For those keen on becoming a solar power developer in India, it is important to understand the various business models under which solar power plants get built.

Power plant development belongs more to the infrastructure sector than to consumer product sector, in the sense that these are investments that pay off well in the long term, and in that these are businesses that rely on long term agreements rather than dynamic short term sale transactions.

This post from Solar Mango looks at some of the key aspects that any developer of MW solar power plants should know.

Please note that this post is mainly about business models for MW-scale, grid connected power plants and not for rooftop solar power plants for which the business models could be quite different!

For any business keen on having MW scale solar power plants, the first and most important question they should ask themselves is: Who will buy the power?

The answer to this question to a significant extent will decide the business and revenue model for the power plant, and also pretty much define the risk and return profiles. To a certain extent, the type of buyer could also determine the financial returns on the project.

A utility scale Solar PV plant can be monetised through several avenues:

Biz models for utility scale solar india

Business Models for MW Scale Solar

Broadly, you could say that the sale of power is either to a power utility (typically a government owned electricity board) or to a private company. In the special case where the private company happens to be the owner of the power plant, it becomes a Captive Consumption model.

Except in the case of captive consumption, the key contract that forms the business model is the PPA or the Power Purchase Agreement. Here is post that explains the PPA much better.

Each of the above business avenues is explained below.

Sale to Utility (DISCOM)

Utility usually refers to state power generation or distribution companies (TANGEDCO, APTRANSCO, MAHAGENCO) or other large central power entities such as NTPC.

There are two ways you could sell power to these state utilities.

  • PPA/FIT – A Power Purchase Agreement (PPA) is signed with the DISCOM, usually for 25 years, where the price of power (Rs./kWh) is either determined through competitive bidding or a Feed-In-Tariff (FIT) is fixed by the government. This is the most popular form of power sale in India today
    • One of the earliest FITs in the country was the Gujarat FIT in 2009 at Rs. 15 (Years 1-12) and Rs. 5 (Years 13-25)
    • In contrast, the latest announced allocation for Telangana (April 2015) caps the bids at Rs. 6.45/kWh (for the entire 25-year period)
  • APPC + REC – The solar plant developer sells power to the DISCOM at Average Pooled Power Cost (APPC) which is fixed by each state, and is usually lower than the PPA/FIT tariff (Madhya Pradesh APPC – Rs. 2.79/kWh; Karnataka APPC – Rs. 3.06/kWh). The developer additionally receives Renewable Energy Certificates (RECs) that can be sold to entities with a Renewable Purchase Obligation (RPO). This model is currently not very popular in India due to poor sales of RECs

Sale to Private Consumer

A private company is free to purchase power from whoever they wish, with only a few constraints attached. You could sell the power generated to private companies as well. This route typically is through a power purchase agreement.

  • PPA –The solar plant developer signs a PPA with a private consumer for sale of power. The price is usually decided based on negotiation. The PPA term may only be 5 years initially. The private consumer will need to apply for Open Access to buy power from anyone other than the utility
    • Solar developers who sell power to private consumers are entitled to RECs, provided the consumer is not under a Solar Purchase Obligation

Captive Consumption

For power plant developers who also happen to be running energy intensive businesses, the third route to sell power is through the captive consumption of the solar power generated by their own power plant.

  • The solar plant developer is also the consumer of power. Here, the cost to consumer is the cost of obtaining solar power  at the facility i.e., landed cost of power
    • A captive plant need not be located at the facility. If located some distance from the facility, the cost of transmitting power to the facility (including open access charges) will need to be paid to the grid operator. This cost will need to be added to the cost of generation of solar power to arrive at the landed cost of power at the facility

Solar generation under captive consumption is also eligible for RECs, provided that no concessions have been obtained.

Pros and Cons of the Business Models

Biz Model Pros Cons
Sale to Utility Long term PPAs viable and bankable, in the case of at least some states

Large power plant PPAs possible as the buyer is a very large distributor of power

Rates might not be very attractive, especially in the regime of competitive (reverse)  bidding

Poor health of state DISCOMS could pose payment delays and hence poor cash flows

This model is allotment driven and hence feasible only under scenarios where there are such government allotments

Sale to Private Consumer No need for government policies or allotments, purely market driven

Could have attractive tariffs, as this is a bilateral agreement between two private parties

REC benefits can be availed, through the market for RECs is yet to take off meaningfully

Long term PPAs are difficult except in the cases of very large corporates

Large corporates might set up their own captive solar power plants instead of buying from third parties, and so there might be challenges for this attractive segment

High wheeling, banking and cross subsidy charges might weaken the business case

Captive Consumption No need for government policy or allotments, purely driven by the cost of energy

Tying in the cost of energy for your company for 25 years, as against uncertain grid power cost escalations during the same period

REC benefits can be availed, through the market for RECs is yet to take off meaningfully

This might not be possible for every developer. In fact, IPPs in most cases operate only power plants and they have no other businesses (though they might have companies that are related to them in some fiduciary way)

Captive power plants require significant upfront capital costs, something many companies might not find feasible

Key Takeaways

The first and most important question any MW solar power aspirant should ask is: Who will buy my power?

There are three main types of buyers for a utility-scale, MW solar power generator

o   Government utilities, usually through state or central solar policy allotments

o   Private companies, through a mutually negotiated power purchase agreement

o   Self-consumption (captive power plant)

Each of the above three buyer-routes has its own pros and cons, and thus, there is no one avenue that is “best” for all developers