Month: October 2012

Jasmeet Khurana, Market Intelligence Consultant at BRIDGE TO INDIA has expertise in project performance benchmarking, success factors for module sales, financing and bankability of projects in India.

For a significant part of 2012, project developers in India have had very limited visibility on their project plans and pipelines. This scenario is expected to change with the announcement of new policies.

The Andhra Pradesh solar policy will provide various exemptions under the open access mechanism and will allow developers to sell under the REC mechanism

The Tamil Nadu solar policy aims to create demand for solar power by enforcing obligations on select power consumers

Implementation of Viability Gap Funding under phase two of the NSM will emphasize the shift from a government-backed to consumer driven off-take

The India solar market is anticipating many alterations with the recently released state solar policies in Andhra Pradesh and Tamil Nadu, the expected announcement of the guidelines for phase two of the National Solar Mission (NSM) in December 2012 and phase three allocations under the Gujarat solar policy in January 2013. Each of the newly announced policies is taking an innovative route to promote investments in solar power and set a precedent for other states to follow.

Andhra Pradesh solar policy aims to remove regulatory hurdles for captive use and third-party sale of power, provides exemptions from various levies under open access mechanism and allows developers to sell Renewable Energy Certificates (RECs). Project developers have lauded the policy as it provides a conducive environment for investments and at the same time does not put any financial burden on the state exchequer.

A part of the Tamil Nadu solar policy promises higher tariff if the power is sold to the state-owned distribution company, but given the poor financial health of the distribution company, it is unlikely that many project developers will be interested in that. To ensure investments into the state, a large part of the policy aims to create demand for solar power by enforcing an obligation to buy solar power on select power consumers.

The market can be seen to be moving away from the state backed Feed in Tariff (FiT) and towards a consumer driven off-take. Implementation of Viability Gap Funding (VGF) for NSM projects will also be a step in that direction (refer to the October 2012 edition of India Solar Compass to read more). The falling costs of solar are responsible for such a shift in the market and a key learning for other states at this stage is that a transparent and conducive regulatory framework can go a long way in promoting investments into solar power. This can now be done without putting any significant financial burden on the state exchequer.

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Dr. Tobias Engelmeier, Managing Director at BRIDGE TO INDIA, has co-authored a scientific paper on ‘Rent management and policy learning in green technology development: The case of solar energy in India‘ along with Dr. Tilmen Altenburg, Head of Department for ‘Competitiveness and Social Development’ at the German Development Institute, Bonn, Germany. The following blog is an excerpt from this paper.

Sir Nicholas Stern has called climate change “a result of the greatest market failure that the world has seen”, because it has potentially huge global effects for the whole world’s inhabitants. In order to keep global warming within tolerable limits, new mitigation technologies must be developed and many conventional greenhouse gas-emitting technological trajectories disrupted.

Investors need to be able to earn above-average returns in the new green industries to build up physical capacities, acquire capabilities and make these industries competitive

The challenge for policymakers is to manage rents so that they reach the targets with a minimum of political capture and waste of taxpayer and consumer money

Solar energy is a socially desirable source of energy, but remains considerably more expensive than energy from other sources for which it requires steadfast government support till it can achieve grid parity

The areas in which it is necessary to accelerate major technological breakthroughs are well known: renewable energy and energy storage technologies, carbon capture and storage technologies, new resource saving materials, new mobility concepts and more eco-efficient agricultural technologies – to name just a few. In most cases, it could take years, or even decades, until carbon-efficient technologies become competitive in the market place. To accelerate their development, reliable long-term policy frameworks are required with attractive subsidies and/or guarantees that reduce the risk and bridge early development and commercial success. In economists’ terms, rents need to be created, that is, investors need to be able to earn above-average returns in the new green industries for as long as needed to build up physical capacities, acquire capabilities and make these industries competitive.

Creating rents for supporting specific industries can, however, have two undesirable effects (Chang 2006). Policymakers tend to act on incomplete information that can lead them to make wrong choices and support technologies which never become commercially viable. Thus, the possibility of earning above-average returns in regulated markets creates a strong incentive for rent-seeking, that is, lobbyists will try to influence regulations in order to increase their rents or stretch them over longer periods of time than are necessary for developing the new industries (‘political capture’). Thus the challenge for policymakers is to manage rents so that they reach the targets with a minimum of political capture and waste of taxpayer and consumer money. Rent management is especially demanding when pressing environmental problems require that established technological trajectories be disrupted and new generations of technologies developed.

