Month: June 2012

A recent visit to from New Delhi to Intersolar Munich has shown that the solar world is still buzzing. The main threat to the industry is not the current mismatch of supply and demand and slowing growth rates, but a disturbing trend towards protectionism and provincialism that can be observed in all major markets. Changing our energy set-up has always been a global challenge and a global project. We have benefited tremendously from the internationalization of the PV industry. Costs have come down so rapidly that we are at the threshold of a world where solar can compete without subsidy. We need uninhibited competition and trade to now make it a reality.

The solar industry is more robust and more sober now than two years ago

There is a worrying trend towards local thinking – both, on the industry side and on the market side

The industry as a whole would benefit enormously from uninhibited trade

Following a recent visit to the Intersolar Munich in June 2012, I want to share some ideas on the state of the solar market. Firstly, the industry has matured: It is no longer a big party selling a vision of green plenty, but a collection of more sober problem-solvers who are engaging with the technical, financial and infrastructural details of making solar power mainstream. Secondly, there was an ever so slight sense of optimism. In the past year, many companies have exited or have been bought, others have restructured their finances, changed their management, focus or products. While times are still tough (and I expect more consolidation in the industry), more companies are prepared to weather the storm. Thirdly, Intersolar in Munich is still the place for everyone in the industry to meet. It is a living example of the success of globalisation. What started as a great, global idea (using the sun as the most plentiful source of energy for the planet), has become a great, global economic success (the subsidy driven solar boom of the last ten years) and fantastic example of how international trade, scale, and best-practice-sharing can bring down costs and establish a new technology. As a result, we are now at a level where PV can start competing without government subsidies and where the industry can really take off.

This last point, the globalisation of the industry, is, however, coming under increasing pressure as the tightening market of the last years is now translating into protective policy measures. The US has recently imposed anti-dumping legislation on Chinese module manufacturers in a step to protect its own manufacturers. India wants to build its own (less efficient, more expensive) PV cell and module industry and to that end is debating domestic content requirements in its National Solar Mission (see our India Solar Strategy Brief and our July 2012 Solar Compass for details). China, after growing its industry for years on the back of European markets, is now making it almost impossible for international module manufacturers to compete in its own solar market. All these measures keep the cost of solar high and delay the moment when solar will be a mainstream alternative to conventional power supply options around the world. This has to be the goal. And the best way to achieve it is through international trade.

A global approach is not only impeded on the manufacturing side, it is also facing difficulties on the market side. Germany wants to fundamentally change its power supply – away from coal and nuclear, towards wind and solar. It is called “Energiewende” and Germany is about half way into this vast, highly ambitious project: too far to go back, but without a clear roadmap on how grids and storage have to be set up to replace scheduled power with unscheduled power. What is striking about the project is that it is limited to Germany’s borders. This is absurd as Germany is entirely embedded into a European power infrastructure. There is almost no coordination with its European partners who share a transmission grid with Germany but not Germany’s enthusiasm for renewables (France has a very pro-nuclear stance). There is also very little consideration for harvesting renewables where they are more plentiful. Any investment into solar power will be greatly more rewarding in sunny Southern Europe than in Germany – not to speak of the Sahara desert (the Desertec initiative is on hold).

Solar energy makes great sense and grid parity is within reach. However, this is a global project that needs to be approached with a global mindset, international infrastructure and trade. At Intersolar San Francisco, where I will be in July, I am hoping to see the famous American optimism and “can-do”, which is needed now more than ever: Making solar power work on a vast scale to use its full potential requires a belief in our ability to fundamentally change and improve our lives and a readiness to take risks. These are – in my mind – quintessentially American qualities. This may be a simplistic equation, but: India, where we work, is a vast market for solar. China has proven that it can manufacture more cheaply than anyone else. Germans have experience and a systemic approach. And the US has the most innovative financial industry. It makes sense to cooperate.

The recent hikes in power tariff by the distribution company B.E.S.T. comes amidst a trend of increasing power prices throughout the country. Rising power tariffs drive up the cost of energy procurement and reduce the overall profitability of industries and commercial consumers. With the economy slowing down, this can only add to the woes of the industrial and the commercial sector. Such consumers of power are actively looking for alternate energy solutions.

In B.E.S.T.’s case, prices have risen by nearly 30% in all consumer categories

Commercial consumers are the worst affected with prices as high as INR 10.79 per unit

Several DISCOMs across the country are faced with huge financial losses and raising power tariff despite stiff opposition remain the only option to stay afloat

The price of solar energy has fallen by nearly 40% over the last two years owing to economies of scale, technological improvements and competitive pressures on OEMs. This has made solar energy cost competitive with industrial and commercial power tariffs. Given the trend of rising power tariffs, it is only a matter of time before solar is cost competitive across all consumer segments. The average price of generation of solar energy is around INR 7 per unit. Commercial consumers of B.E.S.T. for example already pay an average of INR 9.27 per unit – 30% higher than the price of solar energy (see graph).

