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Interview: The Aditya Birla Group on the REC Mechanism in India

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BRIDGE TO INDIA interviewed the Aditya Birla Group for the INDIA SOLAR HANDBOOK for their views on the solar market in India. Mr. Ravi Khanna serves as Chief Executive Officer of the Solar Power Business of the Aditya Birla Group. BRIDGE TO INDIA garners an understanding of the motives, scope and strategies behind its solar incentives.

As a developer in the Indian solar market, the Aditya Birla Group is keen on operating projects under the REC/RPO mechanism. According to the company:

Both small scale projects – around industrial townships, mining facilities and telecom towers – as well as larger projects under the NSM or through REC mechanisms are viable options

The lack of enforcements and unclear regulations in the REC market stunt the access to capital

BTI: Why has the Aditya Birla Group decided to develop solar power projects in India?

RK: The Aditya Birla Group is committed to sustainable business practices and environmental conservation. Towards sustainable resource management and furthering the growth of alternative energy in India, the Group has decided to participate in the development of solar power in India. We have taken a conscious decision to voluntarily align our energy portfolio and ensure that a sizable portion of energy comes from renewable sources.

BTI: What are the sizes of projects that you are looking to develop? Will these be under the NSM or state policies?

RK: We are looking at various opportunities independent of scale. Among small scale projects, we have evaluated setting up decentralized solar power projects for community development in and around our industrial townships, mining facilities as well as for our telecom towers. We are also keen on developing large scale projects under the grid connected policies – be it the National Solar Mission, existing or forthcoming state policies as well as the independent REC/RPO mechanism.

BTI: As a large business conglomerate, you face RPOs for your different businesses. What is your strategy to meet these obligations?

RK: As one of the largest private consumers and captive generators of power, we will of course adhere to all regulatory obligations as they are mandated in the future. However, we are seeking to move proactively to make sure that we can address these obligations promptly and efficiently. In any large corporation, there will be a mix of activities to meet the stated target including purchase of certificates, own generation, purchase of renewable power and so on.

BTI: Is the solar REC market viable? Are you looking to develop projects based on the REC mechanism?

RK: For a business venture, a stable regulatory environment is essential. This enables a fair analysis of the market risks to be managed. The REC market today faces certain challenges – the key being the lack of clarity on the enforcement of RPOs and its impact on the REC prices in the future. The regulation itself is a well thought out document, but due to enforcement issues businesses are slow in committing capital on the scale that is required. The market will remain stunted without access to capital or finance until the concerns relating to enforcement are addressed. Other problems that are systemic to the power sector such as the development of evacuation infrastructure, intra and interstate transfer of energy and payment from the state distribution companies (DISCOMS) can all be addressed in parallel after the resolution of the key issue of enforcement. We, at the Aditya Birla Group, are keen to develop projects under the REC/RPO mechanism both for sale of power to our units and to other companies that may require such power as well as to supply certificates to the exchange to help facilitate the REC process.

BTI: What are the key factors that govern your decision on the purchase of modules?

RK: The key considerations that we look at for the purchase of modules fall under three broad heads – quality, effectiveness and price. Under quality we look at the warranty and guarantee conditions that the module supplier provides, the rate of degradation and the health of the company backing the module. In cases where we have limited land availability or where land is costly, the efficiency becomes important. Under effectiveness we explore the type of guarantee provided – whether it is linear or flat, the size of the bankability reports of the company providing the module and the related balance of system costs for that particular module. Under price considerations, cost, payment terms and delivery schedule are key.

Look out for BRIDGE TO INDIA’s analysis on ‘Viability of the REC Mechanism in India’.

For more information on the Indian solar market, visit our Reports page or Contact us.

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Making unsubsidized PV work in India

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Dr. Tobias Engelmeier is founder and Managing Director at BRIDGE TO INDIA. He consults international companies in developing successful market strategies in India.  The following post analyses the state of the PV ‘Market’ in India. The ‘Market’ forms one part of BRIDGE TO INDIA’s INDIA SOLAR NAVIGATOR – India’s only dedicated online business intelligence tool that is being designed to enable leading solar companies to take strategic decisions to succeed given the ever-changing landscape of the Indian market.

Solar PV in India will be driven by commercially attractive opportunities, not by government subsidies. These opportunities are already there, but to realize them, some challenges need to be overcome.