In such cases, policymakers must often design support schemes without knowing which technologies will become the commercially successful ‘dominant design’ (Anderson / Tushman 1990) – or the specific capital requirements, the speed with which economies of scale will reduce unit production costs, how long it will take until the new technologies reach cost parity with incumbent technologies, and to what extent the new activity will create knowledge spillovers in related activities. All this makes it very difficult to determine the necessary amount and duration of subsidies or protection. At the same time, uncertainty increases the scope for rent-seeking: industry lobbies have strong incentives to overstate the need for subsidies and protection. Governments must take the trial-and-error approach to testing various policy options and continuously adjust their support in view of the market’s changing realities.

The paper on ‘Rent management and policy learning in green technology development: The case of solar energy in India’ explores how the Government of India creates and allocates rents in its attempt to promote solar energy generation, how it tries to minimize political capture and how it tests and fine-tunes its policies. This case is particularly interesting for two reasons. First, energy from the sun is a socially desirable source of energy that deserves and requires long-term policy support: it is practically emissions-free, is more abundant than other renewable energies in many countries, and can be locally generated, which furthers development. At the same time, solar energy remains considerably more expensive than energy from other sources (conventional, as well as hydro or biomass) and therefore requires steadfast support until it achieves grid parity. The Government of India has recently adopted a ‘National Solar Mission’ that includes a range of new incentives, and some Indian state governments are also experimenting with support measures. India thus provides a unique ‘laboratory’ for learning about solar policy.

To continue reading, click here.

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Jasmeet Khurana, Market Intelligence Consultant at BRIDGE TO INDIA discusses India’s newest state solar policy as a part of his blog series, ‘Understanding the Tamil Nadu Solar Policy 2012′. This is part I of the IV part series.

Tamil Nadu announced its state solar policy last week. The policy aims to achieve an ambitious installation target of 3GW by 2015.

The policy targets installations through Solar Purchase Obligations, which are separate from Renewable Purchase Obligations (RPOs)

Though distribution companies (DISCOMs) will be directly responsible to meet RPOs, the burden of purchasing solar power will eventually pass on to consumers through power tariffs

The state of Tamil Nadu has tried to transfer the obligation as well as its financial responsibility to the select few obligated entities that already pay higher tariffs

For a target of 1.5GW of utility scale projects till 2015, the policy targets an installation of 1,000MW from the fulfillment of Solar Purchase Obligations (SPO). This SPO is different from the solar RPO requirements of 0.05% earlier notified by Tamil Nadu Electricity Regulatory Commission (TNERC) for the current financial year. These obligations have been mandated at 3% till December 2013 and 6% from 2014 onwards on various power consumers such as Special Economic Zones (SEZs), IT parks, industrial consumers guaranteed with 24/7 power supply, colleges, residential schools and all buildings with a built up area of more than 20,000 square meters.

So far, though distribution companies are directly responsible to meet RPOs, the financial burden of purchasing, for example, solar power is eventually passed on to the consumers through power tariffs over time. In Tamil Nadu’s case, the financial situation of its distribution company, TANGEDCO, is weak and according to official estimates it has been known to be running a loss of around INR 50,000cr as of March 2012. It is also known to have defaulted on payments to wind power producers, for well over a year. Under these circumstances, banks would have been particularly wary of lending to any project developer selling power to the distribution company.

Under its new policy, the state has tried to transfer the obligation as well as its financial responsibility to the select few obligated entities like the industrial consumers, IT parks, SEZs, etc. that already pay higher tariffs. This has been done by allowing developers to sell directly to these obligated entities. Moreover, till it is clarified by the state regulator, these consumers have the dual obligation: direct obligation of the SPO and the impact on tariffs that will result due to the earlier notified RPO.

Follow this space for part II of ‘Understanding the Tamil Nadu Solar Policy 2012′ on ‘Tamil Nadu Solar Policy burdens consumers, but only a select few’.

Write to us at contact@bridgetoindia.com for more information.

Dr. Tobias Engelmeier, Managing Director at BRIDGE TO INDIA presented on ‘The Indian PV Market: A 12.8GW Opportunity by 2016‘ as a part of a webinar with Solar Promotion on October 11th 2012.

