Month: January 2013

The financial bids for the allocation of 100 MW of solar PV projects in Rajasthan were opened on February 11th 2013. A total of 25 bids worth over 200 MW have been received.

The lowest valid solar bid in India of INR 6.45/kWh was submitted in Rajasthan. This tariff only makes financial sense if the developer makes full use of accelerated depreciation benefits

The Rajasthan solar policy does not consider separate tariffs for projects that avail accelerated depreciation and projects that do not

Only the developers backed by Indian companies and with prior businesses in India will stand to avail accelerated depreciation benefits, and are at a clear advantage

Developers could bid for either a 5MW project or a 10MW project. The lowest bid has been submitted at INR 6.45/kWh by Essel Mining and Industries Ltd. This is currently the lowest valid solar bid in India. It has no escalation. (The INR 5.97/kWh bid for a 10 MW project in Tamil Nadu by Mohan Breweries has now been offered a tariff of INR 6.48/kWh with an escalation of 5% per annum for the first 10 years. Effectively providing a tariff of over INR 7/kWh in levelized terms).

According to the project allocation process under the Rajasthan policy, in order to obtain a project, other developers will now be asked to meet this lowest tariff (referred to as L1). Assuming that the current capital cost of setting up a project is at least INR 70m, this tariff could only make financial sense if the developer is making full use of accelerated depreciation benefits. Unlike the National Solar Mission (NSM) and the Gujarat solar policy, the request for proposal (RfP) document for the bidding process in Rajasthan does not consider separate tariffs for projects that avail accelerated depreciation and the projects that do not. For the Rajasthan bids, project development companies that are not backed by an Indian corporate (e.g. Azure Power) as well as international project development companies that do not have prior businesses in India (e.g. SolaireDirect) face a disadvantage in competing for the allocations as they would not be able to avail the accelerated depreciation benefit.

For the Rajasthan bidding process, companies that are backed by Indian businesses with multiple interests such as Essel Mining, Emami Cement, OCL Indian and Jindal Power will stand to benefit as they will be able to make use of such accelerated depreciation benefits. Apart from that, these companies will also be able to avail recourse-based debt finance for the projects. Non-recourse financing in Rajasthan will be extremely difficult given the poor long term payment security for the PPA signing entity, Rajasthan Renewable Energy Corporation Limited.

Jasmeet Khurana works on project performance benchmarking, success factors for module sales, financing and bankability of projects in India.

This post is an excerpt from this week’s INDIA SOLAR WEEKLY MARKET UPDATE . Sign up to our mailing list to receive these updates every week.

You can view our archive of INDIA SOLAR WEEKLY MARKET UPDATES here.

Tamil Nadu today opened the financial bids received for allocations under its state policy. The state had received a subdued response with bids totaling 499MW for a tender of 1,000MW (refer to our earlier blog post to read more). Initial reports suggest that financial bids have been opened for 493MW and the lowest bid has touched INR 5.97/kWh (for a 10MW project by Mohan Breweries).

The lowest bid has touched INR 5.97/kWh, the average bid is just over INR 8/kWh

The options for determination and negotiation of tariffs are still open.

Large parts of the state are reeling under severe power cuts and solar is the only source of power that can help the state meet its peak power needs in a short duration of time.

Tamil Nadu has thus seen the lowest tariffs in the country, primarily owing to the provision for a 5% annual escalation for 10 years in tariff. However, the average bid was just over INR 8 kWh and some prominent bidders such as Welspun (INR 8.56/kWh) and Lanco (INR 8.2/kWh) were significantly higher than the current norm in the country (around INR 7-7.5 kW/h).

BRIDGE TO INDIA had earlier estimated that the lowest tariff in Tamil Nadu could touch INR 6.2/kWh (refer). This tariff was based on very aggressive assumptions with an expected IRR of 12%. While some industry experts communicated to us that this estimate was unrealistically low, we were surprised to see that the lowest tariff is even lower than that. A more realistic tariff with a 5% escalation for the first 10 years that should be acceptable to developers, the state and the lenders is likely to be around INR 6.8/kWh.

