Solar for the MSME sector of India

Solar for the MSME sector of India

India’s substantial and sustained economic growth has led to an increase in demand for energy resources. In such a scenario, using alternate energy options, particularly renewable energy sources, is one of the most desirable ways to address demand increase in the short term, while diversifying energy infrastructure and improving energy security.

One of the strongest pillars of the Indian economy is the MSME sector. Over the past five years, the industry has grown steadily. In addition to producing 111 million employment, it contributed 29% of the nation’s GDP. Approximately 25% of the total energy used in the industrial sector is consumed by this sector, making it one of the top energy consumers in the economy. But among the most important elements affecting the MSME sector’s long-term profitability, competitiveness, and sustainability are erratic market circumstances and rising energy costs.

In response to this demand, the Indian government has put in place a number of laws and policies that support MSMEs in implementing energy-efficient procedures, less-polluting methods, and alternative energy sources.

The Ministry of New and Renewable Energy (MNRE) has allotted 40 GW for rooftop solar, which has experienced early uptake among C&I consumers, to help the country reach its lofty goal of 100 GW of solar energy capacity by 2022. To promote the expansion and uptake of grid-connected rooftop solar systems (RTS) across various consumer categories, more than 20 states have implemented specific solar policies and net/gross metering rules. The MSME sector is essential to lowering greenhouse gas emissions and advancing the nation’s renewable energy targets.

Things you need to know about MSMEs to understand how solar adoption can help them.

Ownership: More than 90% of the MSMEs own the properties/ buildings from where they run their companies. Therefore, ownership of the solar installation place is not an issue.  

Electrical load: Almost 50% of the MSMEs had a connected load in the range of 50−200 kW, while in most cases (~54%), the rooftop solar potential is less than 50% of the connected load. This implies that the entire solar generation can be fully absorbed in such MSMEs. The auto components and pharmaceuticals clusters had the maximum number of units with a connected load of more than 500 kW. This is primarily because these are well-developed clusters with a higher proportion of small- and mid-size units. 

Electricity cost as a percentage of operating expenses: Most SMEs spent either between 5% and 10% or between 10% and 20% of their operating income on electricity. The share of electricity in the overall operating expenses varied with the nature of the industry and the cost composition of other raw materials. 

Financing challenges: Most MSMEs cannot afford to take any loan from any bank to install the solar. This is because their plant and machinery are already committed to other term loans.

Barriers to scaling up rooftop solar in the MSME sector 

Technical challenges, lack of long-term business visibility, and lack of awareness emerged as the key barriers impeding the growth of rooftop solar among the surveyed MSMEs. MSMEs (especially micro and small) face challenges such as stringent collateral requirements, cumbersome documentation, and time-consuming loan processing procedures while raising funds to support CAPEX. 

Solar rooftop business models and financing instruments 

There are 2 models which are being used by the MSMEs and they are CAPEX and OPEX models. Let’s understand them.

The whole investment in the CAPEX model comes from power customers. Typically, clients hire a solar EPC company to do a turnkey installation of their entire solar power system and transfer ownership of the assets.

But with the OPEX model, users pay for the energy used or supplied by the solar power project while a renewable energy service company (RESCO) incurs capital costs. A long-term power purchase agreement (PPA) for a predetermined duration and price is signed by both the consumers and the developer. The decision between the CAPEX model and the OPEX model in the context of MSMEs is mostly based on the desire of the MSME units to invest capital in RTS, which is not their core activity. Due to the low adoption of the OPEX model and the few developers who do target the MSME market, MSMEs either deploy RTS using the CAPEX approach or do not adopt it at all.

MSMEs have different lending preferences and face varied challenges in financing their investments. Therefore, the design of financing instruments must take into consideration the requirements of different MSME segments, facilitating optimization in terms of the utilization of available resources and efficacy.

Why MSMEs should adopt solar and that too ASAP?

More than 200 manufacturing clusters that consume a lot of energy are located in India. MSMEs in India are thought to consume 50 million metric tonnes of oil annually. As a result, the adoption of clean energy measures by this largely disregarded industry could significantly reduce air pollution, slow down climate change, and boost the economy. China was able to save 11% on power between 2000 and 2014 thanks to improvements in energy efficiency. It also avoided 1.2 gigatons of carbon dioxide (CO2) emissions in 2014 alone, the equivalent of planting over 20 million trees over a ten-year period. These increases in energy efficiency and resulting reductions in air pollution were made feasible by required industry initiatives, a building remodel, and a consumption metering reform.

India has ambitious ambitions to boost renewable energy production and energy efficiency across a wide variety of infrastructure, including the grid and the building industry, to address air pollution. These renewable energy techniques haven’t been widely adopted in the MSME sector, though. A few significant causes include a lack of funding for investments in renewable resources like rooftop solar, as well as a lack of energy usage profiling and production process benchmarking.

So in simple terms, To make Indian Energy Independent, Reduce Pollution, and Reduce Coal Dependency, it’s very important for the MSMEs to adopt solar.

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