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The market this quarter: The January 2013 edition of the INDIA SOLAR COMPASS

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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 January 2013 edition of the INDIA SOLAR COMPASS.

The previous quarter (October to December 2012) has seen a flurry of new solar policy announcements, which seem to have awoken a lulled market.

With the new announcements (totaling 11.3 GW of PV by 2013), government sponsored PV in India appears to be set for maturity.

Up to 5.3 GW of the announced capacity relies on the Renewable Purchase Obligation (RPO) targets set by states.

An investigation for anti-dumping duties against manufacturers from China, the US, Taiwan and Malaysia has been launched in the last quarter. Conclusive evidence can result in the imposition of duties up to 20%.

The states of Tamil Nadu, Andhra Pradesh and Chhattisgarh have announced policies targeting a cumulative 5 GW of solar photovoltaic (PV) installations over the coming years. In addition, the National Solar Mission (NSM) has proposed a target of 6.3 GW of PV installations as part of its phase two draft guidelines until 2017. The announcements totaling 11.3 GW of PV by 2017 mark a significant departure from the state of the market in 2011 and the first three quarters of 2012. There was a slump in project opportunities in the Indian market after close to 1.1 GW had been allocated before December 2010.

With the new announcements, government sponsored PV in India appears to be set for maturity. This is crucial for component suppliers and Engineering, Procurement and Construction (EPC) players looking for new project opportunities, especially in the face of a significant fall in demand in Europe. It is also important for a large pool of project developers and investors who have built their capacities in the early stages of the market and are now ready to expand their portfolios towards achieving scale.

The market needs to be approached with measured optimism. Up to 5.3 GW of the announced capacity relies on the Renewable Purchase Obligation (RPO) targets set by states. Further, the policies of Chhattisgarh and Tamil Nadu specifically target the Renewable Energy Certificate (REC) mechanism as an off-take. With no clear RPO enforcement mechanisms at the state level yet and challenges with the bankability of REC projects, there is a significant question mark on how much of the planned capacity addition will actually translate into projects. Further, Feed-in-Tariff (FiT) based projects under the Tamil Nadu and Rajasthan solar policies are expected to rely on the respective state distribution utilities for the off-take. The utilities of both these states are mired with large financial losses that will challenge the bankability of their Power Purchase Agreements (PPA). In addition, up to 1.5 GW worth of projects under the NSM may be offered Viability Gap Funding (VGF) under which they will have to find alternatives to the payment security backed PPA that was offered by the NTPC Vidyut Vyapar Nigam (NVVN) in the first phase. Such projects too might face bankability issues in the absence of a secured PPA.

Another key development in the last quarter has been the launch of an investigation into the alleged dumping of cells and modules into India by manufacturers from China, the US, Taiwan and Malaysia. If conclusive evidence of dumping is found in the next six months, it could result in the imposition of anti-dumping duties of up to 20% on imports from the countries under investigation.

Manufacturers from the countries under investigation have supplied up to 70% of the modules used in the Indian market so far. If imposed, anti-dumping duties are bound to decrease their competitiveness vis-à-vis manufacturers from India and those from countries outside the scope of the investigation. Project developers will face higher system costs as they will no longer be able to import cheaper modules from abroad. This in turn will dent their ability to offer solar energy at prices that can compete with commercial and industrial prices of electricity across some states in India.

While anti-dumping duties are largely perceived as a necessity for the survival of Indian manufacturing, their benefit will be limited to a handful of Indian cell manufacturers. A majority of Indian module manufacturers rely on imported cells. They will face an increase in the prices of their modules as they will have to bear the import duty on cells. Anti-dumping duties are likely to create a distorted market where certain Indian players will enjoy exceptional advantages. Indian cell manufacturers justify this as a move needed to correct the alleged advantage that international manufacturers have enjoyed in India so far. However, BRIDGE TO INDIA’s opinion is that some international manufacturers have been able to sell at prices lower than their Indian competitors because of their scale and technology advantages under conditions of global over-supply. Anti-dumping duties will restrict Indian projects from capitalizing on cheaper international imports while doing little to improve the fundamental competitiveness of Indian manufacturers.

Download our complete analysis on the previous quarter in the January 2013 edition of the INDIA SOLAR COMPASS, where we answer the key question, ‘What will be the impact of anti-dumping duties in India?’.