The state had planned for a mechanism under which it would ask all bidders to meet the lowest bid (L1). However, due to the subdued interest and complications involved in negotiating such a price with the developers, first signs are emerging that the Tamil Nadu Power Generation and Distribution Corporation Ltd. (TANGEDCO) is willing to consider other options such as taking a median tariff for all projects. The options for determination and negotiation of tariffs are still open.

However, even if the final tariffs are acceptable to developers, we expected ongoing challenges. The revolving line of credit that promises to be a guarantee of payment to developers is unlikely to help them in raising non-recourse debt. One clause in the agreement implies that the government will have the right to make amendments in the policy and guidelines of the agreement from time to time. Such a clause places the developer in a position that is not protected from policy or governance changes. Another clause states that the Power Purchase Agreement is subject to approval from the Tamil Nadu Electricity Regulatory Commission. The time required to obtain such approval from the TNERC is not known and may create delays.

BRIDGE TO INDIA believes that if the PPA does not get TNERC’s approval in time, developers will face difficulties in achieving financial closure. This will further strain the already stringent eight-month commissioning deadline.

The state must, however, be commended on taking an initiative to promote solar power in spite of its financial problems. Large parts of the state are reeling under severe power cuts and solar is the only source of power that can help the state meet its peak power needs in a short duration of time. If Tamil Nadu is able to take all steps necessary to help the allocated capacity of 493MW to come up, it will still be a more than respectable target achievement.

Read our Tamil Nadu Solar Policy Brief for more.

Jasmeet Khurana works on project performance benchmarking, success factors for module sales, financing and bankability of projects in India.

What are your thoughts? Leave a comment below.

The Ministry of New and Renewable Energy (MNRE) has today announced draft guidelines (refer) for setting up of 750 MW solar PV capacity under Phase 2, Batch 1 of the National Solar Mission (NSM).

Viability Gap Funding will be provided with an upper limit of 30% of the project cost for a maximum capacity of 100 MW
The VGF amount will be handed over in three installments, and the SECI can claim assets equal to the VGF amount if the plant remains inactive or if any assets are sold
A mechanism is needed to ensure that there is a match between states willing to buy power at the pre-determined prices and developers’ preference of location for the projects

As per BRIDGE TO INDIA’s predictions in the October 2012 edition of the India Solar Compass (refer), the allocations are based on Viability Gap Funding and the maximum capacity that a developer can bid for has been increased to 100 MW.
The allocation process, signing of Power Purchase Agreements (PPAs) and handing out of VGF will all be handled by the Solar Energy Corporation of India (SECI). According to the draft, a fixed tariff INR 5.45/kWh will be awarded to projects not availing accelerated depreciation and a fixed tariff of INR 4.95/kWh will be awarded to projects availing accelerated depreciation. Over and above this, VGF will be provided with an upper limit of 30% of the project cost or INR 25m/MW. The exact quantum of VGF will be determined by a reverse bidding mechanism.
A key concern with regards to the implementation of the VGF is its impact on the long term performance of projects and the scope for developers to execute low quality projects for short term gains. The MNRE has provided some safeguards to prevent this. As per the draft guidelines, it has been decided that a hand-out of the VGF amount will take place in three installments. The first installment of 25% will be handed out after the delivery of at least 50% of the equipment, another 50% will be handed out on successful commissioning of the project and the remaining 25% will be handed out after one year of successful commissioning. The draft also says that if the plant fails to generate any power continuously for one year during the course of the PPA period or the project is dismantled or its assets sold, SECI will have the right to claim assets equal to the value of VGF granted. However, no real safeguards have been provided to ensure the quality of production. In the current scenario, the developers’ will lend greater focus on reducing the CAPEX against focusing on optimizing plant performance. For example, a developer could buy the cheapest equipment and reduce the plant CAPEX to INR 60m/MW with an equity investment of 18m/MW. On this, the developer could avail tax benefits based on accelerated depreciation, up to INR 15.8m/MW, and, as an example, is able to avail INR 20m/MW as VGF. In such a scenario, the developer would have received back almost 60% of the project investment and almost 200% of the equity investment within one year. This will leave very little incentive for the developer to stay invested in a project with a PPA of just INR 4.95/kWh. This not only has the potential to derail the policy motives but will also put the lenders in doubt about the developer’s intentions.
Another key concern is the location of projects. Currently, the draft guideline states that as and when the Request for Selection (RfS) is submitted by the project developer, the SECI will simultaneously issue “Expression of Interest” to states willing to procure the power. No clarity has yet been provided on which states will be willing to buy solar power at the given prices. There could be a scenario in which all the developers opt to set up projects in Rajasthan but Rajasthan is unwilling to buy this power. For such a situation, there is no clarity on how the SECI will ensure the off-take of the power to states across the country that might be willing to buy the power. There is a need for a mechanism to ensure that there is a match between states willing to buy power at the pre-determined prices and developers’ preference of location for the projects. As the NSM provides the cheapest option for state power distribution companies to meet their Renewable Purchase Obligations (RPOs), most states that are currently not meeting their RPO requirements should be willing to buy this power. We can expect demand for solar power from the NSM to move out of Rajasthan this time as the state is already meeting its RPO requirement. However, given a free reign (as is currently the case), developers would prefer to set-up projects in Rajasthan due its excellent irradiation and large availability of land.
BRIDGE TO INDIA will follow up with the concerned officials and industry leaders to get their thoughts on the issues and also look at possible solutions to these issues. Follow BRIDGE TO INDIA’s blog to keep track of our analysis and opinion on the new phase of the NSM.
This post is an excerpt from this week’s INDIA SOLAR WEEKLY MARKET UPDATE. Sign up to our mailing list to receive these updates every week.
You can view our archive of INDIA SOLAR WEEKLY MARKET UPDATES here.
What are your thoughts? Leave a comment below.

