Month: July 2012

Mr. Shivansh Tyagi specializes in project development policy and project finance as Consultant in the Solar Project Development team at BRIDGE TO INDIA.

Under the National Action Plan on Climate Change (NAPCC), the government has made it mandatory for particular obligated consumers to consume a part of their total consumption from renewable sources under Renewable Purchase Obligations (RPOs). The RPO creates demand for renewable energy in the market. In order for the obligated entities to meet these RPOs, the government has introduced the Renewable Energy Certificates (REC) mechanism. The RECs create a supply push needed to complement the demand pull from the RPOs.

The REC mechanism has significant potential to reach more than 1GW by 2017

However, there is no clarity on the regulatory framework that surrounds the REC mechanism at this point

It is important for these regulations to be clarified in order the REC market to become viable in India

The RECs provide a simple way for obligated entities to fulfil their RPOs, especially for small Open Access (OA) consumers and captive power plants. They otherwise have to maintain three different power purchase agreements, one conventional energy supply and two others for solar and non-solar renewable power to fulfil their RPOs. The obligated entity can simply buy the RECs from the exchange. The CERC had formulated the regulations for RECs in 2010. Even though the regulations are quite detailed, there is a lack of clarity on issues regarding (a) defining minimum size of projects eligible for REC, (b) new grid connection regulations for REC projects allowing smaller projects, such as up to 500kW, to be connected on the lower voltage side and (c) new intra state distribution open access regulations for renewable power projects.

The regulations states that the minimum size of a project under the REC scheme should be determined by the SERC which in turn leaves the decision onto the state nodal agencies i.e. renewable development authority.Only four state nodal agencies have notified the minimum size allowed for REC projects. However, there are cases where projects lower than the specified capacity of 250kWp have been accredited.

The following table lists the minimum size regulations in various states across India:

StateREC capAndhra PradeshNo CapAssamNo CapBiharNo CapChhattishgarhNo CapDelhiNo CapGujaratNo CapHaryanaNo CapHimachal PradeshNo CapJammu & Kashmir250 kWGoa & UTNo CapJharkhandNo CapKeralaNAMadhya PradeshNo CapMaharashtra250 kWManipur and MizoramNo CapMeghalayaNo CapNagalandNAOrissa250 kWPunjabNo CapRajasthanNo CapTamil NaduNo CapTripuraNo CapUttar PradeshNo CapUttrakhandNo Cap

Secondly, the regulations are silent on a separate grid connection rules for REC projects. As for REC eligibility, the project is required to be grid connected thus grid connection become a necessity. The current grid connection rules according to Indian Electricity Grid Code (IEGC) – applicable to wind and solar projects in general – states that the injection points should always be at the higher voltage side of distribution or transmission network. The grid rules are made in context to large power plants where per unit cost of step-up transformer for connection to the grid is very low due to high energy generation. However these additional costs make small REC projects unviable.

Recently in the state of Maharashtra, Tata Power Renewable Energy filed a petition in Maharashtra Electricity Regulatory Commission MERC to allow connection at low voltage side for their 500kW solar rooftop plant at Tata Motors. The commission expressed its inability to give any judgement as the regulation is yet to be framed. The MERC referred the case to the CEA and CERC, which in turn replied that they are in consultation to formulate new grid connection rules for such small scale solar projects referring to the FOR meetings, leading to which the petition was withdrawn (Petition order).

The open access charges for conventional energy are between INR 1 per kWh to INR 3.5 per kWh, which makes the sale of solar power through OA unviable even with the REC upside. Some states like Maharashtra give concession on OA charges but most states to do not have a separate regulation on open access charges. Further, the transmission and distribution losses are very high in India and a generator has to bear such charges if they are selling power through open access. It is possible to install a solar power plant on the consumer’s roof itself, so that the generator and consumer are not using the infrastructure of the area’s distribution company (DISCOM). In such cases DISCOMs should not charge any losses to the generator.

If the REC market must be successful the government should address these difficulties as soon as possible and ask all nodal agencies to come up with clear regulations on RECs and grid connectivity. The REC market has the potential to reach more than 1 GW by 2017. We believe that this can only be achieved through clarity on the regulation that surrounds this mechanism.

