In India, we consume 1250 KWH electricity per capita per year. Of this, 60% comes from fossil fuels, costing anywhere between INR 7-10 per unit (per KW) for residential use and INR 12-15 per unit for commercial use. These costs decrease sharply as we shift to renewable sources of electricity. Renewables (180 GW) account for 40% of the total energy capacity, with solar contributing 40% of this. While we are adding renewable energy capacity annually, by 2050 fossil fuels reserves will be halved and global warming induced temperature will increase by 1.5° celsius. We need to act faster and find viable and scalable solutions.
- Is hydroelectricity the solution? These plants are typically further away from demand centers, costly to construct, and require abundant space and water.
- Is green hydrogen the answer? Perhaps, it remains to be seen. (If you have thoughts on this, I’d love to discuss!)
- Is wind power a contender? While potentially a part of the solution, wind projects are also distant from demand points and require large land areas.
- Is solar the way forward? Certainly, it is a significant part of the solution.
The Indian government is bullish on solar, and there's a significant regulatory push for it to succeed in India.
- 70 GW of total solar capacity installed in India, 15% of which was installed in the last year.
- India aims for 280 GW of installed solar capacity by 2030.
- Government is providing 40% subsidies for installations of 3 KW or less, and 20% subsidies for installations of 3 KW -10KW.
Solar addresses multiple issues: affordable electricity for all, renewable source, and proximity to demand centres.
However, solar also poses several questions and challenges: high initial capital expenditure, ongoing maintenance, installer quality assurance, evolving regulations (subsidies, net/gross metering),intermittent generation, long-term investment viability, and sufficient rooftop space.
Is the market large enough to even try to address some of these challenges? Total Solar Market is expected to be a $20B annual market, adding 30-35GW per year, excluding O&M fees, insurance, resale, and other ancillary services.
Okay, so the TAM is substantial. Now, which are the potential areas for technology innovation?
Let’s start by examining the broader target group characteristics.
The industrial segment is organized on almost all fronts – EPC, installation, and financing. A potential opportunity in this TG is analytics. These farms are large, and the undetected loss of just one panel can impact payback periods and ROIs. Analytics can be leveraged to diagnose problems, propose solutions, and expedite work orders for efficient operations at a large scale.
Further innovation potential lies in the Resi, MSME and Rural side, particularly in the installation and financing segment.
Installations: With 7,000-8,000 installers across India, the segment remains unorganized, comprising smaller, local operations. There's a trust gap among consumers, who require confidence in the installer's reliability over the 25-year lifespan of the solar asset. The customer needs to feel assured that installers are using the right components, have the right design and will provide the necessary O&M services for 25 years. Addressing this trust deficit and market fragmentation presents an opportunity to establish a reputable brand.
The challenge for the brand lies in the O&M required from them, especially for MSMEs with larger installations, where frequent cleaning is critical to avoid energy generation losses. The installer/brand needs to have a dense network for operational efficiency in order to minimize servicing costs.
Here, software platforms to help installers with design, project management and supply chain financing could also help organize the segment.
Financing: Despite homeowner satisfaction with solar installations, the category is yet to take off in India. A major hurdle is access to financing. Banks are receptive to financing large-scale commercial solar projects, but on smaller loans the cost-to-benefit ratio for banks break. The effort to create a TEC report, and complexities in managing a smaller asset in case of default outweighs the interest banks would earn on these loans. Also, banks have other avenues to disburse those funds, with significantly less effort. Technology could streamline underwriting and validate project specifications, leading to an attractive cost-to-benefit ratio. While distribution and adoption at scale for early-stage players remains to play out, solar NBFCs can benefit from a cheaper cost of funds by leveraging Green Bonds or similar funding sources to improve NIMs.
Alternate Financing: An intriguing approach to the above scenario involves the average 25-35 year-old who is renting a property. This individual may lack the space, inclination, or commitment to manage solar installations, and may be reluctant to make a long-term investment in a rented property. This is where fractional ownership of a solar asset comes into play. Here, MSMEs have the space and much needed demand to lower electricity bills (opex) without spending much on capex. The capex, in this model, is funded by retail investors who can think of the monthly payments from MSMEs as a return on their investment (capex). Win-win. While still evolving, this model could gain traction. However, if understanding the payback period of a standalone solar panel is hard for a consumer, will understanding this model be even harder?
Ancillary services like storage batteries, insurance, and resale markets would also stimulate growth in solar, although we are yet to see notable business models here.
We believe, that while grid dependence will persist due to solar's intermittent nature, the growing ecosystem is expected to significantly reduce this reliance by 2030.
We, at Sorin, are bullish on Climate tech. If you are a founder in the space or a fellow investor looking to brainstorm, feel free to reach us at aashna@sorininvestments.com
I am not that guy :)