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Data Collection and Analysis

Discuss about the Solar Panel Business Project.

The general aim of this project is to evaluate the business of manufacturing of and trading in solar energy panels. Specific objectives  included: to undertake a comparative review of the nature of the solar power business in India and Australia, to evaluate the future growth and potential of the solar power business in India, to evaluate the political and legal factors which affect the solar power business, and to evaluate the importance of solar power business in the rural areas.

The study made use of both primary and secondary data sources.  Secondary sources were used to generate quantitative data touching on: required investment, expected rate of return, capital structure types and financing methods for solar businesses. Financial and accounting techniques was used to analyse the capital structure (debt to equity ratio), and rate of return (return on investment or ROI).

Secondary data was also collected for the political and legal aspects of the solar panel business, and analysed using the content analysis method. Data related to the importance of solar panel was based on the attitudes of the consumers. This was collected using primary methods, and specifically the survey method.  Structured questionnaires, designed around the 5-point likert scale, will be administered to a sample of 100 solar power consumers selected through the simple random sampling method, and the responses was evaluated using both descriptive statistics and the linear regression method. The findings indicate that the solar power business will yield positive ROIs for both India and Australia, but the returns are likely to be potentially higher in Australia than in India. Therefore, it is recommended that Australia offers the best investment arena for solar power business

To successfully answer the posited research questions and meet the research objectives, secondary and primary data were collected by the researcher. Analysis of the collected data was carried out, on the basis of which the requisite conclusions were derived. The findings made and the analysis done thereof are presented in this chapter.

One of the main questions here was to provide reliable estimates on the quantum of investments required to establish a solar power business in India. Latest estimates from the Central Electricity Regulatory Commission were considered, and the investment breakdown for the typical solar power business (per megawatt) is presented in the table 3.1 below:

Item

Cost (Rs. lakhs/MW)

Percentage of overall cost

Solar PVs

310.19

62%

Land

25

5%

Civil and general works

35

7%

Structural works

35

7%

Unit for power conditioning (PCU)

30

6%

Solar power evacuation costs

40

8%

Preliminary and contingency costs

26.13

5%

TOTAL INVESTMENT OUTLAY REQUIRED

501.32

100%

Source: Irena (2016)

It was also found that capital structure refers to the mix of debt and equity which the solar power business can use to finance their assets (Faccio and  Xu 2015). It may consist of debt, equity, or retained earnings or a mix of these three. Since debt is typically cheaper than equity, use of more debt should be considered since it is likely to reduce the firm’s weighted average cost of capital (WACC) and therefore increase the value of the business (Robb and Robinson 2012). Moreover, use of debt helps to generate tax shield savings for the solar business firms (i.e. interest payments are tax deductible) and should therefore be encouraged. This is aligned with a number of capital structure theories, including the net income and Miller &Modigliani (MM2) theories (Awan, Rashid and  Zia-ur-Rehman 2011).

Solar Power Business in India and Australia

However, high levels of debt may lead to bankruptcy or generate high distress costs for the businesses (Fan, Titman and Twite 2012). Therefore, in line with the trade-off theory, the solar business firms ought to find an optimal structure which maximises on the benefits of using debt, while minimising on the negative effects of using debt (DeAngelo, DeAngelo and  Whited 2011). The average proportions of debt and equity in the solar power business’ capital structure were found to be 75:25 for India while the debt to equity ratio for Australia was found to be 4:1.

The various options available to finance the capital structure of the solar power business are summarised in table 3.2 below:

DEBT

EQUITY

RETAINED EARNINGS

Debentures

Ordinary shares

Bonds

Preference shares (including cumulative and redeemable preference shares)

Loans

Redeemable shares

Warrants

Source:

Document analysis showed that the Indian government generally had supportive policies and frameworks which played an instrumental role in enhancing the expansion of the solar power business in India.

Under the “National Solar Mission” framework, document analysis has shown that the Indian government has stimulated the growth and expansion of solar energy through: offering solar power businesses a raft of tax exemptions, and offering attractive subsidies to solar power businesses (Mnre.gov, 2016). For instance, solar power businesses are allowed to import PV cells on an import-tax free basis.

Other policies are focussed on offering incentives targeted at solar power generation and include depreciated income tax benefits of up to 80%. Policies supporting grid-based power allow solar power projects to attract up to 90% subsidy financing.  These have reduced the costs for solar power businesses and also helped to provide capital for the business, thus ensuring the development and growth of these businesses. Similarly, document analysis showed that the legal framework in India had been configured to encourage the expansion of the solar power business in India. This legal framework comprised of the Electricity Act, 2003as well as the Energy Conservation Act, 2001(Ministry of Law & Justice 2016).