Senior Consultant, Akhilesh Magal will be speaking at REaction2012 on ‘Viability of REC projects in India’ today, July 26th 2012 in Chennai, India.

Akhilesh Magal heads the Project Development team as a Senior Consultant at BRIDGE TO INDIA. He will be speaking on ‘Viability of REC projects in India’ at REaction2012 on 26th July 2012 at the Chennai Trade Centre. This blog looks at the growing relevance of REC mechanisms in India.

India is facing an acute energy deficit of 10-13%[1]. Industrial and commercial electricity prices have risen by nearly 11% p.a. from 2000 to 2010 while agricultural electricity prices have remained more or less constant as a result of cross-subsidies[2]. Rising grid electricity prices, frequent power interruption, costly diesel backup electricity, falling costs of solar energy and abundance of solar resource have made solar PV an attractive technological choice for industrial and commercial consumers.

Solar PV is becoming an attractive choice for industrial and commercial consumers due to high prices of conventional power

State regulators issue mandatory consumption quotas (Renewable Purchase Obligations) for solar energy which can be met by buying Renewable Energy Certificates (RECs)

Currently, the demand for RECs is much greater than the supply and our analysis suggests that therein lies an innovative market opportunity for industrial and commercial consumers looking to reduce their expenditure on power

The electricity prices in India vary significantly across different consumer groups. The electricity price paid by industrial and commercial consumers is much higher than that paid by residential and agricultural consumers. There is a fundamental upward movement in power prices as such, driven by the energy deficit and globally rising costs for fossil fuels. In addition, there are two specific factors that increase the power prices for commercial and industrial consumers. Rising grid electricity prices, frequent power interruption, costly diesel backup electricity, falling costs of solar energy and abundance of solar resource have made solar PV an attractive technological choice for industrial and commercial consumers. However, profitability continues to be a concern in smaller systems.

Our analysis suggests that the REC mechanism can provide a significant upswing to new and innovative business models.  Apart from the sale of electricity, a solar energy producer’s revenues are bolstered by the sale of solar RECs on the Indian Energy Exchange (IEX). The trading of REC in India has commenced in February 2011 and has shown early signs of promise. The total number of REC traded as of April 2012 was 105,844[3]. Meanwhile, the supply deficit for REC stood at 55% during the trading session for the month of April 2012, emphasizing that many obligated entities consider REC as a viable option to meet their renewable purchase obligations (RPO) and are participating in the trading. This demand significantly exceeds supply. There was no solar REC traded during this period, due to non-availability of solar REC generating projects. This is expected to change with many solar projects in India adopting the REC generation mechanism in the next six to eight months.

[1] CERC. Annual Report. 2011

[2] Government of India – Power Finance Corporation Ltd. Annual Report. 2011

[3] Indian Energy Exchange. REC Data. 2011

EAI is organising REaction2012, a summit focussing on future technologies, business models and business opportunities in renewable energy. Senior Consultant, Akhilesh Magal will be speaking on ‘Viability of REC projects in India’ for his presentation on July 26th 2012 at 4:45 pm in order to provide an account on the development of REC trading in the Indian market and its future prospects.

Mr. Mohit Anand heads the Market Intelligence team as Senior Consultant at BRIDGE TO INDIA. Together with his team, he is responsible for the INDIA SOLAR NAVIGATOR, India’s only dedicated online business intelligence tool that is designed to enable leading solar companies to take strategic decisions to succeed given the ever-changing landscape of the Indian market. 

With close to 1GW of installed PV capacity, the Indian market is seen as an upcoming growth driver for the global PV industry. The quick growth, over 800MW in the past two quarters, has been driven by feed-in-tariff based policies. A majority of these projects are concentrated in the states of Gujarat and Rajasthan, pushed by the National Solar Mission and the Gujarat Solar Policy. This segment alone is expected to add a cumulative 3.7GW by 2016 (according to BRIDGE TO INDIA’s market model).

Growth in the market has been seen only on the generation side, and has skipped local manufacturing

Over 80% of projects so far have used internationally manufactured modules

The question is: Will the Domestic Content Requirement help Indian manufacturers pull out of the current slump?