However, solar energy comes with a few concerns:

Energy consumers do not want to invest in the high capital costs of setting up a power plant

Solar power is intermittent and completely absent during the night times

To work around the first concern, solar companies have started to offer solar energy as a service. These companies are known as Renewable Energy Service Companies (RESCO). The energy consumer does not have to invest in the capital costs of setting up the plant – they only pay for the energy consumed.

By setting up a hybrid system (a mix of grid power and solar power), the intermittency of solar power can be managed. The grid power is used during the night times and cloudy days while solar power is used during the day. These innovative business and technology models are transforming the energy landscape in India. The coming years will see distributed energy taking prominence of which solar will play a crucial role.

WRITTEN BY OLIVER HERZOG & DORJE WULF – QUO VADIS, INDIA SERIES 1/4

The Euro-crisis has further sensitized investors for sovereign debt levels in the wake of slowing economic growth. As one of the most promising emerging markets following China, India has witnessed a string of negative macroeconomic news recently:

Real GDP growth slowed to 5.3% in the fourth quarter (ending March 2012) of 2011 the lowest rate in 9 years

Quarter over quarter gross fixed capital formation has fallen ever since the beginning of 2009 in every consecutive period

Overall budget deficit (including states and off-balance sheet items) is expected to approach 9% this year

Gross public debt is expected to reach 68% of GDP in 2012

In the wake of the Euro-crisis, slowing economic growth in emerging markets has caught the attention of investors. Deemed as the new rising star following China, India s current state of economy has particularly raised concerns. But recently, there have been several worrying developments in terms of newly proposed legislature, which might seriously alienate investors. No doubt, India has tremendous growth potential but political action is needed urgently as reforms seem to have reached a dead end. It is now on Indian politics to prove that the great optimism investors and business executives have shown towards India for so long was not a mistake.

While the economy grew at an average of 9% annually for five straight years up to 2007 (IMF, 2012), India now seems to have fallen into a second slump since the inception of the financial crisis. In part driven by high oil prices and weakening external demand, GDP grew only by 5.3 percent in the fourth quarter (ending March 2012) of 2011 the lowest rate in nine years and way below IMF expectations. While this figure is still impressive, for an economy with a population of 1.2 bn this is not enough to alleviate India s masses (around 30% live below the line of poverty) from poverty within a satisfactory time frame. Ten million young Indians enter the labor market every year clearly, growth is needed to create these jobs. By the same token, India would need an annual growth of at least 6% to maintain financial stability. Lower growth rates will increase the weight of India s debt burden and can lead to a dangerous debt spiral. Greece is an illustrative example how high debts increase the cost of further borrowing. In order to drive down these costs, the government has to cut spending and increase taxes which both have a negative impact on growth. Lower growth rates again mean lower government tax income which makes it even harder to repay the debt.

In India, excessive public borrowing and high inflation, which has been close to 10% for a couple of years now, have led to high costs of debt financing. Furthermore, legal limits on foreign activities in sectors such as multi-brand retail, pharmaceuticals, pensions and insurance have deterred Foreign Direct Investments (FDIs). Several attempts for reform in this field have been blocked by the ruling Congress party s coalition partners, such as the Trinamool Congress. Taken together, high private sector interest rates and procedural obstacles such as land purchase and policy uncertainties have resulted in disappointing industrial investments. Ever since the beginning of 2009, quarter-over-quarter investments (gross fixed capital formation) have fallen in every consecutive period from 32% of GDP to around 28% in the third quarter of 2011. Investors have been further discouraged by governmental arbitrariness like the levying of retrospective taxes on companies (see the Vodafone case as an example). The 2012 World Bank Doing-Business ranking (132 out of 183) indicates that India s legal business environment needs to be improved with particular focus on contract enforcement and investor protection which deteriorated recently.

Source: IMF Fiscal Monitor Data

With an expected overall fiscal deficit (including the states and off-balance sheet items) of 8.5% in 2012 and gross public debt of around 68% of GDP, the government will find it hard to revive growth through fiscal measures. Consequently, Finance Minister Pranab Mukherjee announced that taxes will be raised and subsidies for fuel and food are to be cut. At the same time, the defense budget of the world s largest arms importer is expected to increase by 17% this year. With little fiscal leeway and monetary policy strained by stubborn inflation, the only way to get back to a higher growth path will be structural reforms. India still has some way to go to become the number one destination for global investors, as announced by Mr. Anand Sharma, India s Minister in charge of Commerce, Industry and Textiles at a recent visit in Hamburg.

READ THE NEXT PART OF OUR QUO VADIS, INDIA SERIES about “Fragile political environment & darkening investment climate soon.

Worldwide manufacturing capacity of PV cells has grown over four fold since 2009. Most of this new manufacturing capacity has come up in China. The global module manufacturing industry is heavily driven by large production capacities that have been developed in China. Allegedly, Chinese equipment makers get free power for manufacturing, free land, incentives for exports and cheap capital.