Attitudes related to the importance of solar power business in India were solicited from a sample of 100 consumers of solar energy in the country. 73 responses (representing a survey response rate of 73%) were obtained, and the findings are captured in table 3.3 below: 

Research Question

Number of respondents

YES

NO

Has the solar power business aided the growth of rural areas?

51 (69.9%)

22 (30.1%)

Does this business help in generating employment opportunities for the people?

53 (72.6%)

20 (27.4%)

Has this framework helped in the overall development of the rural areas in both monetary and non-monetary terms?

46 (63%)

27 (37%)

Source: author 

Table 3.3 demonstrates that the majority of the rural dwellers were in agreement that the solar power business was important, insofar as it helped to stimulate growth in the rural areas, generate job opportunities for them, and facilitated monetary and non-monetary growth and development of the rural areas (EAI 2016). 

Political and Legal Aspects of the Solar Power Business

The findings and analyses presented in the chapter demonstrate that the average investment per MW for the solar power business in India is 5 crores while that in Australia is 9 crores. Rate of return analysis using the ROI as the key metric shows that the solar power business is viable (i.e. positive annual as well as lifetime ROI). The average proportions of debt and equity in the solar power business’ capital structure were found to be 75:25 for India while the debt to equity ratio for Australia was found to be 4:1. The political and legal environment was also found to be favourable for the solar power business, with the majority of solar power consumers in rural areas in agreement that the solar power business was important, insofar as it helped to stimulate growth in the rural areas, generate job opportunities for them, and facilitated monetary and non-monetary growth and development of the rural areas.

These findings align to the initial hypothesis that solar panel industry in India is still in an infancy stage and a lot many things are still to be discovered. As the table 3.1 shows, a single megawatt of solar power in India would require an investment of 501.32 lakhs (or 5 crore). This translates to 835,533.3 US dollars per megawatt of solar power, and compares favourably with the cost estimate of 4-6 crores given by CFD in the literature review. PV modules account for the bulk of the investment cost (up to 62%) of setting up a solar power business in India.

Based on a similar breakdown of investment costs captured in table CSW above, however, it was found that the per MW cost of investing in a solar power business in Australia was much higher compared to India, with VDE giving investment cost estimates of 8-10 crores.

With the initial investment costs known, it was possible to compute the expected rate of return for the solar power business in both India and Australia. The expected rate of return can be computed using the return on investment (ROI) metric (Lloret Romero 2011), which by definition is captured by the formula:

ROI = (gain from investment – investment cost)/investment cost

Assuming optimum conditions (i.e. maximum number of sunny days possible in both countries), air mass, irradiation, temperature, and operation and maintenance activities, it was projected, in line with Efficient Carbon (2016) estimates, that each megawatt of installed solar power will generate 1.5 million units per megawatt each year.

Importance of Solar Power Business to Rural Areas

According to Sharma (2016), solar tariffs in India stand at 5 Rupees per unit. Therefore, each MW generated by a solar power business in India is expected to yield annual revenues of 7,500,000 Rs (or 0.75 crore) (i.e. 1.5m multiplied by Rs 5). The typical solar power module/plant has a useful life of 25 years, and will therefore generate lifetime revenues of 18.75 crore (i.e. 0.75 multiplied by 25).

According to Efficient Carbon, average operating and maintenance costs as pegged by the Central Electricity Regulatory Commission were Rs.12.3 lakhs/year/MW for 2014-15. Assuming this shall remain constant over the project’s useful life, total O&M costs will be 3.075 crore (i.e. 12.3 lakhs multiplied by 25, and then converted into crores at the rate of 1 crore = 100 lakh).

The difference between the revenues generated and the O&M costs represent the gain from the investment, that is: 0.75-0.123 crores per year or 0.627 crores annually. Over 25 years, the gain will be 18.75 – 3.075 = 15.675 crores.

Accordingly, this yields a lifetime ROI for the solar business in India of: (15.675-5)/5 = 213.5% or 8.52% every year. This is lower than the 15% rate of return projected by SAW.

Replicating the same calculations for Australia will yield the ROI for the solar power business in Australia. Electricity cost in Australia averages 27.5 cents per kilowatt-hour (Brakels 2013).  This generates total annual revenues of $412, 500 or lifetime revenues of $10,312,500.  O&M costs were found to range between $18 and $20 over the solar power business’ lifetime (average of $19) (Arena 2016).

Over 25 years, the gain will be $10,312,500 - $19 = $10,312,481 (i.e. 524,118, 600.45 rupees or 52.41 crores).  Accordingly, this yields a lifetime ROI for the solar business in India of: (52.41-9)/9 = 482.3% or 19.292% every year. This compares to the average rate of return of 16% earned by Australian solar power firms over the last three years, as per BGF.

From the calculations, it is evident that the solar power business will yield positive ROIs for both India and Australia, but the returns are likely to be potentially higher in Australia than in India. Therefore, it is recommended that Australia offers the best investment arena for solar power business. 