The growth in the market, though impressive, has only been witnessed on the generation side. It has worked to the great benefit of Indian project developers, a mix of Indian and international EPC companies and a host of international module suppliers. On the other hand, Indian module suppliers seem to have missed the bandwagon of Indian PV growth. Over 80% of projects so far have used internationally manufactured modules (based on BRIDGE TO INDIA’s estimates). This is primarily due to the obsolete business models of Indian manufacturers, and the aggressive pricing of their Chinese (and some non-Chinese) counterparts. The Indian manufacturers meanwhile are sulking and are in dire need of solutions, recommendations, prophecies, or perhaps just a stronger Domestic Content Requirement.

In this time of need and crisis, PV Insider brings to us the PV Manufacturing Summit India 2012. The conference, being held on August 1st and 2nd 2012 in New Delhi, aims to answer a key question – “With this much potential and support – why isn’t India already on its way to becoming the PV manufacturing hub of the world?”

I, for my part, will be giving the opening presentation at this conference, on August 1st 2012 at 10AM. I hope to give the participants a sense of the much talked about ‘potential’ in this market. I will argue that India is a 12GW market by 2016 that will grow primarily through commercially driven market segments. I will also give an outlook on the Domestic Content Requirement (DCR) and the impact this will have on sales for module suppliers. Through my presentation, participants will get a first-hand account of the size and scope of this market. This should set the tone for the two days of intense brainstorming on how the Indian manufacturing industry can succeed in the current market environment.

Register for the PV Manufacturing Summit using discount code ‘ANAND’ and receive a $100 discount on your ticket. Write to us at contact@wordpress-117315-688799.cloudwaysapps.com for more details. 

Mr. Mohit Anand heads the Market Intelligence team as Senior Consultant at BRIDGE TO INDIA. Mr. Anand will be speaking on the ‘PV Landscape in India’ at the PV Manufacturing Summit in New Delhi on August 1st 2012.

As the rupee depreciates and reaches an all-time low against the dollar, projects that have opted for international financing without full or partial hedging of the debt might see a fall in cash flows.

International financing has been the favored source of funds for project developers in India

The Rupee has depreciated by 24% since January 2011

The slide of the rupee to record lows will have a negative impact on the balance sheets of the developers that have relied on un-hedged or partly hedged overseas borrowing for projects

Complete non-recourse debt financing is an exception rather than the norm in India. Interest rates from Indian banks are not only relatively higher but Indian banks have also not been keen on lending to the solar sector at all. Currently very few projects have claimed to have received non-recourse financing. Another trend in the market is to initially finance the project on a pure equity or recourse debt finance basis and operate the plant for up to a year. After that, developers look to refinance the projects on reduced interest rates (~11%). This refinancing option is feasible because after a year of operation, there is less risk (as construction has already finished by then) and operation data is available. Therefore, banks are more confident of financing the project on reduced interest rates. A large number of developers in the Indian solar market, though, rely heavily on international financing through Export Credit Agencies (ECAs). Module suppliers play a key role in this transaction.

Developers that have gone in for international financing are concerned. Factors like a high current account deficit, policy stagnation, low capital in-flows and strengthening of the US dollar in the wake of the Euro zone crisis have led to the depreciation of the Indian rupee by 24% since January 2011. The slide of the rupee to record lows will have a negative impact on the balance sheets of the developers that have relied on un-hedged or partly hedged overseas borrowing for projects under batch one of phase one of the NSM and projects under phase one and two of the Gujarat Solar Policy. The principal and interest payments are to be made in the currency of the loan and the revenue is in the weakening Indian rupee. This is bound to nullify the cost advantage they enjoyed through a lower cost of capital. Further, the currency volatility in the last one year has also left many developers with projects under the batch two of phase one with confusion on the right hedging strategy for financing.

Following the interest rate cuts in economies like China and other Southeast Asian countries, it is expected that the Reserve Bank of India (RBI) will also cut rates. This rate cut will make fully hedged external borrowing unviable. The only reason a developer might still look for external borrowing is because Indian banks are still skeptical of lending to the sector.