Mr. Akhilesh Magal is the Head of Project Development at BRIDGE TO INDIA.

The government recently delayed announcing the NSM Phase 2 for lack of funds. In this blog post I discuss why the phase 2 may not see the light in 2013. The underlying reasons are:

The fiscal deficit is alarmingly high at 5.3% of GDP and the government is serious about limiting it to 5%

This means the government must spend less without jeopardizing their electoral chances just before the general elections in 2014

This can be done by limiting all other subsidies except direct cash transfers to the poor (who form the majority of the Congress’ government’s vote-base) through the UID scheme

There are worrying signs that the NSM phase two will be indefinitely delayed due to lack of funds. The funds were supposed to have come from the National Clean Energy Fund (NCEF). Phase one of the NSM did not have such funding issues due to ‘Bundling of solar power’. Bundling meant that the government ‘mixed’ solar power with previously un-allocated conventional power from the National Thermal Power Corporation’s (NTPC) generating stations. Because solar power was bundled in a ratio of 1:4 with thermal power, the price increase was marginal and therefore passed along the consumer value chain.

However, under Phase 2, there is no more power available to bundle. This means, that the government would have to foot the bill for expensive solar power.

That is precisely the problem. The government does not want to. Why? Election politics. The government, especially finance minister P. Chidambaram, wants to reign in the fiscal deficit. The fiscal deficit is the difference between what the government earns (primarily in taxes and interest on deposits) and what the government spends. The fiscal deficit is already alarmingly large at 5.3% of GDP. India risks facing a downgrade if this remains un-checked. Diesel prices have already been raised and there are talks of a complete deregulation of diesel prices (similar to petrol prices). Just today, the government announced that diesel prices would be increased by INR 10 per litre for bulk purchases.

One needs to read these actions in the background of the election scheduled in 2014. Going by the current corruption riddled image, it seems highly likely the Congress government will come to power based solely on performance. The Congress government (with its voter base especially in rural India) needs as much funds as possible to buy their way into power in 2014. The Congress needs a philosopher’s stone. This is where the Universal Identification Card (UID) – used for direct cash transfer to the poor comes in handy. The Congress government is rushing the implementation of the Aadhar card, despite stern warnings from several NGOs and experts. It is cash for votes – only done under the legal framework. Given the extent of the direct cash transfer, it is no surprise that the government does not have funds for other projects – least for subsidizing renewable energy projects.

