Pumped Up: Deep Dive into the increasing uptake of solar pumps in the country

The past one year has seen launch of several state schemes alongside the announcement of the flagship KUSUM (Kisan Urja Suraksa evam Utthan Mahabhiyan) scheme of the central government. The large-scale procurement by the state governments has witnessed aggressive bidding by the suppliers leading to significant reduction in the quoted price of solar pumps. So far, the growth has been driven by government subsidies, ranging from 30-95%. While KUSUM also offers a total subsidy of 60%, it is yet to be seen how it will be streamlined with the existing state schemes. For successful implementation of the scheme, it will be crucial that financial and business interventions are designed accordingly so as to deliver on the targets and catalyze the opportunity presented by the scheme.

Context

With basic energy access almost in place, the focus of government has now shifted to mainstreaming renewable energy for productive uses such as irrigation. Even though the efforts to integrate solar power and agriculture was initiated in 1992 with the launch of solar pumping programme by the government, it’s only recently that this segment has been witnessing a transformation. Between 1992 to 2014, nearly 14,000 solar pumps have been installed in the country. Meanwhile, 165,385 solar pumps have been deployed in three years between 2014-2017. While the increase has been significant, the off-take has been slow compared to the target of one million solar pumps by FY 2021. In the past year, however, the solar pump segment has been at the forefront of discussion with the Central government rolling out the ambitious KUSUM scheme. Meanwhile, even before the commencement of the scheme, several states such as Rajasthan, Maharashtra, Tamil Nadu and Andhra Pradesh have floated tenders for solar pumps – even as these have seen aggressive bidding by private players, it is crucial to understand the implementation process and interplay with the funds allocation from the government, extent of increase in orders for private players and the financial impacts of the same.

Recent market trends

During 2017-18, 62,133 pumps were installed in the country with an aggregate of 10,381 solar pumps installed in the states of Rajasthan, Maharashtra and Andhra Pradesh. Within a span of a year, these three states have cumulatively floated tender for 96,500 solar pumps.

State tenders during 2018-19 outperform total cumulative installations across states

*Based on discussion

Maharashtra

After discontinuing the solar agriculture pump scheme in 2016 due to affordability issues and instead opting for feeder-based solar energy scheme, Maharashtra again announced its ambitious plans to install 100,000 solar pumps for off-grid regions in three years from FY 2018-19 to FY 2020-21 under Mukhyamantri saur krushi pump Yojana.

The scheme, which has a total project cost of INR 34.35 billion, is being implemented by Maharashtra State Electricity Distribution Company Limited (MSEDCL) with the aim to provide day-time power availability for agriculture pumping and to decouple irrigation sector from power subsidy burden. The state government is also providing two LED bulbs, a DC fan and a mobile charging socket for charging, as part of this scheme to further incentivize the farmers to use solar pumps. Under the scheme, the beneficiary share of the total cost is 5% for SC/ST farmers and 10% for the general category farmers. The scheme will be implemented in three phases, where 25,000 solar pumps would be installed in the first phase, 50,000 solar pumps are to be expected in the second phase and remaining in the third phase. So far, the Maharashtra State Electricity Distribution Company (MSEDCL) i.e. the implementing agency for the programme has released a tender for the first and second phase and the discovered price of the solar pump under the first phase is INR 2,25,000. In order to meet the fund requirements, the government will provide subsidy of 10% to the farmers. To meet the balance requirement, the government will levy cess of INR 0.10 per unit on commercial and industrial consumers, to finance 80% of the amount for general category consumers. MSEDCL’s aggregate sales to commercial and industrial consumers during FY2018-19 and FY 2019-20 is estimated to be 86.6 BUs¹, which translates into INR 8.66 over the next two years i.e. financing of INR 0.36 billion monthly.