Subscribe to the INDIA SOLAR COMPASS now to get detailed analyses on the market. A preview of the report is available on our ‘Reports‘ page.

Mr. Mohit Anand, Senior Consultant, BRIDGE TO INDIA, will be speaking on the ‘PV Landscape in India’ at the PV Manufacturing Summit in New Delhi on August 1st 2012.

The Indian PV manufacturing industry is in dire straits at the moment, running their plants well below capacity due to dwindling orders (refer to our latest INDIA SOLAR COMPASS). A fall in demand in European markets has impacted Indian manufacturers significantly, as they have almost entirely relied on them for business so far. In the Indian market, they are losing out to foreign suppliers that are more competitive than them on both price and technology.

Module prices in India are consistently below the international levels

Indian manufacturers are running their plants on extremely low utilization rates of 10-15%

Chinese Tier-1 manufacturers have found it difficult to sell in India, facing competition from Tier-2 manufacturers

With the investments made to build new plants between 2009 and 2012 and the absence of orders, most Indian manufacturers now run their plants on extremely low utilization rates of 10-15%.[1] Indian manufacturers are waiting for the announcement of the new policy for phase two of the NSM. If the government announces a stronger protection mechanism for the second phase of the NSM, these Indian players are ready to ramp up their production. Indian manufacturers will need support from the government to survive amidst the over-supply in the market and become more competitive. Without political assistance the future of the Indian industry is not secure.

The rising supply from China is one of the most discussed issues in India’s PV sector. Suntech has so far sold 70MW and Trina Solar has sold 50MW to India. Both companies use a strategy of aggressive pricing. However, Chinese Tier-1 suppliers stated during Intersolar Munich in June 2012 that Tier-2 suppliers from China have been even more aggressive in the Indian market. As a consequence, module prices in India are consistently below the international levels and such companies have been largely unsuccessful in selling to the market. In the wake of recent trade barriers in the US against Chinese modules, the Indian domestic industry also started to lobby for setting import duties on aggressively priced Chinese modules (typically Tier -2). Some large Chinese producers with strong order books such as Yingli Solar have not sold to India yet and instead still concentrate on higher margin markets. With India’s overall market demand expected to exceed a cumulative 3GW in 2012 and 2013 these companies will need to find an appropriate strategy for the market.[2]

Two scenarios are possible as of now: First Chinese and other international late comers will adapt the market strategy of smaller module suppliers and offer aggressive prices. This will further decrease module prices and raise the pressure on the domestic industry, as well as on the less cost-competitive international suppliers. Second, companies may focus on new, growing market segments outside the FiT policies, build up their own project development teams or offer EPC services. None the less, the FiT driven segment will be the key segment in the next three years. BRIDGE TO INDIA expects that international Tier-1 suppliers will try to focus on this segment with the majority trying to sell modules to projects under the state policies.

Subscribe to the INDIA SOLAR COMPASS now to get detailed analyses on the market. A preview of the report is available on our ‘Reports‘ page.

[1]Statement of Mr Venkataramani, General Secretary, Solar Manufacturing Association in Economic Times on June 8th 2012

[2] BRIDGE TO INDIA market model

Mr. Mohit Anand heads the Market Intelligence team as senior consultant at BRIDGE TO INDIA.

The INDIA SOLAR COMPASS July 2012 brings you updates and analyses from Indian solar policies, projects, industry and financing. Read below the key findings from our research on the market in the last three months.

The biggest ‘Policies’ development is expected at the end of the year with the guidelines for the NSM Phase 2 coming out towards that time

In terms of ‘Projects’, the REC mechanism is gaining foothold in the market. This can be accounted to India’s first project to have been issued RECs in the last quarter. We also present an analysis on the performance of projects in Gujarat

The financial landscape in the market has seen some cause for worry on account of the recent rupee depreciation. Projects who have procured international financing may face a cash crunch

1. The last quarter has seen anáaddition of 360.42MW of solar PVácapacity.

2. Guidelines for phase two of theáNSM are being formulated andáexpected to be announced towardsáthe end of this year.áPhase two will aim to buildá9,000MW of solar power of whichá3,000MW shall be through feedin-átariffs and 6,000MW througháRenewable Energy Certificatesá(RECs) and Renewable PurchaseáObligations (RPOs).

