Is solar city a viable business model?

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State governments and electricity utilities are finding it difficult to cope with the rapid rise in the demand for power and, as a result, most cities and towns in India are facing electricity shortages. The Indian government has, therefore, laid down a programme to develop solar cities. This plan envisages 54 cities being developed as ‘solar powered cities’, of which 39 have already received sanctions. The cities for which the master plan has been approved are Chandigarh, Thane, Kalyan-Dombiwali, Aizwal, Kohima, Agra and Moradabad. The programme is designed to encourage urban local bodies to prepare a road map to guide their cities in becoming renewable energy cities or solar cities.

By Richa Chakravarty

Thursday, June 14, 2012: A solar city’s energy needs will be addressed by all types of renewable energy based projects that use solar power, wind, biomass, small hydro projects, waste, etc. Apart from this, every possible energy efficiency measure will be implemented, depending on the needs and resources available in the city. At the end of five years, the programme’s aim is for a solar city to reduce its projected demand of conventional energy by 10 per cent.

Current status of model cities

A state can have a maximum of five solar cities supported by the Ministry of New and Renewable Energy (MNRE). While across India, 10 cities are to be developed as pilot solar cities, four cities will be developed as model solar cities. So far, MNRE has selected Nagpur as the first city in India to launch its ambitious solar city project. The city will become a model solar city by the end of 2012. The target is for up to 10 per cent of Nagpur’s energy consumption to be met through renewable energy and energy efficiency measures. Also, 50 per cent of the cost will be shared by the Ministry, while an initial Rs 5 million will be provided for the master plan, for setting up the solar city cell and for promotional activities. The major solar energy systems that will be installed will cover streetlights, garden lights, traffic lights, hoardings, solar water heaters, etc. Energy efficient green buildings will also be promoted on a large scale in the city.

Similarly, a draft plan to convert Chandigarh into a solar city has also been finalised by the Chandigarh administration. The Union Territory (UT) administration has decided to set up a solar cell, which will work towards developing renewable energy projects and energy conservation programmes. The project will be mutually funded by Government of India, with a matching grant by the administration or the Chandigarh municipal corporation, depending on which civic body takes up the project. MNRE has sanctioned Rs 20.35 million to the UT administration to implement the proposed projects. This project in Chandigarh will save at least 500 million units of electricity by 2018.

Is this a viable concept?

The solar city programme is still at a nascent stage. Proper guidelines have not yet been established or finalised as the government is still in the process of formulating various schemes. One of the measures recommended include constituting a separate solar city cell with monitoring powers. Awareness campaigns also need to be conducted about the various methodologies to be followed to save energy.

Being set up through a public private partnership, the scheme will require urban local bodies to provide a framework and support to prepare a master plan, including assessing the current energy situation, future demand and action plans to build capacity. Industry experts are of the opinion that if a well planned implementation process is put in place, these solar cities have immense potential. All that is required is a more coordinated and focused approach to get enrolled in the programme. “The concept of developing solar cities in India is highly viable, but the model to be adopted to make a solar city work should be designed in such a way that the responsibilities of the organisations overseeing each system are clearly defined—with regard to both operations and maintenance. And the power generated should be fed to the grid with net metering. This will encourage many small sized plants to come up, with financial gains for their owners and environmental gains for the city,” opines K Subramanya, former CEO, Tata BP Solar. “There needs to be lot of handholding, at least in the initial stages. Central and state level solutions depend on decentralised planning through state nodal agencies and municipal corporations,” he adds.

Throwing open business opportunities

Before investing in a solar city system, people should have a clear picture about their return on investment (ROI). However, with no clear mandate or policy framework for the solar cities, it is indeed going to be difficult to build investor confidence in such mammoth plans. Suggests Hari Kiran Chereddi, managing director, Sujana Energy Ltd, “The government’s plan to develop 60 solar cities is ambitious one that can be achieved only with careful planning. At present, there is a deficit in the demand for indigenously manufactured solar products. Considering the expected upsurge in the demand for solar cells, panels and other raw materials, indigenous manufacturers can very well expect substantial business. However, the government will need to take certain initiatives to promote domestic manufacturing units.”

The programme adds yet another customer segment under its umbrella, feels Hari Kiran Chereddi. “Apart from creating huge demand for solar products and for project developers, there will be vast scope for innovative business models to be implemented. Also, this plan has immense possibilities for job creation in this sector,” he shares.

