved 0.8 GW off-Grid solar projects, 3.4 GW of rooftop solar projects, and 23.2 GW of utility solar project, totalling to 27.4 GW solar capacities as on September 2018.

Solar market attractiveness is completely reliant on the country’s solar policy ®ulatory support issued by Central & State schemes like subsidies, tax benefits, preferential low cost debt, and generation based incentives, state’s grid parity, and other opportunity potential. Apart from good policies and regulations, parameters that help big players to be dynamic in industries are scalability in terms of installation size & manpower intensity, ability to assess risk & enforceability of contract and market structure, competitor’s strength & barriers for a new player.

Ownership Business Model

The most important parameter is business model compatibility and customer preference to understand the project economics of solar PV project. The two most adopted business models in the solar industry are Renewable Energy Service Company (RESCO) or Operational Expenditure (OPEX) or Build Own Operate and Transfer (BOOT) and Capital Expenditure (CAPEX).

CAPEX model based projects are financed and owned by the consumer or rooftop owner. The EPC contractor builds and provides O&M service to the plant whereas RESCO, OPEX, or BOOT model based projects are financed, owned, and developed by third party investors or developer. The developer operated plant and sells power to the consumer on consumption choice – Roof leasing or Power Purchase Agreement (PPA) basis at the consumer’s or rooftop owner’s premises.

As per the Bridge to India, OPEX model has been gaining market share, doubling from 12% in FY 2014-15 to 24% 2015-2016 and large public sector procurement programs will drive further growth in this market. Yearly capacity addition is expected to scale up to over 2 GW by 2019 and over 3 GW by 2020 presenting attractive growth opportunities for all market participants. Looking into the installation trends, OPEX market share has risen to 35% total rooftop solar market has grown at a CAGR of 70% from 2012 to 2018.

Rooftop Attractiveness Assessment

Gensol has carried out an assessment from solar investor's and customer’s point of view to portray attractiveness of rooftop projects in India. The analysis has been done to show most favourable Business Model i.e. CAPEX Vs OPEX with respect to different zones in India. Four (04) cities have been selected from 4 zones respectively; namely Bhubaneswar (East Zone), Ahmedabad (West Zone), New Delhi (North Zone) and Karnataka (South Zone). On the basis of specific yield (kWh/kWp/Year) and State grid tariff (INR/kWh), the financial pillars of the solar PV project have been compared i.e. IRR (Equity/Project), Payback Period and Net Present Value (NPV).

Gensol has estimated specified yield for four (04) zones based on type of roof –Concrete roofs (RCC) and Galvanized roof (Sheds). The rooftop solar PV project configuration has considered Tier 1 modules and inverters with optimized tilts for evaluating specific yields.

2. Grid Tariff Selection

For the selection of electricity grid tariffs, followings assumptions have been considered:

  • HT Tariff slab (latest tariff orders)
  • HT consumers (commercial) -11/33k
  • Weighted average calculated

3. Financial Assumptions

The financial assessment has been carried out to compare, and analyse the best opted business model for different zones based on below parameters. The following assumptions have been considered:

Analysis and Results

Gensol have explored both options to understand the attractiveness of CAPEX Vs OPEX based business model from customer’s point of view. Two scenarios have been presented for RCC and Shed roofs.

  1. CAPEX Vs OPEX for RCC
    1. PIRR, LCOE & Payback comparison for 25 years
    2. NPV Comparison – 10/15/20/25 years
  2. Capex Vs Opex for Sheds
    1. PIRR, LCOE & Payback comparison for 25 years
    2. NPV Comparison – 10/15/20/25 years

For capex model based projects, the project and equity returns are respectable numbers to work with and above the industry average of 14% and 12%, respectively, which defines the technical as well as commercial viability of project. Then again, positive Net Present Value (NPV) is acceptable in any venture for investing in solar PV projects.

Alongside, in OPEX model based projects, the investor, or developer has option to sell electricity to Consumer for a term of 10/15/20/25 years and, eventually, transfers the entire project to the Consumer free of cost.

Gensol has explored various options to arrive at various supply tariffs, each of which will result into certain savings to customer in relation to their existing cost of electricity being supplied by the grid. More specifically, we have calculated tariffs for 10, 15, 20 and 25 years, considering an investor’s equity IRR of 14%, which is the ongoing industry expectation, as per our market insights and our experience with such projects. Moreover, tariffs have been calculated counting as well as discounting the benefits of 40% accelerated depreciation available to the investors.

As we know, the financial palatability of the project is the net present value (NPV), which is nothing but the present value of the savings that would accrue to over the term of the PPA. Looking into the above graphs, we can clearly see that the south zone – Karnataka is having the highest NPV followed by north zone – New Delhi in OPEX model for tenure of 10 years. However, if we observe east and west zones, they are more attractive towards CAPEX model with higher NPVs in both the scenarios. In addition, it has been observed that irrespective of type of roof, ownership model will remain same zone wise.

It is noteworthy that the project turns is economically workable, keeping in mind that the electricity would be free of cost to consumer after the term of the PPA. Notwithstanding this, consumer can still negotiate with various investors and expect tariffs in the range of Rs 4.5/kWh to Rs 5.5/kWh, based on the trends being observed in the third party PPA in the North and South Zone.

| Article published on 18/03/2019 by Moulin

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