3. There are limited projectádevelopment opportunities thisáyear in the Indian market. Severalácompanies have started lookingáat business models for projectádevelopment around the RECámechanism.

4. The government of India has setáup the Solar Energy Corporation ofáIndia (SECI). The SECI is startingáwith an initial fund of INR20 billion (Ç307m). It will take over the role ofáimplementing the NSM from NVVN.

5. Indian module suppliers are askingáfor anti-dumping and additionaláimport duties on internationallyámanufactured modules. Also,áthey are asking for the DCR toábe extended to cover thin filmámodules.

6. The Rajasthan Renewable EnergyáCorporation Ltd. (RRECL) hasáindefinitely postponed projectáallocation under the RajasthanáSolar Policy. No official reason hasábeen given for the postponement.áThis is most likely due to theáunavailability of funds.

7. Madhya Pradesh has allocatedá125MW capacity to two developersáthrough a competitive biddingáprocess. This bidding was notáguided by any policy.

8. Indiaĺs first solar REC was issuedáto M&B Switchgears Ltd. More RECámechanism projects are expectedáto become operational soon.

9. The payments of three projectsáin Gujarat have been put on holdáby the Gujarat Urja Vikas NigamáLtd. (GUVNL). GUVNL claims thatáthese projects have violated theáclause which states that the poweráproducers have to continue to holdáat least 51% of equity from the dateáof signing of the agreement up toáthe period of two years after projectácommissioning.

10. The Indian rupee has depreciatedá24% since January 2011. This willácause revenue losses for projectsáthat have opted for un-hedgedáor partly hedged internationaláfinancing.

11. In the last quarter (April-Juneá2012) Indian manufacturersáhave not announced any furtheráinvestments to expand theiráproduction facilities.

12. Indian manufacturers now run theiráplants on extremely low utilizationárates of 10-15%.

13. After the imposition of antidumpingáduties on Chineseámanufacturers in the US, Chineseámanufacturers will increase theiráeffort to sell to India.

14. Several companies have startedálooking at business models foráproject development around theáREC mechanism. Companiesálike Kiran Energy, SunEdison,áSolairedirect, IBC Solar andáBRIDGE TO INDIAĺs ownáproject development arm areálooking at project developmentábusiness models around captiveáconsumption and the RECámechanism.

Subscribe to the India Solar Compass now to get detailed analyses on the market. A preview of the report is available on our ‘Reports‘ page.

Mr. Jasmeet Khurana covers projects as a consultant in the Market Intelligence team at BRIDGE TO INDIA.

India is promoting large utility-scale installations in solar to achieve the targets under the National Solar Mission (NSM). Distributed generation, which holds the true potential for Indian conditions, has largely been ignored till now. For distributed solar adoption to flourish in India, a domestic financing ecosystem is required. US has been able to create such a financing ecosystem by developing innovative business models. There is an opportunity for Indian and US companies to collaborate and adapt successful solutions to Indian conditions.

Promotion of only large solar power plants in India is hampering the creation of a solar financing eco-system that can help fund a distributed adoption of solar power

Business models created for the US solar market can be adapted to Indian conditions

Indian banks alone will not be able to drive a large scale adoption of solar

It is expected that there will be a large gap in the demand and supply for the financing requirements of solar in India

Third-party financiers from the US or other mature markets may enter the market to fill in the gap

Solar power plants are financed through debt and equity. The mix varies from 90% debt in for example, Germany to 70% debt in India, depending on the maturity of the market and the comfort of the banks. The equity comes from the project developer. These can be independent power producers (IPPs), smaller developers, utilities or private equity players. India has over 200 project developers that have been allocated FiT based projects under various policies. Smaller project developers have faced challenges in arranging finance and commissioning their projects. The solar policies in India have started favoring larger project sizes for allocation processes. The average project sizes have gone up considerably with batch two of phase one of the NSM and other new state bids like those in Karnataka, Odisha and Madhya Pradesh. This is causing the FiT driven market to shift towards a smaller number of key project developers like Welspun, Mahindra Solar, Kiran energy and Azure Power among some others. With large project pipelines, these project developers are able to raise equity either through their own balance sheets or through private equity backing.

