Contributed by: Amarchand & Mangaldas & Suresh A Shroff & Co, Mumbai

The new federal government is targeting adding 100 GW of installed solar capacity by 2022 which creates investment opportunities for international investors

India has put itself on the world solar map with the new government’s staggering target of adding 100 GW of solar capacity by 2022. As of February 2015, the country’s total installed power capacity was 261 GW, with a large percentage of that coming from coal and hydro power generation. With a population just short of 1.3 billion and an electricity penetration rate of 75%, there are 315 million consumers still to be serviced by the power industry. India receives annual solar radiation between 1600 to 2200 kWh/m2 (an equivalent energy potential of about 6,000 million GWh annually), and its solar thrust is therefore intuitive and long in the making. Indeed, reports have indicated that solar power will become the cheapest source of electricity in many regions of the world, reaching costs of between 1.6 and 3.7 cent/kWh in India and the MENA region by 2050. It is predicted that solar power will achieve cost competitiveness with large - scale conventional power plants in these regions already within the next decade, with costs of between 3.3 and 5.4 cent/kWh.

At the end of 2010, India had 10 MW of installed solar power capacity and the journey to 3063 MW as of 2014, has defied perceptions of sclerotic public procurement programs in India. Most of this development, under the aegis of the federal program Jawahar Lal Nehru National Solar Mission (JNNSM), took place in the states of Gujarat and Rajasthan which were obvious choices both in terms of availability of arid land and high levels of irradiation. Other states have now joined the bandwagon with at least 14 of India's 29 states having a dedicated “solar development policy” and the southern state of Andhra Pradesh being one of the largest beneficiaries of the Batch 2 Phase II Tranche 1 of the JNNSM auctions taking place later this year. Rooftop solar has also taken off with some states introducing net metering and the state of Haryana bringing about laws for compulsory roof-top installations in hospital, schools, public institutions, hotels and other buildings of a certain size and specification.

Pre-financial crisis, some of the world's largest energy project financings were happening in India for thermal plants with a capacity of between 1000 - 4000 MW. The same “ultra-mega” scale is sought to be introduced to the solarscape as evidenced by the government’s recent policy pronouncements and tie-ups. An encouraging feature of the government’s approach to renewable energy, is the simultaneous development and upgrade of grid infrastructure in Western and Northern India for the creation of “green corridors”. This has won financial support of over $1 billion from the German development bank KFW and the Asian Development Bank. The federal government is also considering permitting dollar-denominated tariff bidding, with hedging costs being built into the tariff to cover for depreciation in the value of the Indian rupee.

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Source: Mercom Capital Group, LLC. Data derived from MNRE, Mercom Project Tracker & Public Sources.

Utility Scale Solar Development Models

There have been four distinct models followed by developers of utility scale solar projects in the country:

  1. participation in the JNNSM federal reverse auction process (based on discounted feed-in tariff offered by the bidders or viability gap funding sought by the bidders) held by the NTPC Vidyut Vyapar Nigam Limited (NVVN) (for Phase I) and Solar Energy Corporation of India (for part of Phase II). So far 1720 MW of capacity has been allocated since 2011, a majority of which has been for photovoltaic (PV) projects;
  2. participation in state specific auctions run by the relevant state procurement bodies – so far, (amongst others), Andhra Pradesh, Tamil Nadu, Karnataka and Rajasthan have held individual auctions for projects in their states. Offtakers are usually state utilities (model PPAs have been developed to ensure consistency across states);
  3. participation in the Ultra Mega Solar Power project scheme, under which the federal government has set itself a goal of allocating 25 solar parks of between 500 – 1000 MW, for which land will be identified in the states of Gujarat, Madhya Pradesh, Telangana, Andhra Pradesh, Karnataka, Uttar Pradesh, Meghalaya, Jammu & Kashmir, Punjab and Rajasthan. Ultra Mega Solar Power projects do not bring any new allocations to the market independently unlike the JNNSM scheme. Some independent tie ups between the government and industrial developers like Sunedison (5 GW) and Adani group (10 GW) have taken place recently which points to a more ad-hoc approach; and
  4. captive power generation in industrial clusters with a PPA being privately negotiated between the developer and an industrial offtaker on a group of industrial offtakers. The usual size for such plants is between 10 – 50 MW.

Incentives for Solar Power Generation

The federal government has introduced compulsory renewable purchase obligations (RPO) under which individual states, industrial entities, open-access consumers, captive power producers and state owned public sector undertakings must meet part of their energy needs through green energy. To stimulate solar power development, there is a proposal to amend the (Indian) Electricity Act 2003 to increase the solar component of the RPO from 3% to 10.5% of India’s total power consumption.

The renewable energy certificate (REC) mechanism was introduced in 2010 to facilitate compliance with RPOs. RECs (divided into solar and non-solar categories) are awarded to generators of renewable energy and then theoretically traded on the open market (one REC is treated as equivalent to 1 mwh of renewable energy) for those seeking to achieve their annual RPO targets. However, the value of RECs has declined in the past few years and unless RPO compliance is improved through effective penalties on defaulting entities, RECs would not constitute a significant portion of revenue for a solar project. However, the Clean Development Mechanism is active in the country, and India is therefore one of the largest sellers of carbon credits in the world.

