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Weekly Update: Expectations of the Indian solar industry from union budget 2013

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The finance minister of India will be presenting the union budget in front of the parliament on 28th February 2013. The budget is will highlight the public fund allocations for the next financial year (April 2013-March 2014). Multiple commerce and industry associations have provided suggestions to boost the solar sector in India.

FICCI has released suggestions for methods to reduce the high interest rates in India in the next budget

Expensive access to debt puts Indian manufacturers and developers at a disadvantage as compared to their international peers, with the domestic rate of interest as much as 10% higher

FICCI has also proposed further measures to make solar power more competitive, meant to be in addition to existing direct subsidies. However, given the fiscal deficit in India, these measures could replace the direct subsidies

In a pre-budget memorandum, the Federation of Indian Chambers of Commerce and Industry (FICCI), has submitted suggestions (refer) for reducing the high interest rates in India by i) creating a low cost fund for financing solar projects; ii) providing an interest subsidy through the National Clean Energy Fund (NCEF); iii) creating a hedging mechanism for external commercial borrowing (ECB) and iv) creating a separate lending category for renewable energy projects to avoid these being crowded put by conventional power projects.

Expensive access to debt has indeed put Indian project developers and manufacturers at a disadvantage as against their international peers and has hampered the growth of the industry (refer to BRIDGE TO INDIA’s upcoming report on ‘Bankability and Debt Financing of Solar Projects in India’, to be released on 1st March 2013). The domestic rate of interest is as much as 10% higher than in established solar markets.

In addition to financing, the following steps have been proposed by FICCI to make solar power more competitive: i) extend the cutoff date for accelerated depreciation from the end of each fiscal year (March) until 2017 (the end of the next Five Year Plan); ii) exemption from payment of Minimum Alternate Tax (MAT, 19.2% of EBITDA, payable, if now income tax is paid) under section 115JB of the income tax act in addition to the exemption from the income tax (32-33% for 10 years); iii) availability of 80% accelerated depreciation in the first year to manufacturing companies and 100% accelerated depreciation benefit for companies installing large MW scale projects; iv) exemption from all indirect taxes, including CST, VAT and service tax, on equipment used solar plants and v) provision of personal income tax incentives for individuals who are buying solar PV or thermal systems for domestic use (comparable to US tax credits).

These measure are proposed in addition to existing direct subsides (such as FiTs, viability gap funding or capital subsidies). Given the fiscal deficit facing India, however, it is much more realistic that such measures could actually replace the direct subsidies. We already see that the release of some funds to the Ministry of New and Renewable Energy (MNRE) has either been delayed or cancelled (refer). This has caused a significant delay in allocations under phase two of the NSM, which was originally supposed to being in January 2013 but has now been postponed to June 2013. Also, there is uncertainty over the availability of funds for the 30% capital subsidies for solar projects below 100kW in the next financial year.

The exemption of MAT alone would reduce the cost of solar for a 1 MW plant by around INR 1/kWh to ca. INR 7/kWh. The effects of VAT, CST and service tax could add another INR 0.5/kWh. Personal income tax incentives for the <100kW category would also be significant. This can make solar power extremely competitive with grid supplied power and can perhaps even free the market from the need for capital subsidies. Overall, we think that FICCI’s suggestions are good. However, it is unlikely that the government will approve all of them. In BRIDGE TO INDIA’s upcoming INDIA SOLAR COMPASS April 2013 edition, we will analyse in detail, if solar power is already competitive without government support.

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.

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Stabilization of module prices in 2013 will be good for the Indian market

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Globally, most experts have predicted that module prices will continue to fall in the first half of 2013 as a significant overcapacity still exists. Prices from the last two months, however, suggest a contrary trend: a firming up of prices. On the global front, a price index (PV-Insights) has posted marginal week on week increase in upstream raw material costs for over one month now. This has been confirmed to BRIDGE TO INDIA in the Indian market by leading EPC companies and project developers. We believe that this is a good development at this point in time.