Construction financing and term debt for solar projects in India comes primarily from Indian banks, development funding institutions (DFIs) and international banks (mostly through Export Credit Agencies or ECAs). DFI and ECA financing is available only to projects with capacities greater than 10MW. Indian banks continue to be skeptical towards financing solar projects in general. Almost all financing of solar projects in India continues to be recourse financing.

The phase two of the NSM is expected to come out with even larger project sizes. This trend towards larger projects will help the government achieve the installation targets and lower the cost of solar power. Also, financing these large projects is easier for companies with strong balance sheets.

On the other hand, this restricts the creation of a solar financing ecosystem that can fund a distributed adoption of solar power. As per BRIDGE TO INDIA’s market model, more than 60% of the total 12GW solar installations in India till 2016 will come from non-FiT segments like commercial tariff parity driven projects, RPO/ REC mechanism projects, telecom towers and diesel parity driven projects. This goes to show that the future realization of solar power in India will come from outside the FiT segment and from distributed power generation. Currently, there is no solar financing ecosystem in India that can support this growth. This will cause a large gap between the demand and supply of financing options for solar power in India.

Adopting solar power as a large component of the energy mix is critical to India’s energy security in the years to come. If India has to realize its true solar potential, the financing ecosystem in India needs to be strengthened. Learning from the solar financing ecosystem that is being developed in the US will be the first step in the right direction. US solar financing has been similar to the Indian financing scenario today but it is now evolving to the needs of distributed solar growth. Solutions created in the US solar market for distributed growth can then be adapted to Indian conditions.

Commercial and residential consumers are not keen on locking up their liquidity to meet the upfront costs associated with solar installations. The rise of distributed solar has led to the creation of many new business models in the US. This has led to the creation of new financing entities. They provide small scale financing services to commercial and residential consumers via a lease or PPA. They source financing through large investors like pension funds, mutual funds, insurance funds, sovereign wealth funds, private equity and hedge funds among others. Companies like SolarCity and Sunrun in the US have increased their valuation to over USD 1billion through this model. They are called third-party financiers. Their model also gives investors a diversified opportunity to back solar. In this scenario, the role of connecting the actual investors with these third-party financiers also opens up. Companies referred to as third-party intermediaries like Clean Power finance do this job.

Various models used across the US solar industry include:

Utility scale PPA model

This is the traditional model, as it exists in India. Developer invests equity into a project and a lender provides recourse or non-recourse project debt.

Host-owned model

These are typically small installations by the power consumer. It is similar to the subsidy based model in India. In US they have tax credits and net-metering that makes these projects more viable.

Vertical model

Under the vertical model, an integrated player handles customer leads, installation, engineering, maintenance and financing services via a lease or a PPA. Such firms essentially serve as both installer and third-party financier to the home or business owner that receives generation from the PV system.

Semi-vertical model

In this model, third-party financier does not undertake the installation themselves but pay an installer to do it for them. The PPA/lease is still signed with the third-party financier.

Financial market model

This model brings in various investors of different types to compete with each other. Here an intermediary provides an interface to match large lenders with small borrowers.

The actual models followed by third-party financiers and third-party intermediaries are much more complex than the ones explained above. A whole solar finance marketplace has been created in the US. A third-party financier or an installer can now select from and combine multiple financing sources in a competitive environment.

In India, banks alone will not be able to drive a large scale adoption of solar. With the potential that the Indian solar market possesses, installers, third-party financiers, third-party intermediaries and investors from the US or other mature markets, perhaps in collaboration with some Indian entities, may enter the market to fill in the gap.