Contact us for any further information on the Indian solar market.

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The call of sirens: Is India really a good solar market?

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Dr. Tobias Engelmeier is Founder and Managing Director at BRIDGE TO INDIA.

No doubt: the Indian solar market has strong fundamentals. Irradiation is very high, power is expensive and in short supply. Solar is getting cheaper. In addition, there are now a host of new policies (NSM phase II, Tamil Nadu, Andhra Pradesh, etc. – please refer to our other blog entries) promising upwards of 4 GW of new solar installations in the coming months. On the other hand, there are only a few players that are really enjoying themselves. Tier 1 Chinese module manufacturers find price pressures too high – as do many EPCs. Project developers still face difficulties in getting their projects financed. The question is: does anyone earn any money? The answer is: no. But those who are ready to try new approaches will do so in future.

Solar in India is a long-term business proposition with moderate returns

‘Quick wins’ are rare

The market has only deceptively low barriers to entry

To tap the great fundamentals, patience and a real business case are needed

On the face of it, solar power in India seems like a no-brainer. And the national and state governments are willing to encourage it in various ways – from providing subsidies to creating demand. Large figures for new allocations are making the rounds. Tamil Nadu alone aims to have 3 GW of installed solar capacity by 2015 and the NSM double that by 2017 (for our assessment of the growth, see the blog’The Indian Solar market – new market, new chances‘). This creates a great attraction from a distance: EPCs and module suppliers in need of new sales opportunities, overseas Indians (often with a finance background) looking for a promising opportunity in India, Indian business houses and land owners with political connections, and many more – they are enthralled by this promise.

However, at a closer look the opportunity is far less straight-forward. In urban slang, the word, I believe, is ‘layogenic’ – or, to go with the 1996 film ‘Clueless’: “A full-on Monet – from far away it’s ok, but from close up it’s a mess”. Once the math is done, solar is a pretty mediocre business proposition. This is, I believe, by-and-large is a success: The Indian government does not overpay for solar power (refer to ‘Rent management in the Indian solar market‘) and allocation processes have so far been transparent and highly competitive (refer to our blog ‘Why the ‘I know the Chief Minister claim’ does not work for solar in India‘). There are also significant risks and uncertainties in the policies, the wider power regulations and infrastructure (including the strength of PPAs with loss-making DISCOMS), the data-basis, and the legal environment that continue to raise concerns about the bankability of solar. Many of the large, 100 MW+ projects being talked about in the market will not come to fruition.

Quick wins are also difficult to realise. Land prices have risen in some areas. Those who sold just the land have profited. However, many of those who wanted to take the process further and have invested into power purchese agreements with a view of selling them on without significant own value addition or constructing a plant with little understanding of the technology have lost money (e.g. their bank guarantees). Even those who knew well what they are doing have made little money. As far as I can see, refinancing of projects post construction has not happened at favorable terms. Selling of completed projects has been difficult, more because of low project IRRs and unmitigated risks than because of legal limitations.

Market entry barriers are only deceptively low. The technology (PV, not CSP) is not difficult to master. Solar projects in other markets (US, Germany) have become household commodities. However, especially in a seemingly simple market, competition is high and making money requires a competitive advantage. That can be found in, for example, a superior ability to raise money at favorable conditions, the provision of real energy solutions to customers, the delivery of quality project development, the mitigatition and hedging of risks, the prediction of pricing developments of the global solar industry, tapping into tax breaks or other policy support, the building of strategically aligned assets and from the point of view of the capital markets.

The hard challenges in the market have been somewhat cushioned by the fact that projects under NSM Phase I and Gujarat have simply ‘lucked-out’, as a large Indian investor recently put it to me. The rapid fall in module prices over the last 18 months has saved project profitability. As per my understanding of the larger industry trends, this cost reduction is not going to be repeated.

If returns are not so exciting, another reason for getting into the market could be strategic. Many participants do not know yet, when or even how they will earn money, but they believe that it makes sense to establish themselves early. However, while there are notable exceptions, many seem to be strategic movers without a strategy and early movers without an early mover advantage.

