A case study on the use of renewable energy for telecom towers, adoption of which is likely to face several challenges
22-May-2015 •Anand Tandon
Telecom tower companies are the second largest consumer of diesel in India, second only to Indian Railways. The telecom tower industry has approximately 4,20,000 towers installed all over India. Of these, about 82 per cent are grid-connected and the rest are off-grid. Off-grid towers are typically powered by diesel gensets and batteries. Half the grid-connected towers suffer from power outages of over four hours per day. These too need power back-up.
Industry figures indicate that telecom towers consume over five billion litres of diesel in a year. Given the magnitude of diesel consumption and the resulting ten million tonnes of carbon emission, TRAI, the regulator for telecom companies, has recommended that at least 50 per cent of the towers located in urban regions and about a third of those located in rural areas be powered by renewable power. Despite this, towers that are actually powered by renewable energy (largely solar) are just about 1 per cent of the total population of towers.
Managing a network of telecom towers is no easy task. Towers are located at regular intervals over the entire region where wireless communication services are offered. Typically, telecom infrastructure companies divide their towers into smaller groups of 2,000-2,500 towers for ease of management. Each such group is handed over to an operation and maintenance (O&M) company. The O&M contractor is responsible for ensuring that towers and the related equipment are secure, generators are fuelled in a timely manner and things are generally working. A typical O&M player employs one operator per ten towers (depending on the distance between towers, this is the number in non-urban India) for maintenance, and one supervisor for every ten such operators. In other words, an O&M provider employs close to 300 people - most in `6,000-10,000 per month salary range.
Tower companies pay according to a cost-plus model, fuel price and manpower being the major costs. Diesel has to be procured and filled manually at each tower location. The incentive for an operator to overstate diesel consumption is extremely high. Even one litre of 'excess' diesel per tower per month can add 10 per cent to his take-home pay. Typically, tower companies are aware of this but have limited ability to eliminate this practice. It's apparent that solar power, with no fuel costs and low maintenance, could significantly value-add for tower companies. In theory, it could also reduce the number of people required in the O&M operation, bringing down both energy and manpower costs.
Capex costs - less of a deterrent
Conversion to solar power requires fresh capital expenditure. Balance sheets of tower companies are already loaded with debt. Setting up towers is capital intensive and for almost all towers, diesel gensets are already present as back-up. Creating a fresh back-up for solar power requires further capital investment.
There are financing solutions available for this. If a tower uses over eight hours of diesel per day, its blended cost of energy would exceed `12 per unit (assuming `6 as the price from the grid) on a variable-cost basis. On a fully loaded basis, it would be close to `20 or more. At this rate, investors would be happy to set up solar panels and accept payment on a per unit basis (investor rate of return would exceed 20 per cent at this rate), eliminating the need for tower companies to use their balance sheets. So why is there no rush to convert to solar energy?
Despite such a strong business case, conversion to solar power is sketchy at best.
Most towers in urban India are located on roof tops. This does not leave space for installing solar panels. New towers can be designed to carry panels on the tower. However, retrofitting to existing towers may not be possible. Where space is available, often landlords demand additional rent, which may make installation unviable.
In semi-urban and rural areas where there are ground-mounted towers, tower location plays a major role. Shadows due to surrounding buildings or foliage may not allow sufficient sunlight to fall on generating panels. Another problem peculiar to India is Vaastu. In parts of India where Vaastu is followed carefully, towers are typically placed in the south or south-west corner of the plot. This is also the best location for solar panels. This makes retrofitting of solar panels almost impossible.
Combined, this implies that potentially only about 10-15 per cent of existing tower locations can convert. New installations could be better designed, especially since they are mostly coming up in the remoter parts of India. But tower companies are focused on increasing 'tenants' on existing towers and not particularly keen on increasing tower density, given weaker business economics of new locations.
Another key constraint is interests of the parties involved. In a pay-per-use contract, the solar investor would want that solar power be used when it is being generated. However, with grid being cheaper than solar, tower companies do not want to commit to using it unless as a replacement to diesel. Using batteries to store power doubles the capital cost and makes it unviable.
Additionally, the O&M contractor sees no advantage with the solar solution since it takes away diesel and therefore reduces revenue from 'over-stated' diesel consumption. To align interest, the O&M contractor too has to benefit from solar conversion. This reduces attractiveness to both - the solar investor (who has to share proceeds with O&M player) and the tower company (that sees no benefit of a lower energy charge).
Last but no less important is an improving grid. As grid power availability improves, the cost of solar may well turn out to be high (lower diesel consumption would imply lower blended rate). Since solar returns are calculated over 15-20 years, the possibility that tower companies will find ways to wriggle out of buying costlier power - once they have an alternative - is a real danger. Solar investors, therefore, have to consider contract-default possibilities when pricing power.
Despite seemingly attractive business economics, adoption of renewable energy is likely to face several such challenges. Investors bidding up stocks in the renewable space would do well to consider these pitfalls.
Anand Tandon is an independent analyst.
This column appeared in the May 2015 issue of Wealth Insight.