This has prompted local industry in many countries to seek protectionist measures against cheap Chinese imports. US manufacturing industry has taken concrete measures to seek anti-dumping duty against Chinese imports

These protectionist measures were likely to have a positive impact on the Indian market

However, Indian manufacturers also applied for anti-dumping protection against China and other countries. BRIDGE TO INDIA believes this protectionism will not help improve the market for Indian manufacturers

Even though solar installations across the world are growing, the addition in manufacturing capacity has grown faster, creating an oversupply. In a highly competitive and oversupplied market, the Chinese manufacturers, who work on economies of scale and get government support, have been able to cut costs at a pace that manufacturers across the world, including India, have not been able to do. This has prompted manufacturers in various countries to call for protectionist measures. As a short term measure, the US recently imposed anti-dumping duties on Chinese PV cells. (Refer to BRIDGE TO INDIA’s earlier blog titled “US-China solar trade war to have a positive impact on India” to read more on that subject)

Now, Indian manufacturers have called for a similar measure. They have gone a step ahead and asked for anti-dumping duty on module imports from Taiwan, Malaysia and the US as well. The manufacturing capacities of multiple Chinese companies like LDK, Suntech and Trina Solar are as high as 2GW per year as compared to the 215MW manufacturing capacity of Moser Baer, which is the highest in India. In today’s date and time it can be assumed that a capacity below 350MW-500MW is not competitive for mass market sales. Protectionism at this stage will not really help anyone, it will only be a hindrance to reducing the cost of solar power in the country. If they can, Indian manufacturers need to think of scaling up manufacturing capacities to be competitive. Keeping this in mind, the government should also think of providing support through manufacturing incentives to scale up manufacturing capacities rather than adopting protectionist measures.

The National Solar Mission (NSM) has faced controversy with reports arising in the media of discrepencies in the dates of commissioning of some projects. Project commissioning dates are crucial as delays are penalized heavily under the policy. The NTPC Vidyut Vyapar Nigam (NVVN), the implementation agency of the NSM, has concluded an investigation into the controversy and has a released the list of commissioning dates of projects in Rajasthan.

The deadline for the commissioning of projects under batch one of phase one of the NSM was January 9th 2012

An NVVN investigation has found that out of the 20 projects in Rajasthan, 13 projects were actually commissioned after the deadline

The action by NVVN to provide clarity on this has been crucial in instilling confidence in the implementation of the regulations under the NSM

Under batch one of phase one of the National Solar Mission (NSM), PPAs were signed in the month of January 2011 for 28 Solar PV projects for a total capacity of 140MW. The deadline for commissioning of these projects was January 9th 2012. The responsibility for ascertaining the commissioning of these projects was entrusted to state nodal agencies in the respective states.

Reports then surfaced about discrepancies in the commissioning dates provided by state authorities in Rajasthan. Subsequently, a committee comprising of representative from state authorities and NTPC Vidyut Vyapar Nigam (NVVN) was constituted to ascertain the commissioning of 20 PV projects located in the state of Rajasthan.

Out of the 20 projects in Rajasthan, it has been found that 13 projects were actually commissioned after the deadline. It has been found that projects have been finally commissioned as late as March 3rd 2012.

Company name for delayed projectsEarlier reported date of commissioningActual date ofcommissioningDiscrepancy foundAlex  Spectrum RadiationNot reported21.02.2012NoAmrit Energy (AAPL)Not reported02.02.2012NoDDE Renewable Energy10.01.201214.02.2012YesElectromech Maritech10.01.201201.02.2012YesFinehope Allied Energy10.01.201207.02.2012YesGreentech PowerNot reported08.02.2012NoIndian Oil CorporationNot reported02.02.2012NoKhaya Solar Projects09.01.201228.01.2012YesNewton Solar07.01.201209.02.2012YesOswal Woollen Mills09.01.201210.01.2012YesPrecision TechnikNot reported22.03.2012NoSaidham Overseas09.01.201230.01.2012YesVasavi Solar Power09.01.201202.02.2012Yes

Source: MNRE, NTPC Vidyut Vyapar Nigam Limited (NVVN)

The NSM has a provision to draw the bank guarantees of projects in case of a delay in meeting the deadlines. The provision states that the NVVN can draw 20% of the total sum as a first tranche if a project is delayed by a month (January 9th – February 9th, 2012), 40% as a second tranche after two months (February 9th – March 9th 2012) and the remaining 40% as a third tranche after three months (beyond March 10th 2012). In addition, a penalty of INR0.1m (EUR1,540) per MW is to be levied for each day of delay beyond March 10th 2012. Bank guarantees have been en-cashed for the delayed projects as per the regulations.

The projects have been delayed as developers have struggled with on ground project execution challenges and securing non-recourse financing on time. The difference in the actual commissioning dates and those claimed by the developers suggests that the Rajasthan Renewable Energy Corporation Limited needs to provide clarity on its definition of commissioning. Further, it needs to be stringent in assessing the status of the projects in the state. The action by NVVN to provide clarity on this has been crucial in instilling confidence in the implementation of the regulations under the NSM.

For further analysis on project delays under the NSM, please read BRIDGE TO INDIA’s April 2012 edition of the India Solar Compass.