Post his presentation at the webinar on ‘The Indian PV Market’, Dr. Tobias Engelmeier engaged with the attendees in a question and answer session. His answers highlighted the following:

Main challenges faced by Indian solar module manufacturers are price, quality and innovation

Solar energy, being more abundantly available in India than wind power can have better planning for its generation which would reduce grid challenges, making it more preferable than wind energy

CSP continues to be valued as a technology with the potential for indigenization and storage options. This could make it more viable in the future

Q: What are the main challenges of solar manufacturers in India?TFE: Indian manufacturers face challenges on two levels – the global and the national. On the global level, have the same trouble that everyone in the industry has: Great oversupply and, as a result, crippling prices. On the national level, Indian manufacturers have three challenges: price, (perceived) quality and innovation. They are not large enough (50-200MW) to compete on scale with Taiwanese or Chinese competitors. They are also not vertically integrated and thus not able to shift margins between different sections of the value chain. This has been explained further in ‘Status of PV Manufacturing in India’. On quality, they are often better than their reputation and many Chinese competitors. However, their branding is not strong. Innovation – making modules that suit India-like conditions (dust, humidity, low-tech construction, little water for cleaning, etc.) could be an asset, but at the moment there is almost no innovation happening. Like elsewhere, we will see a strong consolidation from the 20-odd manufacturers to two to five (if that). Hopes are currently placed in protective government measures. This is discussed in more detail in our INDIA SOLAR COMPASS, which can be downloaded for free.

Q: How does the product distribution work in rural areas?TFE: There is no single solution for product distribution in rural areas. India consists of very diverse states and regions. The idiosyncrasies become very important when dealing directly with end customers and especially rural ones. There are hardly any established distribution channels (such as e.g. rural supermarkets). I would think, we are currently in the ‘exploration’ phase with respect to rural markets. There are many large and small companies that work here. They have in many cases moved beyond pilots and are beginning to scale. However, they still only reach a small segment of the rural population. And then, there is the payment question. Rural households have a – in pockets surprisingly high, but on average very low – disposable income. For this reason a number of sales channels are linked to microfinance.

Q: What makes solar power development more sustainable and competitive compared to wind energy?TFE: Wind and solar bother have an important place in the Indian energy landscape. Wind power is, of course, cheaper per kWh than solar power by a factor of two. Wind also often comes in big ticket sizes (10-100MW plants) and can draw on 20 years of experience in India and the execution capabilities of large Indian and international companies. That makes it much more bankable. Solar is the newcomer and rising fast. It will be the preferred choice wherever the wind resource is insufficient and wherever smaller, de-central solutions are needed (2MW or less). Solar also has two important long-term advantages: the resource is more abundantly available in India and its generation can be better planned than wind, thus reducing the grid challenges. In the past year, the cost of solar PV has come down so rapidly that it shook up many energy calculations. Much will depend on whether that will continue. At the same time, India has not yet tapped into off-shore wind and is just starting to explore the options. The upcoming report on ‘Renewable Energy in India: An Overview’ written for the Indo-German Energy Forum and available on our website for further information will elucidate the above.

Q: What do you think about grid instability? Don’t you think that, until this is cleared, is not that easy to develop on-grid PV? Don’t you think off-grid PV is likely more promising at the moment?TFE: I agree. Grid instability works in two ways: It will make large, unscheduled power generation feeding into the grid difficult especially in areas with much renewable power generation in bundled (Gujarat and Rajasthan for solar, Tamil Nadu for wind). We already see first local, significant grid bottlenecks. At the same time, the instability of the grid (remember the July 2012 power cut) makes power consumers very keen to increase their supply security. At the moment, they do so with diesel gen-sets. This is very expensive. In future, renewables (especially PV) will likely play a more important role, replacing diesel and also grid power. ‘Off-grid’ is a slightly more complex market. There are, broadly speaking, two types of customers: Firstly, economically strong customers that tend to have infrequent power demand (e.g. food processing) or such significant power demand that they build large fossil power plants (e.g. aluminium, steel). Secondly, there are the rural off-grid households. See answer above for details. Refer to the post on ‘Making unsubsidized PV work in India‘ to know more.

