How to Create a Passive Income Stream by Investing in a 1 MW Solar Plant in Andhra Pradesh

Our article Why invest in Solar in India discusses in detail about the current opportunity in Solar sector in India and in leading solar states such as Andhra Pradesh

There are few business models that solar investors/developers could choose from when it comes to investing in Solar in India, our article Business models in Solar in India discusses these models in detail

REC is the preferred model because it is more profitable until 2017 as RECs are trading at ₹ 9.3/kWh, you could check the latest REC trading data at Indian Energy Exchange

For our business case let’s consider FIT(Feed-in-Tarif) model as this model is guaranteed income though it might not be as profitable as REC model

Andhra Pradesh has issued an open solar bid for procuring electricity at ₹ 6.49 per KWH(Unit) from Solar developers who are interested in setting up solar plants in AP

For simplicity sake lets analyze the economics involved in setting up and making a 1 MW Solar plant profitable in AP

Financial Facts

Cost of setting up a 1 MW Solar plant in AP ₹6.5 Crores
Equity Investment: 25% – ₹1.625 Crores
Term Loan: 75% – ₹4.875 Crores
Loan Tenure: 12 years
Interest Rate: 10% – From SBI
Yearly Interest and Financial Charges ₹48.75 Lakhs
Operations & Maintenance Cost ₹38.75 Lakhs
Insurance Charges 0.10% – ₹6.5 Lakhs

Source: CREC Tariff Regulations 2014 Adjusted for 1MW plant in AP

1 MW plant produces around 17.13 Lakh units per year, this number is arrived based on the fact that in AP conditions 1KW generates 5.71 units per day multiplied by 300 sunny days in an year

Total Revenue = 17.13 * ₹ 6.49 (FIT Rate) = ₹1.11 Crore
Total Expenses = ₹45.25 Lakhs (O&M + Insurance Cost)

PBIDT(Profit Before Interest, Depreciation and Taxes) = ₹65.75 Lakhs

Financial Charges = ₹48.75 Lakhs

PBIDT(Profit Before Depreciation and Taxes) = ₹17 Lakhs

Book Depreciation(3.6%) = ₹23.4 Lakhs
PBT(Profit Before Taxes) = (₹ 6.4 Lakhs)
Alternate Minimum Tax(20%) = ₹3.4 Lakhs

PAT(Profit after Tax) = ₹13.6 Lakhs*
Project IRR(Return on Investment) = 8.4%
Payback Period = 12 Years

*We haven’t added Accelerated depreciation benefits(80%), O&M escalation (5.72%) and Solar PV Output degradation of 0.8% per annum

Above financial analysis gives you a good idea on profitability of a solar plant, It is very lucrative if you have a large cash flow business and you can get a one time benefit of AD by setting up a solar plant

Solar plant provides an 8.5% guaranteed annual return for first 12 years, which is decent, considering the absence of risk as in other businesses and this model is immune to market conditions

From Year 12 – Year 20 cash flow increases by 400%

Also, see how you can earn up-to 15% by investing in Rooftop Solar Plants

Are you planning on setting up a solar plant in AP? We offer end-to-end solar plant services with Project management and EPC services for solar projects from KW to MW scale, Visit our end-to-end solar plant services for details

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Cost of setting up a 1MW Solar Plant in Andhra Pradesh

Our article Why invest in Solar in India discusses in detail about the current opportunity in Solar sector in India and in leading solar states such as Andhra Pradesh

There are few business models that solar investors/developers could choose from when it comes to investing in Solar in India, our article Business models in Solar in India discusses these models in detail

Below are the list of components which contribute to overall cost of a solar plant

Solar Modules
Among the various photovoltaic technologies in use, crystalline Silicon technology is most widely used technology globally.

This is primarily because the technology is well understood, and was amongst the first developed photovoltaic technologies. The installation and integration of these modules is relatively easier

Non Module Components
The non-module cost components comprise cost towards land, civil & general works, ground mounting structures, power conditioning unit, cabling & transformer/ switch-gears and preliminary/pre-operating expenses & financing costs.

