Month: March 2012

BRIDGE TO INDIA’s quarterly report on the Indian solar market analyzes policy, projects, industry and financing; the key drivers of this market. The latest edition of the quarterly, explores the telecom tower segment as a significant opportunity that will emerge in the market in the coming 5 years.

In the April issue, we’re looking at:

The last quarter has seen PV projects under both, the National Solar Mission (NSM) and the Gujarat solar policy being commissioned, taking the current total installed capacity of PV in India to 540.4MW. This is the largest PV capacity addition in any quarter in the Indian market so far.

A majority of the projects have managed to complete only after being delayed beyond the deadlines under the respective solar policies.

Commissioning projects has been a challenge in an industry that is yet to gain easy access to project financing.

Developers have further had to deal with tough execution challenges to complete their projects.

The Indian PV manufacturing industry is in dire straits at the moment, running their plants well below capacity due to dwindling orders. None the less, some Indian manufacturers are investing in integrating across the value chain and expanding current production capacity.

Given the continuing fall in solar tariffs, developers are increasingly seeing the Feed-in-Tariff (FiT) segment as being unviable and exploring project opportunities outside this segment.

For the telecom tower segment as well, solar is well positioned to replace diesel generated power which can cost as high as INR25 (EURO0.38)/kWh depending on the location of the telecom tower.

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Andhra Pradesh receives some of the highest irradiation in India. The state has significant renewable purchase obligations (RPO) stemming from its high power demand. In addition, Andhra Pradesh has India’s best performing state power utility (State Electricity Board, SEB). So far, the state has no solar policy in place but it has nevertheless signed a contract for a 100 MW solar power plant with Welspun Ltd.

Andhra Pradesh receives a global horizontal irradiation (GHI) of 1,900 – 2,000 KWh/m2/Year. This is among the highest values in the country after Rajasthan, Gujarat and Tamil Nadu. On further technical parameters, the grid infrastructure in the state is strong with AT&C losses (~16%) significantly lower than the national average (~27%).  Good intra-state power evacuation grids directly translate into good opportunities in grid-tied systems. In addition, there are large infrastructure projects planned to improve inter-state grid connectivity of the state.

Andhra Pradesh has a significant total solar RPO requirement of 551MW until 2016. Solar projects worth 100 MW have already been allocated or are in the process of allocation to meet these obligations. However, there are doubts over the timely implementation of RPO. Policy implementation for the RPO is expected to meet reconsideration requests in absence of availability of options to meet these obligations (lack of enough renewable energy certificates in the country, for example). Therefore, the feasibility of setting up solar plants to meet RPO in the long run is questionable. Notwithstanding these arguments, the long-term power scenario of Andhra Pradesh still provides an opportunity for solar energy: The state currently has a total power demand of 51,563 GWh and a peak load demand of 13,177 MW; the second highest in the country, after Maharashtra. This demand is expected to grow by 48% in next five years as compared to a range of growth of 32% to 72% in rest of the states. Currently there is a total deficit of 2,519 GWh and peak load deficit of 1,586 MW in meeting the power requirements of the state. These account for 5% and 12% of total and peak load power demand respectively. The peak load deficit is higher than the national average (~9.8%). Solar availability is the highest at the peak load time in hot weather conditions. Given these facts, solar is one of the key options to bridge the peak load deficit in the state.

According to the Planning Commission of India report on the working of power utilities in 2011-12, Andhra Pradesh’s SEB reported a net profit of INR11 billion (EUR173m). This makes it one the best performing SEB in the country. The financial health of the SEB makes the PPAs relatively more bankable compared to those by SEBs of other Indian states. Also, AP has been ranked as the third most investor friendly state by a 2012 report by The Associated Chambers of Commerce and Industry of India (ASSOCHAM). The report states that AP attracts 10.05% of the nation’s foreign direct investment (FDI), which amounts to INR121 trillion (EUR1.86 trillion). The public private partnership (PPP) India database corroborates the fact based on information from the Indian Brand Equity Foundation (ibef.org). The database records 96 PPP projects in the state with a contract value worth INR670 billion (EUR10 billion), the highest in the country. More public partnership projects indicate the confidence of private entities in investing in a particular state considering the social, economic and political conditions of that state and therefore corroborate the investment friendliness of Andhra Pradesh.