Q: What is the potential for Concentrating Solar Power (CSP) in India?TFE: There was great initial enthusiasm at the beginning of the National Solar Mission, when India auctioned 500MW. Since then, the road has been rocky: site selection was often less than ideal, the learning curve in construction has been high, indigenization of parts has been slow, etc. Since the projects involve the who-is-who of Indian industry (Lanco, Relianc), they will likely be built. Whether the projects will be profitable is doubtful. As elsewhere, CSP has felt the competition from PV due to falling PV module costs. While the CSP share under the NSM Phase I was as high as 50%, it will be significantly lower for phase II. Nevertheless, CSP continues to be valued as a technology for the potential for indigenization and the storage options. The MNRE has recently initiated a number of large pilots to test different applications of CSP technology (low/high heat, hybridization, etc.). Refer to our article on the status of CSP in India we have written for the October 2012 issue of Sun & Wind Energy.

Q: Has the REC scheme taken off? If so, which are the states where this is attractive? Are the developers able to achieve the financial closure for REC projects?TFE: The REC market has a solar and a non-solar component. The non-solar component has taken-off and significant volumes are traded at stable prices. The solar REC market is still at the very beginning. The Central Electricity Regulatory Commission (CERC) is very serious about getting the solar REC market to move. Much will depend on the penalization of Renewable Purchase Obligations (the demand side). While private utilities and captive consumers have been penalized, the large government-run utilities (around 80% of the market) have not. Enforcement will need to happen at the state level. Everyone is waiting and watching. To learn more about the REC market, please visit our blog or download our free INDIA SOLAR DECISION BRIEF on ‘The REC Mechanism: Viability of solar projects in India’

Write to us at contact@bridgetoindia.com for further information on the Indian solar market.

Join our LinkedIn group ‘India’s Solar Future’ and get our team of solar expert to answer your questions on October 18th 2012 at 2:00PM (GMT + 5:30hrs).

BRIDGE TO INDIA provides a precise, analytical and in-depth update on the Indian solar market every quarter as a part of its INDIA SOLAR COMPASS. This is an excerpt from the October 2012 edition of the INDIA SOLAR COMPASS.

The Ministry of New and Renewable Energy (MNRE) has delayed the publishing of guidelines for phase two of the National Solar Mission (NSM). The guidelines were scheduled to be published by October 2012, but as per our interactions with government officials, they will not be available before the end of 2012.

Two of the main topics of debate that may be delaying the launch of phase two are the method of incentivizing solar projects and protecting the domestic manufacturing industry.

The Solar Energy Corporation of India (SECI) will take over from the NVVN as the nodal agency with which project developers will sign Power Purchase Agreements

The MNRE is considering two options to incentivize projects under the NSM: Generation Based Incentive (GBI) and Viability Gap Funding (VGF).

The allocation of projects for batch one of phase two should take place before April 2013. The industry is waiting eagerly for new project opportunities under the NSM, as there are currently no policy-based projects available anywhere in India. Two of the main topics of debate that may be delaying the launch of phase two are the method of incentivizing solar projects and protecting the domestic manufacturing industry.

The MNRE has to explore options other than feed in tariffs (FiT) to incentivize solar, because the Ministry of Power (MoP) does not have adequate unallocated power[1] from conventional sources that can be made available for bundling with solar power produced by projects under the NSM.

For phase one of the NSM, the NTPC Vidyut Vyapar Nigam (NVVN) was the government’s nodal agency with which project developers signed Power Purchase Agreements (PPAs). Linked to the MoP, the NVVN bundled the power bought from solar plants with power from conventional sources that had not been allocated to states by the MoP in the ratio of 1:4. The bundled power was then sold at a unitary rate. However, the MoP will not play any role in phase two of the NSM as the Solar Energy Corporation of India (SECI) will take over from the NVVN as the nodal agency.

In addition, the MoP cannot continue to assign this unallocated power to NSM projects, when many states are overdrawing power from the grid due to inadequate supply. For example, in July, the power-deficit states of Uttar Pradesh, Haryana and Punjab had overdrawn power from the national grid, which resulted in widespread grid instability and vast blackouts affecting the entire northern, eastern and the north-eastern grids. The MoP could be looking to allot the unallocated power to the states with high power deficits to curb overdrawal from the grid. Making provisions for the bundling of power as a part of the NSM is currently not a priority for the MoP.