For solar project developers, investments and ROI will remain daunting issues. However, engineering, procurement and construction (EPC) players will certainly get an edge over others, feels K Subramanya. “As there is no mandate for indigenous manufacturers, it will be extremely easy to source cells and modules at very cheap prices, irrespective of quality. Domestic manufacturers, particularly those like Tata BP Solar, will continue to fight our battles as we don’t believe in compromising on quality,” he adds.

Rooftop installations have great business opportunities under this programme. Even middle income group homes can generate revenue by selling surplus power. “It is advisable to have a higher number of smaller rooftop systems with well defined roles regarding operation, maintenance and revenue sharing patterns. Many small systems of say 5 kW or 10 kW can total up to 100 KW, 200 KW or even 0.5 MW. Such small systems feeding metered power into the low voltage grid will result in zero transmission losses and avoid expensive infrastructure creation,” explains S Narayanamoorthy, director, Power Solutions Group, Aplab Ltd.

Loopholes, and challenges ahead

In the absence of a proper policy framework, the solar city programme still remains a mere announcement without any direction. Industry experts feel that critical issues like capital subsidy, net metering, manufacturing and technology concerns have not been addressed properly and no direction has been provided in this regard. “The initiative is appreciable. What needs to be seen is its successful implementation, keeping in mind the individual needs of each city and its most appropriate product mix. More than establishing a solar city, what needs to be ensured is its operational and maintenance aspects. Proper and well thought out guidelines, dos and don’ts, the minimum assured power delivery commitment, validating equipment for performance and reliability in the Indian environment, and setting up regulatory bodies to monitor the process are of paramount importance,” says S Narayanamoorthy.

Despite its obvious merits, one of the reasons that solar energy has not been an incredible success in India is the large expenses involved. Cost reduction can be achieved by nurturing local manufacturing, increasing scale and reducing balance of system costs. Shares Hari Kiran Chereddi, “Solar projects are capital intensive and lack of an effective financing infrastructure for these projects is another major factor that needs to be addressed. Technological innovations that improve the efficiency of the current solar energy systems are necessary to exploit India’s vast solar energy potential. In order to facilitate this, the government has to frame comprehensive R&D schemes and provide incentives along with the current subsidy schemes. Standardisation of systems will lead to rationalisation of costs as companies can invest in R&D and newer technologies to meet common specifications.”

The past experiences of solar players indicate that reinvestments in solar projects are difficult and debts are being recast because of poor planning, execution and recurring policy change. Hence, there is a need to develop a framework that will encourage and assist cities in assessing their present energy consumption status, set clear targets and prepare action plans to generate energy through renewable energy sources and to conserve the energy utilised for urban services. “There has been little involvement of the end beneficiaries, utilities and service providers. Also, the demand-pull scenario in this segment has not been created. Second, there is no viable revenue model in place as an incentive for these players. Factors like roof space availability, reliable grid connectivity and, more importantly, refinancing of batteries, will be some of the major challenges ahead for the players,” cautions K Subramanya.

Some recommendations

Hari Kiran Chereddi suggests that there is a need to provide world class benchmarked products that are available, applicable and affordable. “Cost of low quality products and solutions will impede the acceptance and sustenance of the plan, and hence, it is the responsibility of the companies to collectively drive for standardisation. Going green for the sake of it is not sustainable unless it makes economic sense to invest in solar energy,” he says.

Experts predict that the most efficient and effective work model would be the government taking the initiative to spread the use of solar energy and provide incentives to the private sector to grow in a big way. In the long run, the usage of solar power can be more popular and price effective if the private sector participates at mega and micro levels. Innovative business models are required as solar products and solutions are still comparatively expensive.

“Changes don’t happen overnight and there are always short term rent seekers. The players have to understand that this is not a business to make a quick buck, but a serious business with a long term perspective on healthy techno-commercial competition, ethical values and climate change issues for nation building,” concludes K Subramanya.

FINANCIAL ASSISTANCE PROVIDED UNDER SOLAR CITY PROGRAMME

Up to Rs 5 million per city/town will be provided depending upon the population and the initiatives selected by the city council/administration, as follows:

  • Up to Rs 1 million for the preparation of a master plan within a year, along with a few detailed project reports on its implementation
  • Up to Rs 1 million for setting up the solar city cell and to meet the expenses of its functioning for a period of three years
  • Up to Rs 1 million for oversight of implementation during three years
  • Up to Rs 2 million for capacity building and other promotional activities to be utilised in three years

Source: MNRE

Electronics Bazaar, South Asia’s No.1 Electronics B2B magazine

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