All this smacks of disappointment. This can be good: The enthusiasm is exaggerated, disappointment separates the wheat from the chaff. And from this more realistic position, the real work to create value starts. It can also be too much. The fledgling industry could get a serious dampener, if too many developers, banks, and module suppliers burn their fingers. It would be difficult to reanimate the industry then. But I don’t believe that will happen. With 1 GW of installed capacity, the market is past this highly vulnerable, nascent stage. Much has already been learned and improved.

This is the good news: The strong fundamentals of the Indian solar market are becoming stronger by the day. Those players who have patience, accept normal financial returns (on the project level, say 15%) and concentrate fully on developing sound power solutions, can look forward to building a busines to cater to a vast, growing market. The single most important factors are: an ongoing, accelerated deregulation of the power industry, which will lead to increasing power costs and a further wave of privatisation of power supply; an underfunded and underperforming grid infrastructure that will make local or regional power solutions more attractive (see our blog: ‘Is the Indian grid ready for expansion to renewable energy?‘); continuously growing power demand across the country with a growing power deficit and falling (in future, less precipitiously falling) solar costs. For more thoughts on this, please have a look at the blog post ‘Making unsubsidized PV work in India‘.

In an upcoming blog post, my colleague Akhilesh Magal will discuss how some project developers are nevertheless looking for ‘quick wins’ rather than sustainable business models.

You can also download our latest INDIA SOLAR DECISION BRIEF, ‘The Project Development Handbook’, for a free overview of the processes, timelines, costs, challenges and opportunities in solar project development in India.

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Finally, a manual to understand the challenges of project development in India

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Mr. Akhilesh Magal heads the Project Development team as Senior Consultant at BRIDGE TO INDIA.

Since the announcement of the National Solar Mission (NSM) in early 2010, there has been considerable development in the Indian solar market.

The Indian solar market is poised for further growth with the announcements for new solar policies

New policies provide several opportunities, each with different sets of permits, clearances and approvals.

The absence of structured information deters new entrants into the market and imposes challenges on players that are already in the market

The overall installed capacity has increased from 22 MW in 2010 to over 1,050 MWtoday. This growth was propelled largely by the NSM and the Gujarat State Solar Policy. The market is now poised for further growth with the announcements of solar policies from states such as Tamil Nadu, Andhra Pradesh, Chhattisgarh and draft policies of phase two of the NSM. Meanwhile, the Renewable Energy Certificate (REC) mechanism provides an alternative to the Feed-in Tariff (FiT) policies. This provides investors, project developers and EPC players several opportunities. The challenge is that each of the policies requires different set of permits, clearances and approvals – at different timelines and costs. Navigating through these procedures and assessing their relative risks and returns can be challenging.

At the same time, an un-structured, ill-informed approach to project development jeopardizes project timelines and affects the profitability of projects. From a bankability perspective, structured and well-documented information is key to achieving financial closure. Although information is available, it is often distributed, haphazard and uncritical. This absence of structured information deters new entrants into the market and imposes challenges on players that are already in the market.

The Project Development Handbook from BRIDGE TO INDIA aims to present relevant information in a structured manner to provide a sound overview of the processes, timelines, costs, challenges and opportunities in project development in India. The manual shall help in the assessment of projects in terms of profitability and bankability across various off-take options. The handbook is meant for investors, project developers and EPC players.

Click here to download BRIDGE TO INDIA’s latest INDIA SOLAR DECISION BRIEF, ‘The Project Development Handbook’.

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Why the CERCs proposal to extend the validity of RECs is not a long-term solution

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Mr. Akhilesh Magal heads the Project Development team as Senior Consultant at BRIDGE TO INDIA.

The Central Electricity Regulatory Commission (CERC) has proposed to extend the validity of RECs beyond the current period of one year. The petition is listed for hearing on 15th January 2013 (click here for petition). Interested parties are invited to send in comments by 5th January 2013. I do not believe that this this is right move by the CERC for three reasons:

The CERC is attempting to correct supply. The problem however,  is on the demand side

This move will only compound the problem, leading to even more over supply

RPOs must be enforced. However, merely coercing obligated entities will not work. The CERC must create a framework of incentives to help obligated entities meet their RPOs.

The motivation for extending the validity is due to a large number of unsold non-solar RECs. Nearly 1.28 million non-solar RECs remain unsold, out the 1.5 million non-solar RECs available for sale on the exchange. This affects project developers adversely. If the non-solar RECs lapse at the end of this financial year, it will impact the project adversely.

