The experiences of Azure Power

Inderpeet Wadhwa became the first entrepreneur to supply electricity to a Village in north India, 40 km from Amritsar. On December 1st 2009, his first phase (1MW) of 2 MW solar PV plant went online to become the country’s first commercial MW scale solar power supplier.

For each unit of electricity pumped into the grid, his company, a lifeline for 20 villages, gets Rs 15 from the Punjab State Electricity Board, of which Rs 6 is borne by the MNRE. He says the average cost of generation, or levelized tariff, works out to Rs 9 per unit for the power purchase agreement (PPA) period of 30 years.

Background

In 2007, he started on his vision to set up India’s first private solar power plant. Total investment was 40 crores and Azure Power received initial venture capital funding from Helion Ventures (an India-focused venture fund) and Foundation Capital (a global investment fund which focuses on start-ups).

Azure started building in May 2009 and took less than 6 months to start generating 1 megawatt of power.

Problems Faced and Lessons Learned

“Had the quality been better and cost of modules manufactured in India been lower, we would have considered buying the solar PV modules from India itself,” rues Wadhwa.

When he set out to acquire land amid the region’s wheat and rice fields, he quickly ran into a thicket of bureaucratic problems. Getting money to build India’s largest private solar-power plant was easy compared with getting the required 152 signatures from local bureaucrats in the state of Punjab, says Wadhwa. He had to negotiate terms of a 32-year lease with various village and district officials, then with several more officials in the state’s rural land ministry. It took months and, “the price kept going up at every level,” Mr. Wadhwa said. He also needed sign-offs from the state pollution board and even the railways ministry, which had to approve his request to run a power cable under the local tracks. When the project stalled in various government offices, shadowy brokers offered to help speed up the process for a fee, but Mr. Wadhwa says he refused to pay.

Making a profit on the project could prove even tougher. A total investment of Rs. 19 crores has gone into commissioning the 1 MW output.

After all the installation costs — including importing Chinese-made solar panels and American-made cables — Azure needs much more than the 19 cents per unit of power that the Punjab state utility has pledged to pay.

Besides, the Punjab government is offering a peak rate (peak hours are billed at higher rates) for sale of power from solar projects at Rs 8.93 per kWh (kilowatt-hour) from 2011-12, higher than the Rs 3 to 4 per kWh it pays for conventional energy.

This doesn’t quite cover costs (Rs 12-20 per kWh) but because the power purchase agreement with Punjab is valid for 25 years, Wadhwa reckons he’ll make money at some point since the costs of solar power generation are expected to decline at 7 to 9 per cent per year by 2020. Hence, Azure Power gets the benefit of reduced costs over time and it also does not have to look out for buyers during this period.

Future Plan

He is scaling up the plant’s capacity to 2 MW to feed more villages. He has planned similar projects totaling 24 MW in Gujarat, Punjab, Karnataka and Haryana.

By September 2010, Wadhwa plans to set up another plant in Punjab to take the capacity to 4 MW. He also plans to set up an 8 MW plant in Gujarat by the end of financial year 2009-10. To finance these plants, he has two more investors lined up. One is the International Finance Corporation, the commercial lending arm of the World Bank, which is planning to make a quasi-equity investment of $10 million (around Rs 46 crores — Rs 460 million) in upcoming solar power projects in Punjab and Gujarat.

“The debt to equity ratio is 2:1, so we expect to raise a total of around Rs 150 crores (Rs 1.50 billion) in the form of stake sale and bonds,” says Wadhwa. He, however, declines to divulge the name of the other investor.

And how does he plan to raise the rest of the money? “Ongoing costs for these plants are minimal. Every proposed plant will generate money that can be ploughed back. Besides, we can always go for an initial public offering (IPO),” says Wadhwa.

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