Month: June 2013

BRIDGE TO INDIA has launched the July 2013 edition of the INDIA SOLAR COMPASS, a quarterly market analysis report to the Indian solar market. This post is an excerpt from the report’s ‘Overview’ section.

In the previous quarter (April 2013 to June 2013), the Indian solar market was predominantly focussed on new project allocations in Tamil Nadu, Andhra Pradesh, Uttar Pradesh, Punjab, Rajasthan and Karnataka. Each state allocation came with its own set of challenges. However, overall, they have been able to create a significant interest from developers and will fuel demand for components and EPC in the next year. The signing of Power Purchase Agreements (PPAs) has not been completed for most states, except Rajasthan, but it is expected that the total signed capacity will reach more than 1.5 GW. In the coming weeks, the market will eagerly await allocations for a capacity of 750 MW under the National Solar Mission (NSM), phase two batch one, the process for which is to begin in July.

Despite the changed allocation process, from what had been communicated earlier, developers in Andhra Pradesh and Tamil Nadu have shown a will to make it work

The viability of tracking systems is expected to improve only in so far as their cost decreases as a percentage of the total plant cost

BRIDGE TO INDIA expects that India’s cumulative installed capacity will exceed 2 GW by the end of 2013

The most worrying aspect of these allocations has been the kind of uncertainty that we have seen in Andhra Pradesh and Tamil Nadu. Both the states have had to resort to changing the allocation process significantly from what had originally been communicated. In both cases, this had been a result of a poorly planned and executed process. On the positive side, both states and the developers have shown resilience and a will to make it work. Tamil Nadu now expects to allocate a capacity of 690 MW. In the case of Andhra Pradesh, the arbitrary and ex-post changes in tariff identification will hurt investor confidence more permanently. The state is expected to allocate a capacity of around 300 MW as compared to the planned 1,000 MW, even after originally being oversubscribed.

The sudden influx of allocations helped reduce the intense bidding competition that had previously characterized the Indian market. Allocations in Tamil Nadu and Uttar Pradesh were both under subscribed and the average tariff quoted by the developers across all allocations was more than INR 8 (Euro 0.12/$ 0.16)/kWh. This is significantly higher than the tariff of INR 6.45 (Euro 0.10/$ 0.13)/kWh, currently offered in Rajasthan.

As most prominent developers in India have been allocated projects under one or multiple state policies, these allocations are also expected to reduce the level of competition for projects under the NSM. Adding to this, as developers can opt for project capacities as high as 100 MW under the NSM, informed smaller and new developers will most likely stay away from the bidding based competition.

In our ‘Key Question’ in this edition, we look at tracking technology. Only about 80 MW of the 1,746 MW solar PV capacity installed in India is using some form of axis tracking technology. The question we asked was: under Indian conditions, does an increased yield and revenue justify the additional investment for an axis tracking technology? We found that at current prices, the increase in the Equity Internal Rate of Return (EIRR) increases only marginally when using horizontal single axis and dual axis tracking systems. For vertical single axis tracking systems, the EIRR actually decreases. Even a marginal increase in EIRR probably does not justify the additional risk involved in adopting this technology. Therefore, the low adoption of axis tracking technology in India makes sense. In the future, the viability of tracking systems is expected to improve only in so far as their cost decreases as a percentage of the total plant cost.

A capacity of over 1.7 GW has already been installed in India and close to 1.5 GW of PV is currently under development. BRIDGE TO INDIA expects that India’s cumulative installed capacity will exceed 2 GW by the end of 2013. There’s also a lot of momentum building up for new capacity additions in 2014, which could easily exceed 2 GW. This is expected to take India’s installed solar PV capacity to 4 GW by the end of 2014. Until now, 80% of India’s solar PV projects have been installed in Gujarat and Rajasthan. In future, the focus will shift from the West to the South (Tamil Nadu, Andhra Pradesh and probably also Karnataka).

Click here to read more from the INDIA SOLAR COMPASS- July 2013 Edition

Since 2003, Ernst & Young has been releasing its global quarterly publication, renewable energy country attractiveness index (RECAI) that ranks 40 countries on the attractiveness of their renewable energy investment and deployment opportunities. This index is based on a number of macro, energy market and technology-specific indicators.

India’s RECAI ranking for solar investments has gone down perhaps due to high cost of financing and infrastructure barriers

Only 500 MW of 2.5 GW capacity allocations expected in 2013 are likely to have a DCR depending on the result of the case at WTO

Depreciating value of an Indian rupee would keep investors away from India in the last quarter, however, in the long run India is likely to remain attractive for solar investments

In the 37th issue of RECAI for May 2013 (refer), India has lost considerable ground in the index for the country’s attractiveness for solar investments. In the previous quarter, for example, India was ranked third in position for solar PV after the US and China and was ranked fifth in position for solar CSP. This gave India a second overall position in the solar index. This quarter, however, India has moved down to the eighth position for solar PV, retaining the fifth position for solar CSP.

According to Sanjay Chakrabarti, E&Y India, the reason for the drop has been that the bankability is jeopardized by the high cost of financing and significant infrastructure barriers (refer). He goes on to explain that there are issues in India with regards to the US complaint with the World Trade Organization (WTO), regarding domestic content requirements and India’s anti-dumping investigation for solar cells from the US, mainland China, Taiwan and Malaysia.