References:Re-imagining US solar financing – US SOLAR – WHITE PAPER – BNEF

This blog has been written by Jasmeet Khurana, Consultant, Market Intelligence

WRITTEN BY OLIVER HERZOG & DORJE WULF – QUO VADIS, INDIA SERIES 2/4

Despite the many structural problems in India’s economy, urgently needed reforms in terms of economic liberalization, budget consolidation and government effectiveness seem to have been put on hold recently. In addition, erratic political decision-making has contributed to an unpredictable investment environment.

India’s fragmented political landscape continues to slow down decision making

During recent regional elections, a string of corruption scandals have led to massive losses for the parties of the established ruling coalition

Several renowned companies (foreign as well as domestic) have been alienated by unfavorable intellectual property jurisdiction, non-transparent political decision making and unpredictable turns in tax policies

In spite of the many current economic problems, there seems to be a complete lack of efforts to bring reforms back onto the agenda at the moment. The Congress Party is frequently obstructed by coalition politics and its own fading support in the country. Within its fragmented political landscape, politicians struggle to make meaningful reforms happen while five or six different coalition parties are busy fighting for their own clientele’s specific demands.

In addition, unsettled by a string of corruption scandals, voters are now punishing the long-established elites of the nation-wide parties in state elections in favor of regional leaders. According to recent studies by KPMG and Gallup, corruption has become an endemic problem by now. A prominent example for the adverse effects of corruption on business is the case of the Norwegian telecom firm Telenor which was deprived of 122 telecom licenses in India after a corruption scandal in the licensing process became public. Another reason for poor regional election results were policy flip-flopping as well as a poor record of delivery. The recent election in India’s largest state, Uttar Pradesh (UP), is a case in point. The regional Samajwadi Party won, whereas Congress and the BJP performed poorly. While these changes in voter behavior are a good sign for a working democracy, they will not make it any easier to find political compromises in the future. Too many parties and groups joust for influence, thereby frequently contradicting economic reason and the needs of the Indian nation as a whole.

As investors prefer a predictable economic and legal environment in order to take decisions, the aforementioned developments are worrying. Recently however, a number of additional incidents in India have irritated the international business community casting a shadow on India as investment destination.

At the beginning of 2011, German wind turbine manufacturer Enercon was dragged into a demoralizing lawsuit against its own subsidiary Enercon India Ltd. (EIL), following a strategy dispute with their Indian joint venture partner. In the course of the case, the Indian Intellectual Property Appellate Board temporarily nullified twelve Enercon patents. In the end, the Germans lost effective control of the Indian company with sales of close to USD 600m and were forced to entirely write off their stake in EIL. The Enercon case caused diplomatic tensions between India and Germany at the highest level. Another high-profile case is that of the Korean company POSCO’s USD 12 bn steel project which has been delayed for several years now due to local protests against land acquisition. Recently, the German carmaker Volkswagen, which has been operating in India for over ten years now, put a planned USD 380m investment on hold over a VAT argument with the state government of Maharashtra.

Moreover, frustrated by the lack of political progress and non-transparent processes, steel tycoon Lakshmi Mittal recently announced that ArcelorMittal will shift its investment focus from India to other markets – markets in which returns can be realized faster and in which investments are more predictable. Even though Mittal believes in India in the long term, it is remarkable that a leading businessman of Indian origin considers India currently as too challenging a market.

Another prominent company struggling with the Indian system is telecoms giant Vodafone. The company is to be charged retroactive taxes of INR 2 billion (USD 35.8 million) originating from the sale of an Indian subsidiary in 2007. The deal structure was opaque due to several levels of investment vehicles registered in tax enclaves to exploit double taxation agreements between India, Mauritius and the Virgin Islands. After the Indian Supreme Court had dismissed tax demands in January, Vodafone thought to have won the case. However, now the finance ministry proposed new legislation to retroactively levy taxes on transactions as far back as 1962. The new law aims to circumvent international holding structures in order to grant the Indian state the right of taxation in any case. In the meantime, Vodafone’s hearing of appeal has been deferred until July 27 by the Bombay High Court. This case is particularly delicate for two reasons: firstly, the finance ministry de facto proposed to breach effective tax treaties with sovereign states. Secondly, the retrospective character of this tax proposal would make doing business in India completely unpredictable (what other retroactive laws might follow?). Especially this retrospective character sparked worldwide indignation amongst business executives, lawyers and investors.