There are, however, also some caveats to AP’s strong position. For example, there are concerns over the sociopolitical conditions. It is rated 1.42 on a scale of 5 for law and order condition by India Today “State of States” conclave, 5 being the highest. Demands for the state’s division into Andhra Pradesh and Telangana may also pose a risk to the PPA, depending on the location of the plant. AP also has a significant number of districts affected by left-wing “Naxal” insurgents. A further drawback is that Andhra Pradesh does not have a dedicated solar policy, which implies the absence of a well-defined procedure for solar projects in the state. The state had announced in November 2009 that it would introduce a solar policy with a special focus on manufacturing but has not executed on its plans yet. Instead of using a policy guided Feed-in-Tariff (FiT) mechanism to meet RPO requirements, Andhra Pradesh is going for large direct contracts. However, a specific solar policy limits project development opportunities by size or scope. Thus, not having a policy is a positive point for large solar project developer willing and able to negotiate a PPA directly with the government. This is what Welspun Energy Ltd, the energy arm of Welspun Group, has done. Welspun has received a contract worth INR9.5 billion (EUR150m) from AP to set up a 100MW solar power plant in Anantpur district. Vineet Mittal, Managing Director, Welspun Energy Ltd. Says: “we had entered into the agreement with the state government in January, this year, and will complete the project by 2013. We will construct, operate and maintain the power plant and are acquiring land for the project.”

With high irradiation, strong grid infrastructure, significant solar RPOs, second highest peak demand and peak load deficit in the country, best performing SEB and investment friendliness, Andhra Pradesh could very well become the next solar boom state in India.

India is moving rapidly from direct government support for renewable energies to more market-driven mechanisms. Soon no support will be needed. This opens up the Indian market to growth in a completely new dimension.

Accelerated Depreciation was the early choice for government support for renewables. It allowed the Indian wind power sector to take off

Generation-Based Incentives came next. They attracted more international investment and improved efficiencies of renewable energy plants

We are now entering the phase of Renewable Purchase Obligations. This will give the market more freedom to choose the most cost-effective way to meet renewable energy targets

By 2016, renewable energies in India will be driven by purely commercial calculations as they become competitive with grid power on the power consumer side

This is a brief history of India’s renewable energy policies. In the mid 1990’s tax incentives kick-started the Indian renewable energy economy, leading to significant investments into wind parks by Indian taxpayers from companies to Bollywood movie stars. Turbine manufacturers, such as Suzlon, Vestas or Enercon started to move down the value chain and develop entire projects, which could be sold as tax-optimizing investments.

As a result of the focus on installed capacity, and since owners of the plants where not from the industry, generation of wind power remained below international par. At the same time, the government started early capital subsidy-based programs to support off-grid renewable energy generation. These were of limited success, however, as they failed to create attractive market opportunities.

From around 2007 onwards, India moved towards Generation-based incentives (for wind and solar power) and Feed-in-Tariffs. The National Solar Mission, which came into effect in 2010, was the first scheme that supported a renewable energy source across the country (prior programs were offered by India’s individual states) and based on a preferential FiT. The program – as well as the state solar policies of Gujarat, Rajasthan and Karnataka – limited the amount of capacity that was to be built.

While Gujarat offered its solar projects to investors on a first-come-first-served policy (with some financial and technical criteria), the other policies used a reverse bidding auction to determine which project developers would be allowed to benefit. During a time of rapidly falling solar component costs, these auctions successfully ensured that the distribution utilities did not overpay project developers.

There was some concern in the investor community that the reverse bidding process would reduce the price certainty in the market and thereby reduce international investor interest. These concerns have, however, proven to be unfounded as more and more international investors seek to enter the Indian market not only for solar energy, but also for wind, biomass and small hydropower. As professional renewable energy investors emerge, a slow shift has started towards higher quality project execution and limited (or even no) recourse financing.

The next step will be the Renewable Purchase Obligations (RPOs). All Indian distribution companies will thereby have binding targets for the amount of electricity from renewable energy they sell as a percentage of the total. The central government suggests a rise from 7% in 2012 to 15% in 2020 (with a sub-category for solar power of 0.25% in 2012, rising to 3% in 2020). The RPO quotas are currently in the process of being implemented on the levels of the states (under India’ federal system, they have the ultimate say), with some variations in percentages and timelines. There are still some doubts as to the enforcement (penalization) of the quotas, but most observers believe that the system will be up and running staring in the financial year 2013-14.

In addition to the RPO scheme, there is an option of trading Renewable Energy Certificates (RECs). These can be generated by renewable energy producers that do not receive a preferential feed-in-tariff and bought by “obligated entities” (distribution companies and large captive consumers) in order to meet RPO targets.

The RPO system will help India to complete the transition from installed capacity-based to more effective generation-based incentives. It will also be a significant step towards a free market for renewable energies by placing wind, biomass and small hydropower in direct competition with each other. (It is important to consider that India’s main goal is to produce as much power as cheaply and as reliably as possible – not to foster a specific renewable energy technology.)