Prices in India had been up to 14% lower than the average global prices

Developers in India have in the past bid for tariffs based on a discount factor for expected cost reductions

The stabilisation in solar PV prices will lead consumers to stop waiting and start buying

India needs a stable and predictable pricing regime so that an ecosystem is built that allows businesses to succeed and innovate

In 2012, based on the available market information, BRIDGE TO INDIA had suggested that many deal prices in India had been up to 14% lower than the average global prices. According to BRIDGE TO INDIA’s conversations with global module suppliers, including Chinese suppliers, Indian developers often expect unrealistic prices and some suppliers feel that they can no longer continue to service the market. Due to this, some suppliers have scaled down their plans for sales to the market.

Under a competitive process, developers in India have been in the habit of bidding for tariffs based on a discount factor for falling cost of solar modules, i.e., developers anticipate a price reduction between the bidding date and the procurement date and then bid based on this anticipated price reduction. If module prices stabilise or even rise, the market dynamics will fundamentally change. Another key game changer can be the imposition of anti-dumping duties. The cost of modules in India is expected to rise, if anti-dumping duties are enforced (to understand the impact, refer to the key-question section in the January 2013 edition of the INDIA SOLAR COMPASS).

We expect that BOS costs will continue to see some price reduction as volumes and competition increase. This effect might not be significant in MW-scale projects, where margins are already squeezed. The impact will be counteracted by the increasing cost of land. It is estimated that the cost of land for setting up solar projects in Rajasthan has gone up by almost 300% (from INR 100,000/acre to INR 400,000/acre).

The price reduction that has taken so far will begin to seep into the kW-scale market, where we expect system price costs to come down significantly. This segment will get a further push as the maximum size of MNRE subsidy-based projects has been increased from 100 kW to 500 kW under phase two of the NSM, boosting demand from industrial and commercial consumers. We expect that the budget for subsidies for a financial year, which has been fixed at a cumulative upper limit of 100 MW, will be exhausted before the end of the year and projects planned thereafter will not get subsidy sanctions.

An overall cost stabilization for large kW and MW scale projects at around USD 0.65/Wp (exclusive of taxes), will push some serious stakeholders that have been sitting on the fence to stop waiting and start investing. Developers, investors, manufacturers and power consumers will be able to plan their investments based on fundamentals and move away from the earlier guess work of falling costs.

At this point in time, India needs a stable and predictable pricing regime so that an ecosystem is built that allows businesses to succeed and innovate. In the long run, gradual cost reductions backed by technology and process improvements should continue to make solar increasingly more competitive.

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

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Weekly Update: U.S. takes India to WTO against Domestic Content Requirement

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The US on Wednesday filed a complaint with the World Trade Organization (WTO) over the Domestic Content Requirement (DCR) under India’s National Solar Mission (NSM), which it said discriminates against foreign solar products, including the ones made in the US (refer).

Phase one of the NSM included a DCR on Crystalline Silicon (c-Si) cells,  however phase two of the NSM is expected to expand the restrictions to include thin-film modules as well

US companies supplying thin-film modules to the Indian market risk a significant drop in sales in the event of such restrictions

India and the US have 60 days of consultations to resolve the issue and beyond that the US can ask the WTO to hear the matter. India’s DCR may be done away with if module manufacturers are unable to put up a strong defense

In order to promote domestic manufacturing of solar cells and modules, India has been

 

mandating procurement of c-Si cells and modules from within the country for projects under

 

the NSM.

Until now, there had been no such restriction on the import and use of thin-film modules. The US, which exports primarily thin film modules, has been the main beneficiary of India’s DCR. Chinese companies offering c-Si modules have suffered and Indian manufacturers have not been able to take advantage of it. First Solar, a US company and the world’s leading manufacturer of thin-film (CdTe) modules, is the most successful supplier in India with a market share of over 20%. Lately, the company has sold around 130 MW out of 340 MW for projects under batch two of phase one of the NSM.