Each component of above referred non-module cost of Solar PV based power plant is estimated as under for the determination of capital cost of Solar PV projects

Land Requirement
The land requirement for Solar PV based power project depends upon the technology employed i.e. Crystalline or Thin film, land requirement for crystalline PV project is 5 Acre/MW

Power Conditioning Unit (Inverter)
Power conditioning Unit is an important component of the balance-of-system. Power conditioners process the DC power produced by a photovoltaic system to AC power and match the same with utility’s power

Civil and General Works
The cost associated with civil works includes testing of soil, preparation of soil/ground with all necessary works like earthmoving, digging holes for the foundations/pilings and leveling, fencing of the land, development of approach road, cable trenches, water supply arrangement in solar farm, control room etc.

General works include security of solar farm, setting up of power back-up generator; yard lighting, earthling kits, etc

Ground Mounting Structures
The major portion of the site will be used for ground mounting structures, PV module are mounted in a steel structure which will be installed facing south direction for best efficiency & optimal power output.

The steel structure will be grouted using RCC foundation. The structure is designed to hold 20 modules per structure and which can withstand wind speed up to 170km/hr.

The structure is designed in such a way that it will occupy minimum required space without sacrificing the performance.

Cables and Transformers
Cables  consists of DC caballing between Solar PV panels & Inverters including junction boxes, AC cabling between Inverter & sub-station, Earthling arrangements and Transformer.

Transformers includes Breakers, Current Transformers, Potential Transformers, and Isolators

Preliminary/Pre-operating expenses and Financing Costs
The preliminary/pre-operating expenses include transportation of equipment, storage of equipment at site, insurance, contingency, taxes and duties IDC(Interest during construction) and finance charges etc.

Detailed breakup of Preliminary and Pre-operative expenses and financing cost, lump sum in percentage of total capital cost is proposed as under:

  • Insurance Cost: 0.5%
  • Contingency: 0.5%
  • Interest during Construction (IDC): 5%
  • Financing cost: 1%
  • Project management cost: 1%
  • Pre-operative Cost: 1.0%

Preliminary/Pre-operating expenses and Financing Cost contribute to around 10% of total capital cost on average basis.

The Table below presents the breakup of benchmark capital cost for Solar PV projects

Particulars  Capital Cost
(Rs Lakh/MW) 
% of Total Cost 
PV Modules 360.00 56%
Land Cost 018.00 3%
Civil and General Works 050.00 8%
Mounting Structures 040.00 6%
Power Conditioning Unit 050.00 8%
Evacuation Costs 060.00 9%
Prelim & Pre-Opp Expenses
including IDC and contingency
060.00 9%
Project Design & Management 010.00 2%
Total Capital Cost 648.00 100%

Cost of setting up a solar plant has seen 20% drop from the previous year. CERC attributes the cost drop mainly to the following

  • Civil and General works(58% drop)
  • Mounting Structures(52% drop)
  • Evacuation cost(43% drop)

Are you planning on setting up a solar plant? We offer end-to-end solar plant services with Project management and EPC services for solar projects from KW to MW scale, Visit our solar plant services for details

Also, see how you can earn up-to 15% by investing in Rooftop Solar Plants

Business Models for Solar PV in India

In our previous article Why invest in solar in India? we have analyzed why it make sense to invest in solar in india today, in this article we are going to analyze some existing business models in Solar PV

Solar power can be sold through one the following models:

  1. NVVN Model: Solar power is sold at the competitively bid tariff (under NSM bidding) to NVVN(NTPC Vidyut Vyapar Nigam) which in turn sells it to state power distribution companions (DISCOMS).
  2. State policy Feed-in-Tariff(FIT) Model: Solar power is sold within the state to DISCOMS at Feed-in-tariff determined by state solar policy
  3. REC Model: Under this model, power consumers/distributors/sellers e.g. DISCOMS buys the power at average pooled purchase cost(APPC) from the conventional power generation companies  and buys one REC for every 1 MWh of power purchased.
  4. Power exchange Model: Under this model, the power is sold over the exchange and the seller gets market price per KWh and REC for every 1 MWh of sale of power.