Falling PV solar costs, rising costs of coal and oil and India’s vast power deficit pave the way for commercially viable PV solutions

Solar power can already compete with commercial grid power tariffs in many parts of the country. Replacing diesel generator sets and rural electrification could follow soon

Creating drinking water with efficient means could be a key business model of the future

Solar PV is still one of the most expensive ways of generating electricity. Then why should India focus on solar power as opposed to cheaper alternatives to be sufficient for as many people as possible, as quickly as possible? The cost of solar PV has fallen by 40% in the last 18 months, suddenly making it an attractive alternative to diesel power generation and even grid power for some customer segments. Solar PV also has the great advantage of being easily and de-centrally applicable in small generation units (as small as a solar lantern). India suffers from a large and growing power deficit, resulting in the unavailability of grid power to millions of people and major challenges in developing a high quality distribution grid. Solar PV is helping to fill this gap, rather than replacing another, perhaps cheaper form of energy. This is a key difference from developed markets. In the long-term, solar power also promises to provide India with more energy security, as it is a plentiful and domestically available energy source. Also, we can reasonably expect the cost for solar PV power to continue to come down, while at the same time the cost for fossil fuel based power generation is likely to rise, making solar increasingly more competitive. In that scenario, solar PV would find its place based on the commercial, developmental and political merits of the technology for India rather than climate change considerations. If you are interested in reading more about the Indian solar market, you can download our free INDIA SOLAR HANDBOOK and have a look at our other blog entries, where we discuss some of these issues in more detail.

There are a number of segments in the Indian market, where non subsidized solar PV is currently feasible:

Providing commercial tariff customers with solar solutions to complement their current power supply, thus reducing their Levelized Cost of Energy (LCoE). There would probably be no storage and the PV system size would be designed to ensure the peak PV power generation is directly consumed.

Providing telecom towers with hybrid diesel PV solutions to reduce the cost of power to the tower operating company. Out of India’s estimated 400,000 towers, perhaps 50,000 to 100,000 run on more than 10h of diesel. Individual PV system sizes would be small (5-15kW) and managing uptime is crucial.

Replacing diesel back-up. Solar PV power is already cheaper than diesel power in most cases. According to some estimates, there are as many as 60GW of installed diesel gen-sets in India. These range from MW-scale systems powering factories or real estate developments to small systems powering an AC. Here a key concern is the availability of space for PV installations, as many back-up systems are located in urban areas.

Providing electricity to customers who previously did not have any power, especially in rural areas. There are a number of great ideas, companies and projects out there (e.g. Sellco, Simpa Network), but I there are some questions about their profitability, risks (payment by customers who have very little money) and therefore investor attractiveness and scalability.

Despite its feasibility, there are still many challenges that can be seen with providing commercially viable PV solutions to the Indian market:

The most important challenge is to overcome the liquidity gap: On a per kWh basis, PV may already be competitive with other sources of power. However, as opposed to grid power, the system needs to be entirely pre-financed. It is a Capex model competing with Opex models. In order to level the playing field, the solution provider would have to invest into the plant and provide a solution to a customer wherein the solar power is sold per unit. For that, the investor needs a secured payment stream for 15-20 years. Given the Indian legal environment and the dynamic economic development, this is perceived as high risk by many investors.

If the power consumer would invest into the plant himself, he often does so only if the rate of return is at least as high as his core business investment opportunities. Currently, a reasonable return on investment for solar PV in India is 15%. This is too low for many Indian investors.

Developing off-grid systems is often hampered by their limited size. Pilots are needed as a proof-of-concept. However, the transaction costs for projects smaller than 5MW are often considered to be too high. Project development margins for the first projects are low and many banks are unwilling to carry out due diligence for such small projects.

In addition to these systemic challenges, there are a number of regulatory uncertainties (such as with respect to open access regulations) and the availability of information on crucial elements like electrification rates, actual diesel prices or end-user tariffs are difficult to obtain.

Market Intelligence at BRIDGE TO INDIA provides analyses on the Indian solar market in the form of published reports. You can buy our reports by visiting our Reports page.

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India needs a better innovation ecosystem

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Dr. Tobias Engelmeier is founder and Managing Director at BRIDGE TO INDIA. He consults international companies in developing successful market strategies in India.

The US Bell Labs or the German Fraunhofer Institutes offer some lessons on fostering innovation for India. If the Indian renewable energy sector adopts these lessons, it could become the world leader in low-cost, renewable energy solutions.

The Bell Laboratories are a great example of how innovation can be fostered: by putting many diverse, smart people together, connecting them to real world challenges and then giving them time

The Fraunhofer Institutes in Germany are similar. They bring together academia, industry and government to work on applied solutions

India so far lacks such an innovation ecosystem. If it were to develop one in renewable energies, it could emerge as the world-leader in low-cost renewable energy solutions

I read a very interesting opinion piece in the New York Times called “True Innovation” about the Bell Laboratories. It contrasts the Bell Laboratories’ “slow and build” approach with Facebook’s “fast and break” approach to innovation. It suggests that “Revolutions happen fast but dawn slowly. To a large extent, we’re still benefiting from risks that were taken, and research that was financed, more than a half century ago”. The writer Jon Gertner has also authored a book on the subject titled “The Idea Factory: Bell Labs and the Great Age of American Innovation”. He makes three very interesting observations about how the Bell Laboratories created an environment conducive to innovation:

Put together a critical mass of diverse, excellent scientists in one physical space, where ideas can come about often due to chance encounters and conversations.

