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New Delhi: India may emulate a solar pricing model that made Germany and Spain the biggest markets for the technology, as Prime Minister Narendra Modi seeks to spur renewable energy.

“The government in New Delhi is considering whether to grant fixed tariffs instead of holding competitive auctions for solar power," said Tarun Kapoor, joint secretary at the ministry of New and Renewable Energy. “So called feed-in rates allow generators to lock in prices for solar power without capacity caps, unlike the current auction process."

An overhaul would help solar investors, such as Blackrock Inc.-backed SunEdison Inc. and Welspun Group, to scale up plants as India targets a 10-fold capacity increase by 2022. Indian states may be more willing to fix the rate they will pay for photovoltaic energy as the cost of sun-fired and fossil fuel-based power converges.

There’s a debate on this, Kapoor said at the Delhi EQ Summit on 1 August. “As the solar price comes close to the bottom, then the distribution companies would be more comfortable shifting to feed-in tariffs."

Welspun and SunEdison didn’t respond to e-mails and phone calls seeking comment.

Developing nations including India, Brazil and South Africa have avoided granting feed-in tariffs to control the scale of solar power installed and the amount of subsidy payments incurred.

German market

Germany became the biggest solar market in the world in 2005, wresting control of the industry from Japan and the US, by offering feed-in tariffs. Installations boomed because developers could predict how much cash they’d generate over two decades from projects that require minimal investment after set up and no fuel. They used those figures to lock in financing.

“A feed-in tariff very clearly provides you with visibility," said Gaurav Sood, managing director of the India unit of French developer Solairedirect SA. “It’s up to the investor to put up as much capacity as he thinks is viable under the tariff so long as he can line up the funds, land and permits," he said.

Modi’s government, in power since May, plans to spend 1,500 crore on programmes to boost solar power and reform electricity supply to farmers to end blackouts.

The scale of Germany’s boom in renewables had a perverse impact on the electricity industry. Today, when the sun shines and the wind blows hard, power prices drop so much that grid authorities pay some clean utilities to stop generating. Germany has installed 35 gigawatts of solar compared to India’s 2.4 gigawatts, according to data compiled by Bloomberg.

Boom-bust

More than two years ago, German Chancellor Angela Merkel’s government worked to scale back those subsidies and restrict solar installations. Similar boom-to-bust policies were implemented in Spain and Italy.

In India, most power plants—including coal, hydropower and wind projects—are under a system of fixed payments. State electricity regulators set a rate for wind or small-scale hydropower, and investors build projects if they deem that profitable. For fossil fuel plants and large hydro projects, the tariff is determined by setting a fixed rate of return after accounting for project costs.

Recent coal power projects price their electricity at about 5.5 a kilowatt-hour. In comparison, the most recent national solar auction priced photovoltaic power at about 6.5 a kilowatt-hour, according to data compiled by Bloomberg.

Solar, diesel

Already, solar beats the price of power from diesel generators—widely employed amid chronic blackouts—by two-thirds. Power minister Piyush Goyal projects solar will equal the cost of fossil fuel power by 2017.

“Tendering very often is not a good thing because you have to wait, to bid for capacity to build a project," Kapoor said. “Auctions have also limited the size of projects and the amount that any one company could win."

The cost of solar power projects fell sharply in the first two years after the start of India’s national power program in December 2010. Competitive bidding took advantage of a 64% drop in global panel prices between 2010 to 2012, according to data compiled by Bloomberg.

“The pace of solar price declines has slowed," said Bharat Bhushan Agrawal, an analyst at Bloomberg New Energy Finance in Delhi.

“As policy makers become comfortable with the stabilization of solar costs, they are likely to contemplate feed-in tariffs to give more clarity and freedom to developers," Agrawal said.

Tariff level

For the government, the harder question may be calculating an appropriate feed-in tariff. The state of Andhra Pradesh offered one that was too low, so no investors came forward to install capacity, according to BNEF. The booms in Europe were caused because governments set the rates too high and didn’t act quickly enough when the cost of panels fell.

Sood said India should avoid restrictions that limit the volume of a capacity or projects’ location—the sort of measures that might help the government control the pace of installations.

Gujarat state, which kicked off India’s first state-level solar program, offered a feed-in tariff that made it the top generator of photovoltaic power in the country. However, it limited the amount of projects and didn’t publicly disclose how those were chosen.

“In that scenario, a multinational company like us would always prefer an auction because it is transparent and gives us a level playing field," Sood said. Bloomberg

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