While these business models are to be adopted depending on the opportunity in different states, the current opportunity exists under the REC route. While initial development started under the FIT route, the reverse bidding has taken the solar prices at very low levels of the order of ₹ 6/kWh

In Andhra Pradesh reverse bidding has set the price of solar power at ₹ 6.49/KWh

It is important for solar investors/developers to keep a close watch on the different policies at state level and the investment business model can be selected as and when states come up with the revised policy guidelines.

As of today, the preferred business model is to invest in Solar PV is REC model, considering the fact that RECs are selling at a price of  ₹ 9.3 /kWh, it is an important opportunity for solar investors to tap these benefits which are currently available until 2016-17

Why invest in Solar in India?

Why Solar?

As the world broadens its portfolio of power options to meet growing energy demands and increasingly stringent environmental concerns, solar power is emerging as an attractive option.

Of all the routes for conversion of solar into useful energy, direct conversion of sunlight to electricity through solar photovoltaic technology is well accepted.

Solar photovoltaic has been recognized as an important route for generation of substantial quantities of grid quality power by utilizing the light energy of solar radiation.

As the Solar PV system costs decrease, the geographies with higher solar radiation and high price of electricity will achieve grid parity at the earliest.

In India Solar PV has already reached grid parity with today’s system costs

Why India?

The average per capita consumption of energy in India is around 612 kW, which is much lower than that of the developed countries like USA, Europe, Australia, Japan etc. However, this figure is expected to rise sharply due to high economic growth and rapid industrialization.

Energy is a necessity and sustainable renewable energy is a vital link in industrialization and development of India.

A transition from conventional energy systems to those based on renewable resources is necessary to meet the ever increasing demand for energy and to address environmental concerns.

Thus, the present scenario needs for addition of major renewable energy sources of energy for overall economic development of the country like India

Indian Government’s Initiative

The Indian government has set ambitious goals in the 11th plan for power sector owing to which the power sector is poised for significant expansion. It has been estimated that need-based capacity addition of more than 100,000 MW would be required.

This has resulted in massive addition plans being proposed in the sub-sectors of Generation Transmission and Distribution.

Opportunity under National Solar Mission (JNNSM) 

As part of National Action Plan on climate change, Indian Government has announced plans to install 20GW of solar generation capacity.

Under Jawaharlal Nehru National Solar Mission (JNNSM) policy targets are set to create an enabling policy framework for the deployment of 20,000 MW of solar power by 2022. This will be achieved in 3 phases.

As discussed, the objective of the Jawaharlal Nehru National Solar Mission (JNNSM) under the brand ‘Solar India’ is to establish India as a global leader in solar energy, by creating the policy conditions for its diffusion across the country as quickly as possible.

The Mission stipulates implementation and achievement of the target in 3 phases (first phase up to 2012-13, second phase from 2013 to 2017 and third phase from 2017 to 2022) for various components including Utility grid solar power.

Opportunity under State Policies 

Many states are coming out with their own solar policy which is in addition to the National policy. The leading states are Gujarat, Rajasthan, Tamil Nadu, Karnataka  and Andhra Pradesh, which receive high amounts of solar radiation and have huge amounts of wastelands and desert areas.

Andhra Pradesh State Government has announced its Solar Energy Policy-2012 on 26th September 2012. Solar Power developers are encouraged to invest in Andhra Pradesh and the policy is very conducive and attractive for them.

Now that Andhra Pradesh is divided, both Telangana and Andhra Pradesh have acute shortage of power and will be relying heavily on Solar power to bridge the gap between demand and supply

Andhra Pradesh has issued an open solar bid for procuring electricity at ₹ 6.49 per KWH(Unit) from Solar developers who are interested in setting up solar plants in AP

Opportunity under REC Mechanism

A Renewable Energy Certificate (REC) is a market-based instrument to endorse that a generator has produced a certain amount of electricity from a Renewable Energy resource.

Electricity produced from renewable energy sources have two distinct aspects – the electricity component and the environmental attribute of the electricity produced from a renewable energy source.

An REC relates to this second component, the environmental attribute of the Renewable Energy. RECs can be purchased from the market to meet Renewable Purchase Obligations (RPO).

