The Case for Choosing a Rooftop Solar Plant over a Fixed Deposit Investment

Solar Rooftop Panel (Source: Google Images)

There’s no better time to broach this topic than on the side of COP27: United Nations Climate Conference. As part of its Net Zero obligations, India has promised to increase its total share of installed renewable power capacity to 50% by 2030. Currently, the majority of India’s power capacity comes from non-renewable sources of energy: coal dominates, with 57% share followed by renewables at 33%, natural gas at 7%, and both nuclear and oil at ~2% each.

The table below highlights the current capacity-mix and the targeted capacity-mix in 2030, by source. In order to achieve the targets set for 2030, India has to dramatically shift its power generating capacity to renewables, led by solar.

Source: Macq’s Big Book of Trends (Macquarie Capital Limited — January 2022)

Keeping in mind the targets in 2030, the Government had targeted to achieve 100GW of installed solar capacity by the end of 2022.

Where do Rooftop Solar Plants Fit into this?

Of the 100GW targeted solar capacity, the planned split between utility-scale solar projects and rooftop-solar projects was 60:40. It is estimated that India will fall short of achieving the 100GW target primarily because of lagging installation on the rooftop front.

Sources: Total (Ministry of New & Renewable Energy) | Rooftop Solar (Mercom India Rooftop Solar Market Report Q2 2022) | Utility-scale (Calculated)

Despite the efforts of the government to increase penetration of rooftop installations, customer interest and demand seems to be growing quite slowly (if one was to look at searches on google as evidence of interest and curiosity).

Google searches in India for “solar rooftop” for the last 5 years (Nov 2022)

Why has Rooftop Installation been Lagging?

• Low electricity tariffs: Historically, electricity prices for domestic users have been quite cheap, which has meant that investing in a rooftop solar plant would not have made economic sense.

INR per kWh across countries for domestic users (Source: A Granular Comparison of International Electricity Prices and Implications for India, CSEP, June 2022)

• Lack of awareness: Despite a lot of States across India hiking electricity prices and making an investment in solar rooftop plants viable, there is a lack of awareness of options at a consumer-level.
• Tedious process to avail of subsidies: If the consumer crosses the awareness barrier, the process to liaise with the local electricity boards and get the relevant subsidies, net-meter installation etc. is too tedious for the consumer to bother with. My parents set up a rooftop solar panel in the their house in the city of Hyderabad in March 2019. The net-meter (which gives the input units consumed and the output generated by the solar panel) was installed around the same time. But for the benefit of the net metering to kick-in it took 7–8 months, which meant a loss of ROI from my parents’ perspective.
• Lack of financing options: Lastly, investment into solar rooftop panels cost ~INR 50,000 (USD 620) per KW and the availability of, and awareness around financing options is very limited.

Making Sense of the ROI on Rooftop Panels

All of this learning and research leads me to the question I posed to my parents: has it made financial sense for them to set up that rooftop solar panel. I wanted to share my learnings from this conversation and give everyone else a simple framework for decision-making.

A little bit of background: my parents live in a 2700 sq. ft. house in Hyderabad which has a terrace that receives unobstructed sunlight through the day. They spent INR 1,50,000 on setting up the solar rooftop plant. Here is the math on actual savings (taken from their real electricity bills):

My parents save INR 16,500 per year because of the Solar Rooftop Plant — this will likely increase because of increasing electricity costs

How do they make sense of this savings number? They compared it to the interest they would’ve earned had they invested INR 1,50,000 in a fixed deposit. For them, the math is clearly in favour of installing the solar panel. The savings that it brings them on a yearly basis is more than the interest they would’ve received on a Fixed Deposit. This is true even after assuming a slightly higher rate of interest versus average and a lower tax rate.

If they had invested the INR 1,50,00 in a fixed deposit, they would receive INR 7,800 every year, which is less than the savings on electricity

Also, solar panels typically last 25 years, so once my parents breakeven (after 9 years), the panel still generates savings for the next 16 years.

Parting Thoughts

Since my parents put up their rooftop solar plant, electricity prices have increased (average of 14%) in their State and the cost of installation of the plant has gone down further (from ~INR 50,000 per KW to 40,000 per KW), making this investment even more attractive for someone today. A lot of states have also created an empanelled list of vendors to enable faster customer decision-making.

There are still a lot of problems as well: consumer awareness, upfront costs, liaising with the state electricity boards to install net metering, understanding the electricity bill generated every month (see an example below for the complexity):

Electricity Bill for my parents’ house in Hyderabad, India (June 2022)

All of these problems present opportunities in the solar space to build valuable companies in the decade to come. Whether you’re a customer, builder or investor in this space, would love to hear your thoughts on how India’s commitment to the renewables space plays out. Do reach out at visa@saisoncapital.com.