There are three interesting observations I would like to make and propose a solution to each.

The CERC is attempting to solve the wrong problem. The issue is not with supply, it is with demand. The real problem is that obligated entities (DISCOMS, captive power producers and open access consumers) are not being penalized for non-compliance. Most DISCOMs are adopting a “wait-and-watch” policy to see if penalties will be enforced. The CERC can extend the validity for as long as they want, but if nobody wants to buy RECs- they will remain unsold. What the CERC really needs to do is publically list the defaulters and penalize them before the end of the year. That will set the cat among the pigeons.

Extending the validity, will exacerbate the oversupply. This will keep prices at the floor price of INR 1,500 and deter any new entrants into the non-solar REC market. This sends a wrong signal to potential developers who want to adopt the REC mechanism as an off-take. Unless, the demand is fixed, the REC mechanism remains in jeopardy. The Indian solar market needs the REC mechanism to work, as it is a bridge between a subsidized market and a free market.

Brow-beating obligated entities to fulfill RPOs will not work. DISCOMs are bleeding, open-access consumers have opted for open-access to reduce levelized cost of energy and captive consumers run their own plants (often at high prices) because the DISCOMs cannot guarantee supply. Under these conditions, it would be foolish to presume that the obligated entities are likely (or keen) to comply with RPOs. A better method to ensure compliance would be to offer tax-benefits on the cost of compliance (Accelerated Depreciation (AD) and other specific exemptions under different sections of the income tax code). But of course, tax benefits can be extended only to profitable companies, which excludes most DISCOMs (DISCOMs contribute nearly 75% of the demand for RECs). In such cases, the bail-out money for DISCOMs can be linked to RPO compliance and the cost of compliance can be drawn from the National Clean Energy Fund (NCEF). In either way, the government should hand-hold and not brow-beat.

Download our latest INDIA SOLAR DECISON BRIEF, ‘The Project Development Handbook’,for a free overview of the processes, timelines, costs, challenges and opportunities in project development in India.

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RPOs v/s SPOs in Tamil Nadu – Whose obligations are they anyway?

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The Tamil Nadu State Solar Policy (TNSSP) aims at achieving 500 MW till 2015 through the Solar Power Obligations (SPOs) mechanism (Read BRIDGE TO INDIA’s policy brief on Tamil Nadu for the complete analysis on the policy). SPOs are enforced on High Tension (HT) consumers of power (>33KV). This implies that HT consumers are obligated to purchase a certain percentage of their total power from solar. The SPO is fixed at 3% of total energy consumption until December 2013 and 6% from January 2014. While Tamil Nadu is the first state in the country to announce specific SPOs, they appear to be in conflict with the existing national Renewable Purchase Obligations (RPO) announced by the Central Electricity Regulatory Commission (CERC). According to the CERC, RPOs will be enforced on distribution companies (DISCOMS), captive consumers and open access consumers across the country. The SPOs are enforced on HT consumers.

Regulatory conflicts arise due to the RPOs from the CERC and the SPOs from the state

This conflict is a likely indicator of a larger trend in the Indian solar industry, where solar power is getting politically decentralized

SPOs have a higher likelihood to be enforced given that the DISCOMs have the authority to monitor and enforce SPOs

SPOs can be fulfilled by one of the following options:

Generating captive solar power in Tamil Nadu equivalent to or more than their SPO

Buying solar power equal to or greater than the specified SPO from other third party developers of solar power projects in Tamil Nadu

Buying renewable energy certificates (RECs) generated by solar power projects in Tamil Nadu equivalent to or more than their SPO

Purchasing power from the Tamil Nadu Generation and Distribution Corporation (TANGEDCO) at a solar tariff

There are two unanswered questions that arise from the conflict between RPO and SPO regulations:

Can solar plants that meet SPOs generate RECs? As per the CERC’s RPO-REC regulations this should be allowed, given that the power generated is not being used to meet RPO obligations of any entity.

Why do SPO obligated entities have to purchase RECs generated from solar power projects only in Tamil Nadu? The REC market is a national market that allows states without adequate solar resource to purchase solar RECs from those states that have adequate solar resource. Effectively, Tamil Nadu will have to set up its own REC market.