Rigorously link theory to practice by combining fundamental scientific pursuits, ideas and inventions with specific production, product or marketing requirements – each feeding back into the other.

Give the researchers the time, trust and freedom needed to explore new ideas and thoughts over longer stretches and across boundaries of purpose or expertise.

The highly innovative German Fraunhofer Institutes (Fraunhofer Institute on Solar Energy Systems or ISE) work differently. They are greatly specialized and therefore may have less cross-pollination from radically different sciences. Where they excel is in bringing together research with academia (they collaborate with the Freiburg University), industry (they carry out paid research) and venture capital (they churn out many start-up companies). By providing a link between industry needs and long-term academic research, they manage to be both immediately relevant and creatively innovative, as the Bell Laboratories have been.

India currently lacks a comparable innovation infrastructure. That is a shame, because all the pieces are in place: a vibrant industry, a wealth of smart engineers and scientists, funding (both private and public) and – most of all – many great problems to tackle.

In the field of renewable energies, for example, if India wants to fulfill its ambition to become a world leader in solar power, it needs to move from being a consumer of technology developed elsewhere to becoming a producer of technology. Many Indian entrepreneurs and companies are already starting to do so, but could do well with a state-of-the-art innovation center. This could allow them to lift their gaze from immediate economic gain to strategic long-term solutions, to provide defensible technology or solution USPs in a global competition. After having been defunct for many years, the Solar Energy Center in Gurgaon – just outside New Delhi – is starting to pick up pace again and shows some promise. Equally, the Indian Institutes of Technology in Mumbai and Jodhpur want to become centers of solar research.

Where should India’s efforts be directed? Where can India develop an international, best-in-class competence? If, broadly speaking, China has a vast lead in manufacturing of solar components, Germany is most advanced when it comes to system and grid integration and the US has the most professional renewable energy financing scene, India could find a significant and profitable niche in developing de-central solar energy solutions. Such solutions would not only be for its poor and un-electrified villages, but also for its rapidly growing urban, industrial and commercial centers. Developing such know-how would be greatly beneficial and relevant to markets all over the world.

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Is the Indian grid ready for expansion to renewable energy?

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Mr. Shivansh Tyagi specializes in project development policy and project finance as Consultant in the Solar Project Development team at BRIDGE TO INDIA. He interest lies heavily in tracking the development of power infrastructure in India. 

Two major grid collapses in less than 48 hours – this is the worst power crisis India has ever seen, affecting 19 states and about 600 million people. A cascading effect of power overdrawn from the grid by northern states like Uttar Pradesh and Punjab lead to grid frequency plummeting to an alarming low of 47.50Hz in India earlier during the day. This grid failure has raised fundamental questions about the robustness of the Indian power grid, especially given India’s ambitious renewable power targets, adding significant amounts of unscheduled power to the grid.

Wind and solar power are still a negligible part of India’s power generation but there are plans to increase the proportion significantly

Wind and solar power are known to be more erratic in comparison with power from thermal or large hydro sources

Is the Indian grid stable enough to transmit power from more erratic sources such as solar and wind power?

Currently, wind and solar power only contribute around 8% of India’s power. This is still a negligible quantity. Although reaching a significant installed capacity of renewable power is still some way in the future, it is hard to imagine that India’s grid will be ready for this scenario. For an idea of the challenges ahead, just look at the “Energiewende” discussion in Germany. India wants to integrate in-firm wind and solar power up to the tune of 12-15% by 2020, as targeted by the Indian government under the National Action Plan on Climate Change (NAPCC). The erratic nature of solar and wind power can cause drastic grid disturbances, much more than those experienced through conventional power.

The Indian government plans to develop green energy corridors with dedicated transmission lines for solar and wind power. But will that be a sufficient solution for the capacity addition that is imminent with India’s economic growth and rising power demand?

India is almost back to its status quo of having a highly unstable transmission infrastructure prior to 2001 or perhaps even more fragile than it was ten years ago. With the plan of a centralized national grid (one that will synchronize all five regional grids in India) incidents like the one witnessed this week could leave the entire nation with no power and an economic loss of millions.

If the Indian grid is not ready for significant deployment of centralized renewable power, what are our alternatives?

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