Cost reductions of India’s solar revolution should serve as a warning to coal investors

This week solar PV prices in India dropped to a historic low, with project developer ACME Solar Holdings securing US$38/MWh for 200 MW of capacity. This blog explores what low cost solar PV means for India’s power generation investment dynamics and those investors who are betting on increased thermal coal demand from non-OECD Asia. 

The investment dynamics of power generation can be broadly categorised two ways: new and existing. 

A common but limited metrici to understand new power generation investments is through the levelised cost of energy (LCOE). Power generation technologies with the lowest LCOE are generally considered more competitive than those with higher LCOEs. As we highlighted in ‘End of the load for coal and gas‘, the LCOE of onshore wind and solar PV are on average already lower than fossil generation. The latest solar PV auction in India confirms this reality. According to the International Renewable Energy Agency, the lowest solar PV tariff price in 2017 is cheaper than the National Thermal Power Corporation average coal tariff. 

But what about existing coal generation? In the absence of out-of-market incentives, the LCOE of solar PV will need to get as low as the cash cost of the existing coal capacity to completely overwhelm the economics of coal-fired generation. Making new solar PV investments compete with the cash cost of existing coal capacity is an entirely different proposition to new coal investments. Nevertheless, solar PV in India is making significant inroads. Remarkably, solar PV tariff prices in India have declined nearly 80% since 2011. This price decline means solar PV is no longer just a threat to new coal investments. Indeed, over 60 GW of India’s existing coal capacity may now have a higher cash cost than the lowest solar PV tariff in 2017. 

From nothing to something: The cash cost of existing coal versus lowest solar tariffs in 2011 and 2017 


Carbon Tracker analysis. The cash cost includes fuel and O&M (operation and maintenance) costs. IRENA provided the solar PV tariff data point for 2011. 

This changing investment dynamic comes as the Indian government announced it aims to stop importing thermal coal for its state-owned power generators by 2018. According to the government, this could reduce the country’s import bill by around US$2.6 billion per year. 

It is import ant to note India is not on track to meet the Modi plan’s ambitious solar PV target of 175 GW by 2022. Going forward, India will need to make the necessary grid investments to help maximise the value of low cost renewables and meet the ambitious capacity target in the Modi plan. 

Nonetheless, as foreign investors become more comfortable with deploying capital, industries will develop and the cost of capital for renewables will fall in other emerging markets. This dynamic will likely drive similar solar PV cost reductions in the thermal coal industry’s last major growth market: Southeast Asia. 

As new renewable investments increasingly outcompete existing coal capacity, the thermal coal supply chain will start to break down, causing a potentially harmful ripple effect for those investors overexposed to the seaborne coal market. The remarkable cost reductions of India’s solar revolution should serve as a warning to those investors.

Matthew Gray, Senior Analyst, Power & Utilities

Carbon Tracker Initiative

[i] LCOE should not be the only metric used to compare the economic attractiveness of different power sources. Other operating, economic, and policy assumptions are important, as detailed in End of the load.