The dynamics of India’s solar industry are changing – fast. Reading between the lines, one observes:

Solar is getting politically decentralized. States are clearly choosing to override or ignore national regulations. Earlier Andhra Pradesh announced waivers in taxes, fees and duties for REC projects, which go against the regulations from CERC. This can seriously jeopardize the entire national REC market. On the up-side, RPO enforcements are likely to be more stringent since DISCOMs will implement and enforce them.

The introduction of SPOs could potentially be a strategy to offload the RPO burden onto HT consumers of power that constitute roughly 46% of the power demand. This is a good idea given the poor financial health of most DISCOMs in the country.

SPOs will also see more distributed power in form of captive/roof-top systems. This will go a long way in reducing the overall power demand in Tamil Nadu, which is experiencing a peak power deficit of 17.5%.

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Tamil Nadu Solar Policy: Tariffs expected

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Tamil Nadu Solar Policy: Tariffs expected to fall to INR 6.2 (EUR 0.09)/kWh for 1,000 MW of utility scale projects

Tamil Nadu is the seventh Indian state out of 28 to announce an official solar target. In an overall target of 3GW, the policy is targeting 1,500 MW of capacity addition through utility scale installations till 2015. The Tamil Nadu Electricity Development Authority (TEDA) as the nodal agency will be directly allocating 1,000 MW out of this through the reverse competitive bidding procedure. The solar power produced from these projects will be sold to the state distribution company, TANGEDCO, at a preferential feed in tariff (FiT).

According to our financial model, the tariff in Tamil Nadu is expected to fall to INR 6.2 (EUR 0.09)/kWh

The 5% annual escalation of the tariff for the first 10 years makes this initial tariff viable for projects

According to our financial model, we expect that the Tamil Nadu Solar Policy will see tariffs fall to the lowest ever in the Indian market. For an internal rate of return of 12.8%, we expect the tariff to be INR 6.2 (EUR 0.09) / kWh for these 1,000MW worth of utility scale projects. This is the lowest ever tariff in the Indian market, under the competitive reverse bidding procedure used for the allocation of projects. So far, the lowest tariff under the reverse bidding mechanism has been INR 7 (EUR 0.11) / kWh for 25MW of projects in Odisha in February 2012. The 5% annual escalation of the tariff for the first 10 years, as fixed by the state, is primarily the reason why such a low tariff is possible in the first place. For the remaining duration of the power purchase agreement (PPA), the tariff will remain as determined in the 10th year.

The tariff will be determined by a process called the open tender-two part system in which all bidders have to submit two separate bids in two separate sealed envelopes. Of this, the first is a techno-commercial bid with the commercial terms and conditions and the financial statements of the bidder and the second, a financial or price bid.

For additional details on the project development investments, and other opportunities under the Tamil Nadu Solar Policy, download our INDIA SOLAR POLICY BRIEF for FREE.

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Why the ‘I know the Chief Minister’ claim doesn’t work for solar in India

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Dr. Tobias Engelmeier is Founder and Managing Director at BRIDGE TO INDIA.

Over the past two years, since we have been working in the Indian solar market, I have had numerous conversations with people who claimed to have access to the Minister of the Ministry of New & Renewable Energy or the Chief Minister of a state and could make “big solar projects work”. I know of none of these conversations that have come to fruition. This is why:

Solar energy, unlike good hydro-power sites or natural resources, is not under the control of anyone, even the Minister

Solar power is sold through long-term Power Purchase Agreements (PPAs) – the time period exceeds those of governments

Barriers to entry in the market are low and PPA allocation processes have so far been quite transparent

Solar does not provide short-term, windfall profits, but pays over a longer period of time if projects are well managed

To develop a solar power project, you need a site. If that site is not someone’s roof-top, it will be someone’s land. Buying land in India is not easy. Especially, if it needs to have certain characteristics. In the case of solar power, these are: suitable terrain and soil for constructing a plant, high irradiation, road access and proximity to a well functioning substation. While this limits the options, so far, there has been no shortage of suitable land. This is not to say that relationships at various levels of the government are not important to understand and expedite various processes, but involving the Chief Minister is usually not necessary. Other than land, there is no resource that could be acquired in a preferential manner. Sunlight is free.