The RPO scheme itself, however, will only provide a bridge between the current FiT-driven regulatory support scheme and the time when renewable energies will be able to compete widely with other sources of energy. Given that energy is seriously short in India and given the rising fossil fuel costs as well as the rapidly falling costs of renewables, the relevant “parities” will come within the next three years. Some technologies, such as wind, small hydropower, biomass and (a little later) CSP will compete with coal and gas in the grid. Others, especially PV will compete with end-user power prices. Diesel power generation (a 60GW installed capacity in India) is already significantly more expensive even than PV power generation and the breakeven with PV plus storage (to be able to replace back-up power units) is expected in the next two years.

By and large, the Indian government is very successful at encouraging the growth of renewable energies. While the focus is on power generation, the policies also allow for a domestic renewable energy industry to develop. Both factors together significantly increase India’s energy security. Where the policies are not yet strong enough, is with respect to de-central energy generation – which India’s underserved countryside sorely needs and which renewables could very well provide. Impending Telecom-tower legislation, net-metering (and a proper grid-code), financing support for projects and a wider scope for generation of RECs could help here.

The Jawaharlal Nehru National Solar Mission (JNNSM) was launched in 2008 with a goal of installing 22,000MW of solar power in India by 2022. The first phase, first batch bidding guidelines stated that a company is allowed to bid for only one 5MW solar PV and 100 MW solar thermal project. This was done to foster competition among project developers.

These guidelines were allegedly flouted by LANCO Infratech. In December 2010, LANCO, by floating front companies, had managed to secure about 40% of the total capacity bid in that batch. A government appointed committee comprising of senior officials from the Ministry of New and Renewable Energy (MNRE), the Ministry of Power and the Ministry of Corporate Affairs, is expected to submit its report on the allegation by end April 2012.

A year and two months hence, in February 2012, the same front companies floated by LANCO are under allegations of having obtained fraudulent project commissioning certificates. Seven associate companies of the LANCO Group have been granted commissioning certificates for 5MW solar projects each in Askandra, Jaisalmer. The certificates have been granted by the Rajasthan Renewable Energy Corporation Limited (RRECL), responsible for monitoring the completion of projects under the NSM in Rajasthan. These plants have not been completed yet. The deadline for completion was January 9th 2012. The RRECL defines project commissioning as the logistics for power generation being in place and while the plant does not necessarily generate power. RRECL Director (Technical) M.M. Vijayavergia has gone on record to say that since we have now learnt that all the panels were not installed, we are informing the NWN that these are partial commissioning certificates.”

This incident points to the faulty implementation of the NSM policy. The NSM does not have a strong due diligence mechanism for the bidding companies. There is a lack of proper monitoring mechanisms by the NTPC Vidyut Vyapar Nigam (NVVN) for the execution of the NSM projects and the validation of the commissioning certificates. Officials at the NVVN have acknowledged that they took the commissioning certificates on face value from RRECL without verifying them.

As a result of these irregularities, the MNRE has sent a team to verify all the solar projects in the country. This will provide a clear and more accurate assessment of the installed solar capacity in India. Further, the NVVN has penalized three of the seven companies which produced false commissioning certificates. Such an action has sent a strong message to the market that moving ahead, the policies and regulations will be strictly implemented.

India’s finance minister, Dr. Pranab Mukherjee, declared that solar thermal plant and equipment in India will now be exempt from import duty. “In order to fully realize our potential in the realm of solar energy, solar thermal projects need encouragement. I propose to fully exempt plant and equipment etc. for the initial setting up of such projects from special countervailing duties (anti-subsidy import duty)”; said the minister while announcing plans for the country budget for the upcoming fiscal year.

Till now the solar thermal sector has significantly lagged behind the solar PV sector in the Indian market. CSP installed capacity in India is a mere 8.5MW (as of February 15th, 2012) as compared to 481.48MW for PV technology. There is no domestic manufacturing base for CSP equipment in India and there are only a handful of experienced technology providers abroad. As such, developers are finding it difficult to find reliable, low-cost options, a necessity to make their projects viable at the low tariffs following the NSM auctions in the year 2011. With an absence of CSP technology in India and a lack of projects for reference, banks are exceptionally wary of funding CSP projects. This has led to stunted growth of the Indian CSP market.

In addition, CSP as a technology faces water issues that will require CSP developers come up with creative plant cooling solutions. There is also consternation about the 30% local content requirement.

While the key challenges to CSP in India remain, an exemption of import duty on plant and equipment contributes to an overall reduction of CSP project costs. This will invite greater investment in the Indian CSP market.