However, phase two of the NSM is expected to expand the DCR restrictions to include thin-film modules as well. This would risk a significant drop in global sales for First Solar, which in 2011 has supplied 8% of its modules to the Indian market.

India has always justified the DCR by arguing that since it is financially incentivizing the use of solar power through subsidies and feed-in-tariffs (FiTs), it has the right to impose conditions. Also, it is the stated goal of the Indian government to create a domestic solar manufacturing industry. However, cases challenging local content rules have received a boost since the WTO ruled against Canada’s domestic requirements for a green energy plan in Ontario province.

As per the WTO process, India can file a response within 10 days of receiving the WTO notice. The government has asked for a consultation meeting with both Indian manufacturers as well as developers on 15th February 2013 to discuss and review India’s stand on the restrictions. According to a statement by Farooq Abdullah, Minister for New and Renewable Energy (MNRE), the onus to put up a strong defense lies with the module manufacturers and if they are unable to do that, India’s domestic requirements may be done away with (refer). India and the US have 60 days of consultations to resolve the issue and beyond that the US can ask the WTO to hear the matter.

Also, India is currently investigating allegations of dumping against US companies (along with suppliers from China, Malaysia and Taiwan). Efforts from these suppliers with regards to submitting data and presenting their case to the Directorate General of Anti-Dumping Allied Duties (DGAD) under India’s Ministry of Commerce are already under way. According to BRIDGE TO INDIA, import restrictions will lead to increases of module prices and hence the cost of power to the Indian taxpayer and power consumer without really benefiting Indian manufacturers in the long term (refer to the January 2013 edition of the India Solar Compass to read the analysis).

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.

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Weekly Update: Kerala moves forward with distributed solar power generation

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Kerala’s Agency for Non-Conventional Energy and Rural Technology (ANERT) has chosen 14 companies to be eligible to set up battery backed 1 kWp projects under the state’s 10,000 rooftop solar power programme (refer). It is expected that more than 4,000 applications have already been received from homeowners interested in setting up such systems.

Kerala is the first state to incentivize individual solar power systems at this scale

The chosen companies have provided pre-determined prices for the rooftop solar systems. Customers will also receive subsidies from the state government

Issues related to grid infrastructure and net-metering need to be addressed for India to create a market ecosystem around distributed solar power

The homeowners can now choose from any of these 14 companies to get their systems installed. The eligible companies include Millennium Synergy Pvt. Ltd., Power One Micro Systems, Gensol Consultants,  Adithya Solar Energy Systems, Solar Integration India, Su-Kam Power Systems, Tata Power Solar Systems, Surana Ventures, UM Green Lighting, Ammini Solar, Waree Energies, Luminous Power Technologies, Eversun Energy and Chemtrols Solar. The companies have provided pre-determined prices at which such systems will be available. Millenium Synergy has been able to provide the minimum price of INR 177,541 (USD 3,347) for a system with 1,000 Wp solar modules, 7,200 Wh battery bank and a 1 kW inverter. The state government will provide a subsidy of INR 92,262 (USD 1,742) on this system. Therefore, the effective cost of such a system to the homeowner will be just INR 85,279 (USD 1,605) or INR 85.30/Wp (USD 1.61/Wp).

Such systems will be especially useful for rural and remote locations where the grid is unreliable and in many cases unavailable. A 1 kW system is suitable to run two tube lights, two fans and a television.

Kerala is the first Indian state to incentivize individual solar power systems at this scale. The incentive for battery backed systems makes a lot of sense under Indian conditions as grid connectivity of distributed power generation systems in India is still far from reality.

Given the high irradiation, high power deficit and unavailability of grid infrastructure in large parts of the country, India perhaps has the highest potential for distributed solar power generation among all emerging markets. However, most policies in the country have focused on utility scale solar power projects as the implementation authorities feel that this is the easiest way to meet solar targets.

However, strategically it makes more sense for India to create a market ecosystem around distributed solar power generation and Kerala has taken a step in the right direction. Issues related to grid infrastructure and net-metering need to be addressed to make the market grow faster.

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.

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