Harvard Case - The Solar Photovoltaic Tariff of 2018
"The Solar Photovoltaic Tariff of 2018" Harvard business case study is written by Michael Moffett, Jonas Gamso. It deals with the challenges in the field of Finance. The case study is 14 page(s) long and it was first published on : Nov 1, 2018
At Fern Fort University, we recommend that the Ministry of New and Renewable Energy (MNRE) implement a phased approach to solar photovoltaic (PV) tariff adjustments, focusing on a combination of market-driven mechanisms and strategic government interventions. This approach aims to balance the need for a competitive and sustainable solar energy sector with the goal of achieving India's ambitious renewable energy targets.
2. Background
The case study focuses on the challenges faced by the MNRE in setting the solar PV tariff for 2018. India has ambitious renewable energy targets, aiming to achieve 175 GW of renewable energy capacity by 2022. The solar PV sector has witnessed rapid growth, driven by government incentives and falling global prices. However, the 2018 tariff setting process was complicated by several factors, including:
- Declining global solar PV module prices: This led to intense competition among developers, resulting in aggressive bidding and low tariffs.
- Financial stress in the sector: Some developers faced financial difficulties due to low tariffs and delays in project implementation.
- Uncertainty about future policy: The MNRE was considering changes to the tariff setting mechanism, creating uncertainty for developers.
The key protagonists in the case study are the MNRE and the solar PV developers. The MNRE is responsible for setting the solar PV tariff, while the developers are responsible for building and operating solar PV projects.
3. Analysis of the Case Study
The case study can be analyzed using a framework that considers both financial and strategic aspects of the solar PV sector:
Financial Analysis:
- Capital Budgeting: The case highlights the importance of accurate capital budgeting for solar PV projects, considering factors like the cost of capital, project lifespan, and expected returns.
- Risk Assessment: The declining global module prices and financial stress in the sector highlight the need for robust risk assessment, including financial modeling and sensitivity analysis.
- Return on Investment (ROI): The MNRE needs to ensure that the tariffs set are sufficient to attract investors and provide an adequate ROI, considering the risks involved.
- Cash Flow Management: Project delays and financial uncertainties emphasize the importance of effective cash flow management for developers.
- Financial Forecasting: The MNRE needs to develop accurate financial forecasts for the solar PV sector to ensure that the set tariffs are sustainable over the long term.
Strategic Analysis:
- Government Policy and Regulation: The MNRE's role in setting the tariff and creating a conducive policy environment is crucial for the growth of the solar PV sector.
- Competition: The intense competition among developers highlights the need for a competitive market structure to ensure that the benefits of lower tariffs are passed on to consumers.
- Environmental Sustainability: The case emphasizes the importance of balancing economic growth with environmental sustainability in the renewable energy sector.
- Growth Strategy: The MNRE needs to develop a long-term growth strategy for the solar PV sector, considering factors like technological advancements and market trends.
- Partnerships: The case highlights the potential for partnerships between the government, private sector, and financial institutions to support the growth of the solar PV sector.
4. Recommendations
The MNRE should implement a phased approach to solar PV tariff adjustments, combining market-driven mechanisms with strategic government interventions:
Phase 1: Short-Term (2018-2020):
- Market-driven tariffs: Allow for competitive bidding, but with a minimum tariff floor to ensure financial viability for developers.
- Financial support: Provide financial support through mechanisms like viability gap funding (VGF) for projects in remote or challenging locations.
- Policy clarity: Communicate clearly the long-term policy vision for the solar PV sector, reducing uncertainty for developers.
Phase 2: Medium-Term (2021-2025):
- Transition to a market-based tariff: Gradually reduce the reliance on government-set tariffs, moving towards a market-driven system.
- Capacity building: Invest in capacity building for developers, focusing on financial management, risk assessment, and project implementation.
- Technological innovation: Support research and development in solar PV technologies, including advanced energy storage solutions.
Phase 3: Long-Term (2026 onwards):
- Mature market: Establish a mature market for solar PV, with a focus on efficiency, cost reduction, and grid integration.
- Green bonds: Promote the issuance of green bonds to finance solar PV projects, attracting private capital.
- International collaboration: Engage in international collaboration to share best practices and promote the adoption of solar PV technologies.
5. Basis of Recommendations
These recommendations consider the following:
- Core competencies and consistency with mission: The recommendations align with the MNRE's mission to promote renewable energy and achieve India's ambitious renewable energy targets.
- External customers and internal clients: The recommendations consider the needs of both solar PV developers and consumers, ensuring a balance between affordability and financial viability.
- Competitors: The recommendations acknowledge the intense competition in the solar PV sector and aim to create a level playing field for developers.
- Attractiveness ' quantitative measures: The recommendations aim to ensure that the tariffs set are attractive to investors, considering factors like ROI, risk, and project viability.
Assumptions:
- The global solar PV module prices will continue to decline, but at a slower pace.
- The financial stress in the sector will ease over time with improved project implementation and risk management.
- The government will continue to provide policy support for the solar PV sector.
6. Conclusion
A phased approach to solar PV tariff adjustments, combining market-driven mechanisms with strategic government interventions, is the most effective way to balance the need for a competitive and sustainable solar energy sector with the goal of achieving India's ambitious renewable energy targets. This approach will ensure that the solar PV sector continues to grow while providing affordable and reliable energy to consumers.
7. Discussion
Alternatives:
- Fixed tariffs: A fixed tariff system could provide greater certainty for developers, but it may stifle innovation and competition.
- Subsidies: Subsidies could be used to incentivize solar PV development, but they can be costly and lead to dependence on government support.
Risks:
- Market volatility: Fluctuations in global module prices and financial markets could impact the viability of solar PV projects.
- Policy uncertainty: Changes in government policy could create uncertainty for developers and hinder investment.
- Technological advancements: Rapid technological advancements could render existing projects obsolete.
Key assumptions:
- The government will continue to provide policy support for the solar PV sector.
- The global solar PV module prices will continue to decline, but at a slower pace.
- The financial stress in the sector will ease over time with improved project implementation and risk management.
8. Next Steps
- Develop a detailed implementation plan: Outline the specific steps and timelines for each phase of the tariff adjustment process.
- Engage stakeholders: Consult with solar PV developers, financial institutions, and other stakeholders to gather feedback and build consensus.
- Monitor progress: Regularly monitor the performance of the solar PV sector and adjust the tariff setting mechanism as needed.
By implementing these recommendations, the MNRE can ensure a sustainable and prosperous future for the solar PV sector in India, contributing significantly to the country's renewable energy goals.
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Case Description
On April 26, 2017, Suniva Incorporated, a Chinese-owned U.S. manufacturer of solar cells and panels, filed a Section 201 trade case seeking protection-specifically, temporary relief-from foreign manufacturers of crystalline silicon photovoltaic (CSPV) cells and modules. U.S. trade law permits the president of the United States to grant some form of temporary relief against foreign imports that are found to officially injure a domestic industry. The filing ignited a firestorm of controversy in the solar industry inside and outside of the U.S. The sought-after protection was opposed by many renewable energy interest groups, including most of the U.S. solar energy industry itself. Opponents believed that a tariff on CSPV cells and modules would cost more jobs than they would save and, even with import protection, there was no future for CSPV manufacturing in the U.S.
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