See, Spot, Run: How Solar Overcapacity Is Stinging The Spot Power Market
Indian power companies were preparing for a heat wave. Early showers changed the dynamics.
The idea of May, which brought extremely early showers, crashed the spot electricity market on the exchanges. As India switched off ACs and power loads eased, sell bids rose exponentially, and buyers dwindled, and the electricity unit price slipped to zero. This is as low as merchant or spot power prices have seen during summer.
As much as 8,000 megawatts—that’s how much electricity a state like Karnataka needs during daytime—is available for under Rs 1 on the exchanges, with few or no takers. The great mismatch between supply and demand occurred due to fluctuating weather patterns.
“We expected the summer to be very hot. The government issued instructions a month back that summer is going to be severe, and we need to be prepared. From April, most distribution companies booked for all their deficits for May, June at very high prices ranging from Rs 7-10. That is one of the reasons, again, a lot of surplus is left. Now, if you look at the load scenario, we see a 10-20% drop across all the regions,” said Victor Vanya, co-founder of EMA Solutions, which offers predictive analytics & solutions for energy markets.
In India, most distribution companies tie up with power generators via long-term power purchase agreements (PPAs) for their base load requirements. For the peak load, they go by predictions and tie-up power closer to the months or buy excess needs via short-term trades. Similarly, generators tie up most of their production via long-term PPAs, but also sell a certain amount of power generated as merchant power on the exchanges.
As power dynamics shifted this May, it’s not just power producers but distributors are also offloading excess power they had purchased onto the exchanges, leading to desperate sales, crashing the prices.
“Ten days back, we had around 3,000 megawatts of capacity, which is mostly hydro, wind and solar, which we cannot back down and have to be sold on the exchange. Now, we have around 8,000 megawatts of sell bids on the exchange that are ready to sell below ₹1/unit,” explained Vanya.
Solar Shining Too Bright?
All power producers had been preparing for a hot summer — thermal producers have stocked over a month’s coal to step up production in case of excess power needs.
However, most of the burden of the excess power sold on exchanges comes from renewable power. In May, hydro and wind power producers increased generation. But solar is where analysts have been flagging off excess power supply that’s leading to softness in spot prices.
While spot prices during solar hours plummeted, non-solar peak hours grazed Rs 10/unit, said an SBI Caps report, showing an ‘unprecedented bifurcation’ in the spot market.
“We had flagged the risk of ‘Solar Maximum’, expecting that the grid would run out of space to assimilate incremental solar capacity during sunlight hours, increasing ‘curtailments’. It seems our thesis is playing out sooner than expected, and the spot market is providing corroborating ‘price signals’. We believe 18GW (20% of installed solar capacity) was curtailed on May 25, on account of low weekend demand,” says a research report by financial services group IIFL Ltd.
It does not seem like a temporary impact either. “The average spot power tariffs in the day ahead market of the Indian Energy Exchange moderated to Rs 4.4 per unit in FY25 from Rs 5.2 per unit in FY24, given the slowdown in demand growth and higher capacity,” says a recent report by ratings firm ICRA.
A Cascading Effect On RE Value Chain
This is bad news for renewable energy producers who have been adding capacity at breakneck speed. ICRA expects the generation capacity addition to reach an all-time high of around 44 GW in FY26, even as 34 GW was added in FY25.
The overall installed power generation capacity is expected to reach 520 GW by March 2026. While thermal is expected to add 9-10 GW in FY26, the balance is largely expected to be contributed by renewables.
However, being forced to cut down generation on their installed capacity might be a dampener for renewables. Analysts say that curtailments can have a cascading effect on the value chain of producers, solar and wind equipment makers, construction companies, as well as their financiers.
“Power prices going below ₹1/unit in the summer season is a very negative signal, for solar generation as well as investment. Experts in the sector already know that there's a lot of solar overcapacity being built,” adds Vanya.
Germany, California’s Solar Excess
India is not the only country to face the ‘solar excess’ effect. Germany, too, has been facing excess production during daytime hours, leading to power prices falling even into the negative zone. California, too, has faced the same issue. Like most other nations, solar capacity has a 2.0 stage, which necessitates battery resources to grow to handle it.
“The government is also asking new solar projects to include storage as a part of the project,” said Girishkumar Kadam, group head & senior VP of corporate ratings at ICRA, in a recent webinar. In FY25, the government reduced pure solar tenders in FY25 itself.
Currently, a lot of solar power plants prefer to sell daytime units generated instead of storing them. “Despite over 150 GWh of BESS (Battery Energy Storage System) tenders being floated to date, only a negligible portion has reached completion. Achieving the ambitious target of 230 GWh of BESS by FY32 necessitates a substantial increase in tendering activity,” said investment banking firm SBI Capital Markets Ltd.
As India’s rapid addition of renewable systems has reached a stage of maturity, there needs to be a strategic shift to batteries, which can aid and further the country’s transition to cleaner fuels.