So the logic is pretty straightforward – limit fiscal deficit to 5% of GDP and allocate most subsidies through the direct cash transfer to the poor, win votes of the economically backward section of society and hope to come to power in 2014. Its goodbye solar mission at least for now.

What are your thoughts? Leave a comment below.

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.

Curbing the fiscal deficit has become a key priority in India. Therefore, the government has set itself a deficit target of 5.3 percent of gross domestic product for the fiscal year ending on 31st March 2013. India had already exhausted 80.4% of the target between April and November and as per the current spending trajectory, India will fail to meet that target by around 20% or INR 2.06 trillion. One of the key measures now being taken to achieve the target is the reduction of subsidies. This has positive and negative implications for the Indian solar market and accelerates the overall transition from a subsidised to a commercially viable market.

Phase two of the NSM will get delayed due to unavailability of funds to cover the cost of subsidising solar energy under Viability Gap Funding

The subsidy cut for bulk consumers of diesel improves the business case for distributed solar power generation in India

Non-fiscal policy actions such as enforcement of the RPO/REC mechanism, clarity on regulations regarding grid interaction and implementation of net-metering can help tap the potential of solar power

Project allocations under phase two of the National Solar Mission (NSM) delayed

The ministry of finance has delayed the release of payments to the National Clean Energy Fund (NCEF) (refer). The NCEF is supposed to cover the cost of the subsidising solar under the Viability Gap Funding (VGF) mechanism of the NSM. The idea that the NCEF provides significant upfront capital to be infused into the Solar Energy Corporation of India (SECI) to carry out the part upfront funding for the new projects (refer to the October 2012 edition of the India Solar Compass to understand VGF). As the funds are not yet available, phase two allocations under the NSM are getting delayed. The allocations were supposed to be completed by March 2013. How long the allocation process will be delayed is unclear. Many investors and developers have already been planning their projects and have incurred costs for typical pre-development work such as land and off-taker identification. Also, module and other component suppliers have planned for sales to NSM projects in the next financial year. Some of them have invested into contract manufacturing and growing their teams. A delay of more than two months (which might still be avoided) would have a negative impact on the confidence of market participants.

Better business case for distributed solar

In another measure taken by the oil ministry to scale back the fiscal deficit, diesel subsidies have been cut for bulk consumers of diesel (refer). Due to their high consumption, these consumers buy diesel directly from oil companies and not from retail outlets. Many of these consumers use diesel for captive production of power. Such consumers include large malls, hospitals, office buildings, hotels, airports, etc. The new price for such consumers has been increased by INR 10/liter, equivalent to almost 20%. Many of these consumers may now resort to buying diesel from the pumps, where the prices are still subsidised, despite the fact that buying diesel over a certain amount from retail outlets is not permitted. For most customers, however, the measure is expected to have a significant impact on their energy costs. Solar power is already financially attractive for consumers with high tariffs and/or high back-up or captive diesel consumption. With an increase in diesel costs, especially in areas where power supply is irregular, solar power will now become even more competitive, improving the business case for distributed solar power generation in India.

Non-fiscal policy actions related to enforcement of the RPO/REC mechanism, clarity on regulations regarding grid interaction and implementation of net-metering can help tap the potential of solar power that is already available in the country because of financial feasibility of such projects. These actions can help ease the financial burden on the government and still keep the capacity addition targets on track.

This post is an excerpt from this week’s INDIA SOLAR WEEKLY MARKET UPDATE . Sign up to our mailing list to receive these updates every week.

You can view our archive of INDIA SOLAR WEEKLY MARKET UPDATES here.

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.

Solar in India will, in the medium term, benefit mostly from the ongoing liberalisation and privatisation of the electricity market. In that respect, the state government of Bihar has just announced the process for the privatisation of power distribution in four towns (refer).

