The key segments that are expected to benefit from the growth of the sector are Power Producers, Manufacturers and Engineering, Procurement and Construction (EPC). The opportunities, challenges and outlook for these three segments are, however, different.
The aggressive capacity addition targets have made power production a sector with high potential.
Companies such as Tata Power, Reliance Power and Lanco Infratech have already started developing solar power projects in a significant way. Some other power producers with ambitious plans include Orient Green Power , Astonfield, JSW Energy and Azure Power. Even solar panel manufacturers such as Moser Baer and Solar Semiconductor have integrated forward into power generation. Infrastructure companies like Consolidated Construction Consortium and Punj Lloyd, PSUs like NTPC, Indian Oil Corporation and Karnataka Power Corporation have also jumped onto the solar bandwagon.
The challenges for power producers include policy uncertainties that arise from time to time. Initiatives like the payment security mechanism for JNNSM projects help in building investor confidence and will help in the sustainable growth of this sector. The financial health of many of the state electricity boards is also a cause of concern. For a project developer putting up a power project in these states, the risk of default of payments by these utility companies is quite high. The delay in payments for the wind energy producers in Tamil Nadu is a case-in-point.
Other challenges are non-availability of reliable ground measured solar irradiation data that makes it very difficult to evaluate accurately the returns from a project, technology selection and financing.
The JNNSM seeks to develop a solar PV manufacturing ecosystem in India by mandating the use of indigenous components (especially for PV cells and modules) for the solar power projects. This local content requirement has been a boon for companies such as Tata BP Solar, Indosolar, Solar Semiconductor, Websol and Moser Baer among others.
The second phase of the JNNSM is expected to see more stringent local content mandates. This will help manufacturers mentioned above if they plan to vertically integrate backwards. Companies such as Lanco Solar and Yash Birla group who have announced plans to set up vertically integrated factories stand to gain a lot.
Global competition is a major challenge to the manufacturers. Today, China has more than 50 per cent share of the total global PV cell and module production. Many of the Chinese PV manufacturers are vertically integrated and have huge economies of scale which make them extremely price competitive. Indian manufacturers have to differentiate themselves from their competitors if they have to be successful in this market.
Solar PV prices have also been dropping relentlessly since 2008 mainly because of the build-up of huge production capacities globally. This has led to some high profile bankruptcies of companies Solyndra and Evergreen Solar. This price erosion makes it tough for PV manufacturers to remain profitable and run a sustainable business.
Sensing the opportunity in solar power plant implementation, many infrastructure companies have also entered the sector as EPC players. Larsen &Toubro is a giant in this area and today its solar PV project pipeline is close to 200 MW. Other infrastructure companies such as Lanco and PV manufacturers such as XL Energy, Moser Baer and PSUs like BHEL and EIL have also become EPC companies. Wipro, through its vertical, Wipro EcoEnergy, has successful entered this segment by bagging the EPC contract for a solar power plant in Tamil Nadu. Apart from these, many small and medium Indian companies are tying up with established European and other EPC companies to offer their services in the Indian market.
There is immense pressure on the EPCs to reduce as much cost as possible. In order to be successful in the long run, it is very important for the EPCs to find the right balance between cost and the quality of service offered by them.
The tendency on the part of project developers is to transfer most of the risk onto the EPC is also a challenge. When an EPC accepts a project, it needs to have a clear idea about the risks associated with the project and strategies to effectively mitigate them.
With the governments at the centre and states becoming serious about the National Solar Mission, the solar sector in India is poised to grow at a significant pace. Expect power production and EPC to produce attractive investment opportunities with their good growth potential and relatively lower risks.
The revenue and profit growth prospects for the manufacturing sector is, however, not as assured as it is for the rest of the industry, and government policies and global trends will play a key role in deciding the attractiveness of this sector for Indian investors.