On the PPA side, also, there is little room for receiving Chief Ministerial favors. Solar power is usually sold through long-term PPAs of 20-25 years. Banks have to judge whether to lend money to a project based to a large extent on the strength of the PPA over at least the loan repayment period. That outlasts most governments.

There have been irregularities (a solar scam, even as the Center for Science and Environment claimed) around allocations of projects to Lanco and around plant commissioning dates in Rajasthan. However, public-PPA allocations and all subsequent project development steps have so far worked in a fairly transparent manner. (The partial exception is Gujarat, where the process of allocating FiTs was not clearly defined and open to the public) Given that barriers to entering the market as a project developer are quite low, this has created a healthy competition with significant international participation.

Perhaps the main reason, why solar has not fallen prey to favoritism is that it simply does not pay enough. Solar is a long-term game. It pays those who are professional and patient and can manage risks over a long period of time. The industry is learning that fast. That makes solar power unattractive for those who have short-term profit motivations.

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What a good solar policy for grid connected plants should include

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Dr. Tobias Engelmeier is Founder and Managing Director at BRIDGE TO INDIA.

The Indian solar market is picking up speed. A number of new policies have been announced: the (draft) National Solar Mission – Phase II and the Tamil Nadu Solar Policy as well as new initiatives by Andhra Pradesh, Chhattisgarh, Rajasthan and announcements by Uttar Pradesh and Punjab. The policies are quite different from each other. There is no consensus yet on “how to get solar power right” in India. These are some of the key issues that would-in my view-make a solar policy strong:

Payment security (strength of PPA, bankability)

Measures to ensure quality in project execution (qualitative pre-selection of bidders)

Government support in land, permits, evacuation and information

Payment security: The most important element to a good solar policy is that it allows for bankable power purchase agreements (PPAs). Payments have to be guaranteed for at least the repayment period of the loan (typically 8-12 years), if not for the entire duration of the PPA (20-25 years). It is not enough to simply assume that a public sector PPA signatory such as a state distribution company(DISCOM) or a nodal agency like NVVN will be bankable. In fact, many state DISCOMs are not. One year rolling letters of credit are also not sufficient. Elements that enhance bankability are: strong payment guarantee schemes (as in Phase 1 of the NSM) for public sector PPAs, viable alternative off-take options, PPAs with highly robust private entities, strict enforcement timelines and processes for solar or renewable purchase obligations (RPOs), and (in general) a high degree of transparency and quality of information.

Ensuring quality bids: Now that Indian market participants have a track record, participation in project allocation processes should have a component of quality. Participants should have a letter of intent (LoI) from a financing bank (or a commitment to fund a project fully on equity), should have already identified the land and (if applicable) the off-taker. There could be a list of pre-defined EPC contractors and modules based on the use of standards of quality (can be tested by a testing agency). Majority ownership of Special Purpose Vehicles (SPVs) can only change post construction of the project. Timelines should be rigorously enforced but be realistic to begin with.

The government should provide support in the following way: It should help to specify and pool suitable land to be made available for project development, it should specify evacuation points and loads, ensure a simple and smooth permissions process and provide clear and solid data on irradiation, power prices, grid quality and power customers. The Tamil Nadu policy is a good example with respect to evacuation. The Andhra Pradesh policy aims to provide support on identifying private sector power off-takers. This is useful, but could perhaps be better managed by the project developers themselves.

The goal should be to encourage professional project developers to develop projects financed on a non-recourse basis by streamlining as much as possible of the “local” elements of project development (land, grid connection) and allowing developers to focus on technology choice, revenue streams and financing.

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Phase two of the NSM proposes direct incentives for states to increase solar PV installed capacity

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

The Ministry of New and Renewable Energy (MNRE) has released a draft policy document for phase two of the National Solar Mission (2013-2017) on December 4th 2012 (yesterday). As predicted by BRIDGE TO INDIA, majority of the allocations under the new phase will be based on Viability Gap Funding (VGF) (read our analysis of the impact of VGF on the Indian market in the October 2012 edition of the India Solar Compass).