Further, the government also aims to provide 7,000 solar pumps under the central government scheme, Atal Solar Krushi Yojana-2 (AKSP) wherein 1575 pumps are reserved for SC/ST consumers. The scheme is being implemented by Maharashtra Energy Development agency (MEDA) under a central scheme and has a total budget outlay of INR 2.39 billion. The central government will bear 20% of the financing i.e. it will provide INR 502 million of the total cost, meanwhile the state government will provide 5% share of the grants i.e. INR 120 million and the beneficiaries will bear an aggregate amount of INR 105 million. The remaining amount of INR 1.67 billion will be raised from funds available with MEDA and from additional power sales tax.²

Rajasthan

Rajasthan is the leading state in solar pump installations in the country, accounting for nearly 30% of total solar pumps in India. The state is blessed with a solar insolation of 6-7 kWh/m2/day with around 325 sunny days in a year, thus making it suitable for harnessing solar energy, especially for irrigation purposes. This is primarily because extension of electric grid is not feasible in far-flung areas given that almost 70% of the area is classified as desert³. Even where there is accessibility of grid, the average hours of supply to agricultural consumers is 6.5 hours a day, as per data released by CEA⁴.

The state’s horticulture department led the momentum in adoption of solar pumps in 2011-12 by offering a subsidy of 86% driven by clubbing subsidies available under various programmes such as Rashtriya Krishi Vikas Yojana (RKVY), National Horticulture Mission’s (NHM) water harvesting structures scheme. However, in the state budget for 2018-19, the total subsidy provided by the government is capped at 60% and an additional 15% subsidy is offered to farmers who are willing to surrender their agricultural connection for a solar pump. Further, solar water pumping systems are provided to farmers using drip irrigation system and having water storage facility i.e. farmers use solar pumps for distribution of water from diggi (which stores canal and rainwater) with no impact on groundwater extraction.⁵ Thus, solar pumps have proven to be a boon for this water constrained and solar abundant region by improving water and energy access to farmers.

The state’s horticulture department installed a total of 187 solar pumps during 2017-18 (as of December 31, 2018) and has reportedly floated a tender for 11,500 solar pumps in 2018-19.

Andhra Pradesh

The government of Andhra Pradesh is also taking up the solar pumpsets programme in a big way in the State through New & Renewable Energy Development Corporation of Andhra Pradesh Limited (NREDCAP). As of December 31, 2018, the state government has installed 19,526 pumpsets mainly covering the small and marginal, SC/ST & NTR Jalasiri farmers (8,275) by spending around INR 400 crore^6. As per state budget of 2018-19, the state Government will provide 54% of cost of the pumpset as subsidy and the central government will arrange for 30% as central financial assistance. Thus, the farmers contribution would only be 16%. The state provides subsidy either through the discoms wherein 50% of the unit cost is funded by discom (in which case the ownership lies of the pumps is lies with discom) or using funds from fisheries and agricultural department, in which case the farmer owns the pump.

The State Government is planning to install 100,000 solar pump sets in the year 2018-19 with an estimated subsidy amount of INR 75,000 per pump given a per unit cost of INR 240,000 i.e. an aggregate subsidy amount of INR 23 billion. So far NREDCAP has floated tenders for 25,000 solar pumps and Eastern Power Distribution Company of Andhra Pradesh (APEPDCL) has floated tenders for 10,000 solar pumps. Under the tender floated for 25,000 solar pumping systems, 20,000 will be AC powered while 5,000 will be equipped with a DC motor. 

Financial implications

The large-scale procurement of solar pumps by the government has observed a decline in quoted prices of the solar pumps. There has been an increase in the numbers of bidders with around 20 suppliers participating in a tender. The volumes combined with the aggressive bidding by suppliers of solar pumps, such as Shakti Pumps, Premier Solar Solutions as well as the emergence of new players such as Ravindra energy; and penetration of low-quality pumps in the market has led to a decline in the price for a 5 HP DC pump from INR 4.2 lakhs to INR 2.4 lakhs within a span of one year. Even though the reduction in price help reduce the burden on the beneficiary, the volume entails significant implication for the suppliers of these pumps.

While the key players have strong system integration capabilities, the increasing quantum in the tenders based on government subsidies entails significant working capital loans for the suppliers, who are responsible for system installation and maintenance. In essence, there is expected to be a requirement for bridge financing/working capital loans from financial institutions so that the suppliers can manage their cash flows in case of delay in subsidy disbursals. In addition, the government can also help set up a payment security facility to provide security to the financiers/lenders. The deployment of solar pumps will also be dependent on availability of end-user financing for this segment, which has been limited to RRBs and a few commercial banks that have recently shown interest in this space. Therefore, there is a need to design appropriate instruments and adopt suitable business models to drive the uptake of solar pumps in the country and catalyze the opportunity in the solar pumps segment.