Various tax exemptions and capital subsidies are available for components in the solar energy value chain. JNNSM promotes the assembly of solar modules after import of cells which is free from import taxes. Other benefits include generation based incentives (GBI), which are paid by the federal government for each unit of energy generated and 80% accelerated depreciation income tax benefits on solar projects. A developer can avail of GBI or accelerated depreciation benefits, but not both.

Upcoming Auctions under JNNSM

For Batch 1 Phase-II of the JNNSM, the reverse auction process required developers to compete for viability gap funding (as an upfront capex subsidy). This was a shift from the previous phases of the JNNSM which had developers bidding for a discount over the feed-in-tariff set by the Central Energy Regulatory Commission for each auction year.

The Ministry of New and Renewable Energy (MNRE) have issued draft guidelines in respect of the allocation of 3 GW of projects under the upcoming tranches of Batch 2 Phase II of the JNNSM on which inputs of the stakeholders are being provided. Batch 2 Phase II of the JNNSM is expected to be split into further tranches. One tranche is expected to be similar to Phase I of the JNNSM, with developers bidding for a minimum capacity of 10MW, on the basis of a discount over the feed-in tariff set by the Central Energy Regulatory Commission. The power bought by central agencies (NTPC/NVVN) is expected to be bundled with thermal power and sold at a competitive cost to state power distribution companies. Another tranche is expected to be similar to Batch 1 Phase II of the JNNSM, with developers competing for viability gap funding. The power is expected to be bought by state utilities. The final guidelines for allocation have not yet been issued.

Key Issues to Watch

While the outlook is sunny, there still remain some concerns for foreign investors.


Chief amongst these is regulatory uncertainty in taxation which may affect foreign investors, including:

  • Entities engaged in power sector are currently eligible for 100% tax deduction for a period of ten years if they begin generating, distribution or transmission of power on or before March 31, 2017. However, the government has announced phased removal of all existing tax incentives available to the business entities accompanied by reduction in the corporate tax rate from 30% to 25% over a period of the next four years with effect from FY 2016-17;
  • The General Anti Avoidance Rules, or GAAR that gives significant amount of discretion to the Indian tax authorities to reclassify or re-characterise a transaction are now proposed to be deferred and shall be effective from April 1, 2017;
  • Currently, a foreign company is said to be resident in India if during the relevant year the control or management of its affairs is wholly situated in India. It is now proposed that a foreign company will be treated as a resident of India if its place of effective management any time during the relevant year is in India. For this purpose, place of effective management means a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance made;
  • Transactions between an Indian company and its foreign associated enterprise are subject to transfer pricing regulations. Indian tax authorities have been very aggressive on this front; and
  • On the positive side, the rate of tax for foreign entities earning income in the nature of ‘royalty’ or ‘fee for technical services’ from Indian entities are now required to suffer a lower withholding tax at the rate of 10%.

Dispute Resolution

Power purchase / transmission agreements are subject to the provisions of the (Indian) Electricity Act, 2003 which requires such disputes to be resolved by electricity regulatory commissions.

For disputes of other nature, court processes can be lengthy and cumbersome. However, most contracts can be governed by English law with arbitration clauses allowing for proceedings to be held in jurisdictions like Singapore and London. Recent court judgments have also restricted the ability of Indian courts to intervene in foreign arbitral awards and the government has proposed legislation to further clarify and streamline the Indian Arbitration and Conciliation Act, 1996.


Bankability of projects remains a concern as reverse auctions have seen aggressive bidding by developers and an average tariff of Rupees 7.42/ KWh (around $0.12. KWh at current conversion rates), amongst the lowest in the world. Interest rates levied by lenders in traditional project financings have seen marked variations on the basis of credit worthiness of offtakers, which varies from state to state. While dollar denominated bidding is being considered, it may take some time before such a measure is implemented.

Land acquisition

Solar projects in India also face issues relating to land acquisition (including land use designations and ceilings on land holdings). The JNNSM and state policies require the developer to procure land independently (either through direct sale from landowners, allocation of government land or compulsory acquisition of land). The Ultra Mega Solar Power project scheme of the federal government contemplates support for land acquisition in the form of establishment of solar parks by the implementing government agency (including actual land acquisition).

Domestic Content

A certain percentage of yet to be determined allocations would require solar cells and modules to be domestically manufactured for a certain number of projects under JNNSM. Developers will also be permitted to bid under the non-domestic content or ‘open’ category if they are unable to meet the domestic content requirements.

Grid Availability

Grid availability is a concern for renewable energy projects in most states in India, including with respect to scheduling and forecasting of energy output. This is sought to be improved by the ‘green corridor’ scheme of the federal government, which contemplates transmission of 40GW of renewable energy by 2030.


The Foreign Direct Investment (FDI) policy of India allows up to 100% investment in the power sector (except atomic energy) under the automatic route (i.e. where specific approval of the government for the investment is not required). This includes generation, transmission and distribution of electricity, as well as power trading. The policy coupled with credit provided by international commercial banks, DFIs and multilaterals, presents an attractive opportunity for international investors (several of whom already have a significant presence in India).

There are encouraging signs that the federal government intends for the auction process to yield achievable results for solar power generation in the future. In line with this, PricewaterhouseCoopers (PwC) has been brought on board to draw up a road map for the scale-up of the country’s solar footprint. PwC will assess India’s PV potential and critique MNRE’s current energy policies in an effort to fully determine a realistic power demand projection for the country. The analysts will also evaluate grid parity projections, power evacuation systems and wider networks in handling rapid expansion to 100 GW of solar feed-in, which is the government’s stated aim for 2022.