Conclusion and Future Work – 1page

Conclusion

The research sought to evaluate the business of manufacturing of and trading in solar energy panels, with specific objectives including: to undertake a comparative review of solar power business in India and Australia, to evaluate the future growth and potential of the solar power business in India, to evaluate the political and legal factors which affect the solar power business, and to evaluate the importance of solar power business in the rural areas.

Summary of Data Collection and Analysis

The research findings indicate that average investment per MW for the solar power business in India is 5 crores while that in Australia is 9 crores. Solar power business in both countries are viable (have positive ROI), with average proportions of debt and equity in the solar power being 75:25 for India and the debt to equity ratio for Australia was found to be 4:1. The political and legal environment was also found to be favourable for the solar power business, with the majority of solar power consumers in rural areas in agreement that the solar power business was important, insofar as it helped to stimulate growth in the rural areas, generate job opportunities for them, and facilitated monetary and non-monetary growth and development of the rural areas.

Even though the research findings presented in this study have a high degree of reliability and validity, a number of limitations have exist, which future studies need to improve on. Firstly, the calculation of the rate of return has been done based on the assumption of constant solar tariffs. In reality, the historical trends have been such that solar tariffs have been declining. This is likely to continue into the future, as the cost of solar energy becomes cheaper due to factors such as technological improvements. Secondly, the calculation has also been based on the assumption of constant O&M costs. In reality, due to factors such as inflation, these costs are likely to increase (Efficient Carbon). These assumptions have significant repercussions on the ROI, O&M, and other components used to assess the viability of the solar power business, given that solar projects have an average lifespan of 25 years. Consequently, to get more precise estimates, it is proposed that future studies incorporate the time-varying effects of tax, inflation, and changing tariffs in their calculations (Solleder 2013). Moreover, the calculations made have been based on assumptions of optima conditions regarding the number of sunny days, air mass, irradiation, temperature, and operation and maintenance activities. More accurate calculations can be made by considering the actual conditions in both India and Australia, and future studies should look into this.

The Reference List

APVI 2016, PV in Australia 2014 - APVI. [Available from: https://apvi.org.au/wp-content/uploads/2015/09/PV-in-Australia-2014.pdf [ 16 October 2016].

Awan, TN, Rashid, M &  Zia-ur-Rehman, M 2011, ‘Analysis of the determinants of Capital Structure in sugar and allied industry’, International Journal of Business and Social Science, Vol.2, no.1.

DeAngelo, H, DeAngelo, L &  Whited, TM 2011,‘Capital structure dynamics and transitory debt’,  Journal of Financial Economics, Vol.99, no.2, pp.235-261.

EAI 2016, Central and State Government Solar Policies - EAI.in. Available from: https://www.eai.in/ref/ae/sol/policies.html [16 October 2016].

Efficient Carbon 2016, Frequently Asked Questions on Solar Power, Available from: https://efficientcarbon.com/services/energy/renewable-energy-advisory/frequently-asked-questions [16 October 2016].

Faccio, M &  Xu, J. (2015) ‘Taxes and capital structure’, Journal of Financial and Quantitative Analysis, Vol.50, no.03, pp.277-300.

Fan, JP, Titman, S & Twite, G 2012) ‘An international comparison of capital structure and debt maturity choices’, Journal of Financial and quantitative Analysis, Vol.47, no.01, pp.23-56.

Irena 2016, Renewable Energy Technologies: Cost Analysis Series, Available from: https://www.irena.org/documentdownloads/publications/re_technologies_cost_analysis-csp.pdf [16 October 2016].

Lloret Romero, N 2011, ‘ROI. Measuring the social media return on investment in a library’, The Bottom Line, Vol.24, no.2, pp.145-151.

Ministry of Law & Justice(2016) The Energy Conservation Act, 2001 - Ministry of Law & Justice. Available from: https://lawmin.nic.in/ld/P-ACT/2001/The%20Energy%20Conservation%20Act,%202001.pdf [16 October 2016].

Mnre.gov 2016,  Ministry of New and Renewable Energy - Scheme / Documents.  Mnre.gov.in. Available from: https://www.mnre.gov.in/solar-mission/jnnsm/introduction-2/ [16 October 2016].

Robb, AM &  Robinson, DT 2012, ‘The capital structure decisions of new firms’, Review of Financial Studies, p. hhs072.

Sharma, S 2016, Will low solar tariffs hurt India’s sunrise sector? Available from: https://www.livemint.com/Industry/JiaWUtobFnSpiKhmx5P2fI/Will-low-solar-tariffs-hurt-Indias-sunrise-sector.html [16 October 2016].

Solleder, O 2013, ‘Trade effects of export taxes’, Graduate Institute of International and Development Studies Working Paper, no.08.

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