In phase one of the NSM, the bundled power served to bring down the difference between the average cost and the sale price of solar power. Without the availability of enough unallocated power to negate the higher prices of solar considerably, the government will find it difficult to sell solar power at a higher price. Therefore, it will be difficult and financially unviable for the MNRE to provide FiTs to solar power projects. In light of this, they are considering two options to incentivize projects under the NSM: Generation Based Incentive (GBI) and Viability Gap Funding (VGF).

As per our conversations with MNRE officials, the GBI is a less likely option. As an alternative, the MNRE is keenly considering introducing VGF to incentivize solar in phase two of the NSM. VGF, unlike the GBI is a onetime or short-term capital assistance. As a result, it is not a strain on the government’s finances in the long term.

Click here to download the free October 2012 INDIA SOLAR COMPASS to read our complete analysis. This report also contains detailed analyses on state specific policy allocations, projects and financing in the Indian solar market this quarter.

[1] Unallocated power is the reserve set aside by the central government for various uses, such as allocating a part of it to a state with a power deficit

You can contact us for any further information on the Indian solar market.

BRIDGE TO INDIA provides a precise, analytical and in-depth update on the Indian solar market every quarter as a part of its INDIA SOLAR COMPASS. This is an excerpt from the October 2012 edition of the INDIA SOLAR COMPASS.

The Indian solar market has experienced a lull period this past quarter (July-September 2012). An overview:

A lack of projects through state policies and the NSM has driven interest in the REC mechanism, however regulatory challenges are a major bottleneck

Indian manufacturers have begun contracted sales with projects under the NSM

The MNRE is likely to strengthen the current Domestic Content Requirement (DCR) in the second phase of the NSM, but this will not ensure global competitiveness of Indian manufacturers

In the last quarter (July-September 2012) there has been a capacity addition of only 67.25MW of PV in India, a drastic drop from the 401.74MW of PV added in the first quarter and 340.62MW added in the second quarter of this year. This is a direct result of a low number of project allocations in the Indian market in the first three quarters of 2011. The Indian solar market took off with close to 1.1GW of PV projects allocated between the Gujarat Solar Policy and the National Solar Mission, which happened towards the end of 2010. Since then, the PV market has experienced a lull with allocations of only 350MW by the NSM in December 2011 and another 310MW between the states of Madhya Pradesh, Odisha and Karnataka during the first two quarters of 2012. This has left developers, EPC contractors and module suppliers with very few opportunities in the market, raising serious questions on the stability of demand required for the project related eco-system to develop in a sustainable manner in the country.

The lack of projects through state policies and the NSM since December 2011 has driven interest towards projects under the Renewable Energy Certificate (REC) mechanism. However, BRIDGE TO INDIA’s free report ‘The REC Mechanism: Viability of Solar Projects in India’ shows, while this market has potential, it still faces some critical bottlenecks like the implementation of RPO’s to create demand for RECs and regulations surrounding the use of the open access mechanism for the captive use of power. A project based on the REC mechanism in its current form is not a very viable option. It is critical for project developers to understand future demand for RECs and create new business models that account for various demand and regulatory risks. It remains to be seen if investors and banks in India have the appetite to take on the risk in order to enjoy potentially strong upsides and continued growth. With limited project development opportunities, only entrepreneurial, strategic players interested in investing in new business models around the REC mechanism stand a chance of sustaining their growth in the quarters ahead.

For the manufacturing industry in India, there is some good news. Indian manufacturers have begun selling to projects under the NSM, primarily by integrating downstream through EPC services. Close to 70MW has been sold so far to projects under batch two of phase one of the NSM. In addition, close to 200MW has been tied up for contract manufacturing by international c-Si manufacturers. While this does not yet constitute a drastic reversal of fortunes for Indian manufacturing, it is nevertheless a positive departure from the previous quarters when most manufacturing lines were operating at 15% or less capacity utilization. The MNRE is likely to strengthen the current Domestic Content Requirement (DCR) in the upcoming second phase of the NSM. This is likely to give a further boost to Indian PV manufacturing. However, in order to be competitive in the long-term, Indian manufacturers need to look beyond DCRs and improve their competitiveness in a tough global market.

Click here to download the free October 2012 INDIA SOLAR COMPASS.

You can contact us for any further information on the Indian solar market.