According to Central Electricity Regulatory Commission(CREC), Any power generating company involved in electricity generation from renewable sources of energy will be eligible to get REC for their each 1 MWh (1000 units) of generation

Ongoing price of each REC is ₹ 9,300, you could check the latest REC trading data at Indian Energy Exchange

Procedure to get MNRE Subsidy for Off Grid Solar Systems in India

India’s Solar Potential

India has a large potential for generating solar power using un-utilized rooftop space and wastelands around buildings. Solar power generated by individual households, industrial buildings and commercial buildings can be used to fulfill the requirement of the building occupants there by consuming the power where it is generated, this reduces the large distribution losses that India currently faces today, It is estimated that we loose around 45% of generated electricity in distribution

The price of power generated from solar plants installed today is at par with grid supplied power for residential customers or lower in case of commercial customers, cost of solar power is declining while the cost of fossil fuel based electricity is increasing every day

The cost of generating solar power today is a little higher than the tariff charged by state owned distributed companies(DISCOMS) in most cases (other than commercial). With the capital subsidy, it is possible to generate power at ₹6.50 per unit (without battery backup) at ₹9.50 (with battery backup)

Solar power is cheaper than the diesel gen-set based electricity(₹21.00 per unit) even without capital subsidy, with capital subsidy it could be cheaper than the cost at which most DISCOMS are distributing power to their commercial customers.

Due to these reasons MNRE intends to popularize the use of solar energy under JNNSM Phase II

Eligibility

  • Individuals, Societies, NGOs, Private and Public sector companies, Industries every one is eligible for MNRE subsidy scheme

Subsidy Percentage

  • 30% Subsidy for off-grid solar systems up-to a maximum capacity of 500KWp

Applications
This scheme applies to following residential, commercial and industrial applications

  • Supplemental lighting
  • Industrial Heating
  • Home Lighting
  • Mini Grids

 Implementing Agencies

  • State Nodal Agencies(State Renewable Energy Development Agencies)
  • MNRE Approved Channel Partners
  • Solar Energy Corporation of India

Procedure 

  • Submit a project report with technical and financial details, operations and maintenance plan along with system monitoring and reporting details to MNRE via district head of your state nodal agency
  • MNRE evaluates your project on technical and financial points
  • After your project is approved by MNRE, Open tenders are invited by your state nodal agency and a channel partner will be selected from open bidding process
  • Channel Partner completes the installation process
  • SNA inspects your installation to ensure that only MNRE approved components are installed
  • Subsidy amount is released to channel partner directly from MNRE
  • You will be responsible for payment of 70% of the system cost, if you chose to finance your solar plant, you may work with you bank to procure financing 70% of the system cost

Practical Issues
Obtaining approvals form MNRE is a painfully slow process and it usually takes any where between 6 months to an year to get approval from MNRECreating a detailed project report(DPR) to submit to MNRE is usually a costly affair

Several so called solar constants are charging huge amounts to create those project reports

Solution
Most channel partners have dedicated pre-approved quota on an yearly basis, by working with a channel partner, you will be able bypass lengthy MNRE approval procedures and channel partner will be responsible for getting the project approved and procuring subsidy as well implementing the project as per MNRE guidelines

You should directly approach an MNRE approved channel partner with your proposal and they will be able to provide you with a free DRP with all the technical and financial information based on the solar plant capacity for your needs

You could submit that DPR to your bank to obtain financing, while channel partner works with your SNA(state nodal agency) to get your project approved by MNRE

Once project is approved by MNRE, your bank will fund the balance portion of the system cost (70%) and channel partner gets backend subsidy(30%) from MNRE

Solar Plant Capacity

Visit our Solar Plan Configurator to configure your solar plant size based on your actual usage

Important Links

We are an authorized distributor of MNRE approved channel partner and we have helped several customers to become grid independent

We take care of all the necessary paperwork and we will work with your SNA to get the necessary approvals from MNRE, We will provide all necessary paper work to your bank

Please contact us at +91 9550004871 or email us at info@macsolartech.com to get the process started