Summing up, a high and rising budget deficit, a lack of structural reforms and an unpredictable legal environment taken together with high costs of debt (discussed in part 1 of this blog series) reduce investors’ confidence in the Indian market in the short term. At the same time, India is desperately in need of international funds to address its massive infrastructure requirements as well as to re-boost its industrial growth.

This blog is a part of a Oliver Herzog and Dorje Wulf’s co-authored blog series on ‘Quo Vadis, India‘. The next part will be published in the coming week.

Related links:

Quo Vadis, India: A debt burden putting pressure on growth

Mr. Jasmeet Khurana covers projects and financing as a consultant in the Market Intelligence team at BRIDGE TO INDIA. 

The bankruptcy announcement by Abound Solar has highlighted the risk of projects losing their module warranties as module manufacturers across the world fail. Two projects in India are using Abound Solar modules and they will have to face the liability if the technology does not perform as expected till the year 2036. As more manufacturers are expected to fail, a large number of projects in India may find themselves without warranties.

Abound Solar has decided to file bankruptcy and has blamed aggressive pricing actions from Chinese solar panel companies for its failure

As there is no track record for new technologies like CdTe, company accruals for warrantee claims on modules are based on guessing the cost of repair and replacement in 25 years

The continuously falling costs of c-Si puts the pressure on the financial health of thin film manufacturers and may cause some more to fail

Failing companies will leave projects with warranties that will not be honored in the future

On June 28th 2012, US based manufacturer of thin film cadmium telluride (CdTe) PV modules, Abound Solar, announced that the company intends to file a petition for protection under the U.S. Bankruptcy Code this week. According to the company, aggressive pricing actions from Chinese solar panel companies have made it very difficult for a startup company like Abound to scale in current market conditions.  In the past year, many companies like Solyndra and Evergreen Solar have failed. Most solar manufacturers are in a bad financial condition and more consolidation in the market is expected.

Most module suppliers have a 25 year power output guarantee. This guarantee and its terms are an important part of the purchase criteria for a project developer. Manufacturers set aside an adequate portion of their premiums at the time of sale in a reserve fund as accruals to service all claims arising out of these guarantees. CdTe is a new technology and its performance has not been proven over long periods of time. At the moment, company accruals for such modules are based on guessing the cost of repair and replacement in 25 years, and the frequency of such claims. As an example, another CdTe manufacturer, First Solar, had more than anticipated warranty expenses in 2010-11. Their claims reached levels as high a 1% and they announced an increase in their accruals to meet more future claims. There are very few solar manufacturers that actually insure their product warranties. Only a couple of companies like Canadian Solar and Suntech are known to have a warranty insurance mechanism in place.

A company writing 25 year warranties should have a 25 year reserve. Realistically, as Abound is a new company, their accruals will most likely not be able to meet future claims. In India, Abound has sold modules to Punj Lloyd for their 5MW project in Rajasthan and to Solarsis for their 2MW project in Andhra Pradesh. Modules also have higher claim rates in hot climatic conditions like India. This increases the financial liability of these projects. They will most likely receive pennies on the dollar for any claims that they might have and face full liability if the technology fails to perform during the long lifetime of the project. This makes the bankability of the module supplier an important part of all purchase conditions as most manufacturers have a bad financial health and many of them will exit the market in the coming months and years.

In India, 55% of all installed capacity is thin film. From a price perspective, thin film technologies like CdTe and CIGS enjoyed a cost advantage over c-Si modules in the past. In the last two years, the cost of c-Si modules has plummeted and the cost advantage enjoyed by less efficient thin film modules has diminished. According to the US Department of Energy, China offered more than $30 billion in government backed loans to its solar manufacturing companies in 2010 alone. We know that, most of the solar manufacturing in China is c-Si based. This gives c-Si an advantage in terms of scale and decrease in price over thin film as a technology. The new found cost advantage of c-Si, in turn, puts the pressure on the financial health of thin film manufacturers. If thin film suppliers find it difficult to compete and continue to fail, a large part of the installed capacity in India will find itself without warranties and guarantees on their modules.