Phase 2 of the NSM will stress mostly on allocation of utility scale projects

A capacity of 2.5 GW of PV and 1.1 GW of CSP has been proposed to be allocated over the next two years

Phase 2 of the NSM will also support states in increasing their solar power installed capacity through various incentives

The key learning that has emerged from phase one of the NSM is that serious developers are interested mostly in utility scale projects and phase two of the NSM is expected to stress mostly on such allocation. A capacity of 2.5 GW of solar PV and 1.1 GW of solar thermal has been proposed to be allocated in the next two years for Phase 2 of the NSM. This leaves around 5.5 GW to be allocated at the state level for the NSM to achieve its target of a cumulative capacity of 10 GW by 2017. So far, only the state of Gujarat has contributed significantly towards this target so far(968.5MW under the Gujarat Solar Policy).

The MNRE has acknowledged the need to support state level allocations in the new draft for the NSM. It has proposed to provide support for setting up of solar parks in states. The policy document defines a solar park as a concentrated zone for solar development that consists of a minimum of 250 MW generation capacities on a land area of over 600 hectares with a minimum value of annual average global horizontal irradiance (GHI) greater than 5kWh/m2/day. For this, the MNRE will provide incentives which include 50% of the cost of the detailed project report (DPR), 40% of the cost of transmission infrastructure, 50% of the cost of civil infrastructure, up to INR 100 m for technical assistance and 100% support for irradiation monitoring stations. To receive these incentives, the states will need to take concrete steps that help promote capacity addition of solar power. Most significant of these are the requirement for states to declare their state Renewable Purchase Obligations (RPOs) and tariffs for solar power. With such condition, support for state solar parks are sure to strengthen the case for complete adoption and implementation of RPOs in states, providing a boost to the market.

Click here for a policy comparison of all solar policies in India.

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What are the trends in the Indian solar market?

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

The Indian solar market is at an interesting point at the moment: it has come from zero to 1 GW within a period of 1.5 years. Then, it held its breath for half a year. Now it is just about to get going again. Time for a brief look at the status of the market and the main trends driving it. The most important overall trend is that the Indian market has picked-up significantly in the last weeks. New policies have been announced and there is a palpable sense of excitement in the air. We expect the next year to have project allocations in excess of 2 GW.

There has been an introduction of exciting new policies

A shift can be seen from public to private power purchase agreements (PPAs)

The solar renewable purchase obligation (RPO)/renewable energy certificate (REC) market is underperforming

Protectionism is increasing in the Indian solar manufacturing industry

India is a very exciting, progressive policy laboratory: States almost seem to outdo each other. Tamil Nadu has come up with a net-metering provision and solar purchase obligations (SPOs), Andhra Pradesh is looking to match power customers with generators, the National Solar Mission (NSM) will most likely introduce the Viability Gap Funding (VGF). One could complain that it is difficult for an investor to keep track of developments and risks, but that drawback is much smaller than the larger benefit of finding out what works best in India. There is already a keen sharing of best-practices across states and in the future there might be some more convergence. At present this lively, innovative policy space does justice to the complexity of solving the Indian power (not green power) riddle.

Shift from public to private PPAs: The RPO mechanism has started it, but it became clear with the introduction of SPOs in Tamil Nadu. One very good way of encouraging the spread of solar power without burdening stretched public funds is to simply obligate customers who can afford it (industrial and commercial power consumers) to buy it. These customers are often not even too averse to it as they tend to already pay tariffs of INR 5-8/kWh for their grid power and significantly more for diesel power. They need to think of new energy solutions anyway.

RPOs/RECs continue to under perform: This shift to private PPAs will-at present-only work, if obligations are enforced. It is too early to judge the SPO scheme in Tamil Nadu, but the RPO /REC market continues to languish. Trading of solar RECs is slow. Few of the projects that were registered under the REC mechanism were actually completed. There is a sense of frustration with the mechanism in the market.

Project sizes are increasing: When the NSM started, average project sizes for grid-connected power plants were about 5 MW. In batch two, they increased to around 10-20 MW. Now, the project sizes that are discussed in the market often range between 50-100 MW.

Protectionism of manufacturers: In the larger argument between solar project developers and power consumers who want to ensure the lowest cost of solar through unlimited access to international suppliers and Indian cell and module manufacturers who want preferential access to the Indian market to build-up their business, the latter seem to carry the day. The NSM will most likely have a domestic content requirement that might well include thin film as well. Additionally, there is an increasing likelihood of anti dumping duties being levied by mid of next year (please refer to our recent blog post on the topic of anti-dumping duties).

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