Delhi and Mumbai were among the first cities to have privatized power distribution in the country

In 2011-12, transmission and distribution (T&D) losses in the state stood at 39.2%

 In India, privatization of power distribution is usually associated with enhanced customer satisfaction levels due to improved service quality

According to the officials, the primary reason for this move is to minimize the heavy distribution and commercial losses being incurred by the existing state operated distribution companies. In 2011-12, transmission and distribution (T&D) losses in the state stood at 39.2% – an extremely high number and considerably above the already high country average (upwards of 20%). In India, privatization of power distribution is usually associated with enhanced customer satisfaction levels due to improved service quality. Most customers are willing to pay a higher price for power if the supply is more reliable as compared to subsidized but erratic power supply.

It is also hoped that the ongoing privatisation of power infrastructure will further new infrastructure initiatives relevant to the spread of solar power: grid stability, net-metering and smarter grids. The transition can, however, have an adverse impact on some existing power purchase agreements (PPAs). PPAs for sale of solar power within states are usually signed with local distribution companies. Although, there is no available precedent with regards to solar PPAs, it is possible that privatisation of a distribution company may result in renegotiation of a signed long-term PPA.

Delhi and Mumbai were among the first cities to have privatized power distribution in the country. Thereafter, multiple cities across Madhya Pradesh, Odisha and Gujarat have either privatized power distribution or are planning for it. Given that most Indian state level distribution companies are in financial distress, it is possible that power distribution in many Indian cities will be privatized moving forward.

This post is an excerpt from this week’s INDIA SOLAR WEEKLY MARKET UPDATE. Sign up to our mailing list to receive these updates every week.

You can view our archive of INDIA SOLAR WEEKLY MARKET UPDATES here.

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

In an earlier blog post, my colleague Tobias Engelmeier suggested that the Indian market is for players with long-term strategic interests in solar (read his blog here). While this is true, the market will also see what we call ‘Cowboys’ (players with no strategic interest in solar) who will utilize three levers to drive the market in the initial stages.

Accelerated Depreciation benefit for solar projects

Locking-in on land prices and reaping benefits after 20-25 years

Recognizing that the price of metals will rise multi-fold in the coming years in order to cash-in on the scrap value of the solar power plant.

There are many ‘Cowboys’ or players with no strategic interest in the Indian solar industry. They are attracted by the general buoyancy but also by specific business opportunities. These players have little or no knowledge of solar in India, but want to jump onto the solar bandwagon. The overwhelming interest in the Indian solar market serves to raise awareness in the market, but can be detrimental to the industry in the long run, if they result in poorly planned and poorly constructed projects. For example: A 5 MW project in Uttar Pradesh is operating at a Capacity Utilization Factor (CUF) of 14% compared to some other plants in Rajasthan that are operating at a CUF of 23%. The prime reason to establish the plant in Uttar Pradesh was the pre-availability of land. Cowboys who want to capture the market could potentially outbid other developers without considering the full project cost implications. Already, some market participants are worrying that the current prices of solar energy in India are not commercially viable.

So what makes the Cowboys ride?

– Accelerated Depreciation: Most Cowboys are cash rich real estate developers, SME industrialists, film stars or land bank owners who are looking for ways to reduce their tax burden. Solar provides a great opportunity to do so. The wind sector in India experienced a similar trend in the initial phases. Film stars, politicians and any cash-rich companies cashed in on the accelerated depreciation benefit. We are seeing a similar trend for solar in India. Most of these projects are in the red due to lack of technical know-how.

– Locking-in on Land – Land prices in India are skyrocketing. This is also true for land for solar power projects. For instance, land was available in remote districts of Rajasthan for INR 20,000 per acre before the announcement of the National Solar Mission (NSM) Phase 1. Just after two years, the same land prices have reached INR 500,000 per acre – a rise of nearly 2,400%! Land owners are beginning to recognize the value for their land and demanding much more. The cowboys want to cash-in on this and lock in the land for 20-25 years. The returns from the sale of land would be many times higher than the returns from the solar project. This also means that the quality of the solar plant takes a back-seat.

– Scrap value of power plant – Cowboys also recognize that the prices of copper, steel and other materials that go into building the solar plant will rise multifold with increasing demand for these materials in India. The scrap value can be as high as 15% of total CAPEX.

These ‘outliers’ are making the Cowboys ride – for now. Unless the cowboys make the transition to becoming serious long-term players, they are likely to jeopardize their projects.

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

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