BRIDGE TO INDIA, however, believes that there is very little explained in the report about reasons that have resulted in a drastic downward trend for investment attractiveness for India. Markets such as Germany, Japan, Italy, Australia and Canada, which have moved up with respect to India are perhaps more mature than the Indian market and are expected to see more volumes in any case.

Not much has changed in the past quarter as far as the bankability and financing of projects is concerned. There are a lot of issues with the same, however, lenders are getting more comfortable with solar projects with time (refer to the Decision Brief on ‘Bankability and debt-financing for solar projects in India‘).

The domestic content requirements (DCR) have been around since the beginning of the NSM. In the current scenario, of the 2.5 GW capacity allocations expected in 2013 across India, including all state policies, only about 500 MW is likely to have a DCR. Even this can be put to question if India loses its case at the WTO. The interim order on the anti-dumping can be expected soon and it would be unwise to pre-judge the result.

Key reasons that would keep investors away from India for the last quarter would be the depreciating Indian Rupee and the uncertainty and flip-flops seen in the Andhra Pradesh (refer) and Tamil Nadu (refer) allocations. The Indian Rupee has lost over 10% of its value against the US dollar in the last quarter. Since 2011, it has lost over 32%. A weakening Rupee has a severe impact as it increases the cost of imported equipment, of servicing of un-hedged external debt and of future currency hedging. However, it is unlikely that these factors have been taken into consideration for the purpose of their analysis.

BRIDGE TO INDIA believes that while India’s long term attractiveness for investments into solar is intact, the current position for its placement among global peers might be debatable.

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.

Andhra Pradesh, Tamil Nadu, Uttar Pradesh and Punjab have all recently issued Letters of Interest (LOIs) after carrying out their respective processes for allocation of new solar PV projects. These allocations would cumulatively account for a capacity of almost 1.5 GW.

Andhra Pradesh is now looking to allocate a solar PV capacity of 350 MW and not 1000 MW, while Uttar Pradesh planned to allocate 200 MW but received bids for just 140 MW

Punjab allocates a total capacity of 268 MW for projects in the range of 1 MW to 4 MW and in the range 5 MW to 30 MW

All the new state and national level allocations being undertaken in the current financial year are expected to account for a capacity of around 2.4 GW.

Andhra Pradesh has offered a tariff of INR 6.49/kWh to developers after initially trying to offer projects based on a sub-station level bidding process (read our previous blog for our analysis on allocations in Andhra Pradesh). At this tariff, the state is now looking to allocate a capacity of 350 MW. Of this, seven companies with a capacity of 53 MW have unconditionally agreed to the terms and tariff and another 27 companies with a capacity of 297 MW have given their conditional acceptance. Some of the prominent developers who are looking to get projects in the state are Essel Mining and Infrastructure (35 MW), Kranthi Edifice (30 MW), Mahira Power Systems (20 MW), Premier Solar (two projects of 18 MW and 5 MW each) and SunBorne Energy (15 MW).

Uttar Pradesh had planned to allocate a capacity of 200 MW but bids have been received for just 140 MW. Of this, a project for 5 MW has been disqualified, leaving 135 MW for allocation. These projects are expected to sign a power purchase agreement (PPA) for a period of 10 years as compared to most other policies, where the term for the PPA is usually 25 years. Most developers are open to the shorter duration of the PPA as this would cover their loan repayment period and potentially allow them to sell the generated power at a rate higher than the current tariff beyond 2024 (read our previous blog for our analysis on allocations in Uttar Pradesh). Some of the prominent developers looking to get projects in Uttar Pradesh are Essel Infra (50 MW), Moser Baer (20 MW), Sri Colonizers (20 MW), Azure Power (10 MW) and Jakson Power (10 MW).

Punjab has been planning to allocate a capacity of 300 MW. The plan has been to allocate the projects in two categories, i.e., category one for project capacities from 1 MW to 4 MW and category two for project capacities from 5 MW to 30 MW (read our previous blog for our analysis on allocations in Punjab). For category one, after receiving the bids, the state is now looking to allocate a capacity of 68 MW to 22 projects and for category two, the state is now looking to allocate a capacity of 200 MW to eight projects. Prominent developers hoping to formalize a PPA in Punjab are Welspun (30 MW and 2 MW), Azure (30 MW and 2 MW), Essel Infraprojects (30 MW), Moser Baer (30 MW), SolaireDirect (20 MW) and Punj Llyod (20 MW).

BRIDGE TO INDIA has covered the allocations for 690 MW in Tamil Nadu in the last weekly update (refer). We would like to issue a clarification with regards to this update. We had mentioned that this capacity of 690 MW also includes the new interests received from developers who had not participated in the bidding process. However, this capacity of 690 MW is only from the developers who had earlier participated in the bidding process and any new interests would account for a capacity over and above the said capacity. Prominent developers hoping to formalize a PPA in Tamil Nadu are Mohan Breweries (110 MW), United Telecom (100 MW) and Welspun (60 MW).

Apart from this, Rajasthan has recently allocated 75 MW and Karnataka is also in the process of allocating 130 MW. Allocation for a capacity of 750 MW is also expected under the National Solar Mission (NSM) and the process for these allocations is expected to begin in July 2013. All the new state and national level allocations that are being undertaken in the current financial year (April 2013- March 2014) are expected to account for a capacity of around 2.4 GW.

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.

BRIDGE TO INDIA has launched the June 2013 edition of the

The Renewable Purchase Obligation (RPO) mechanism in India sits awkwardly between the older generation-based incentives for renewable energies and the coming parity. Half supply side push, half demand side pull, is an incomplete framework in a rapidly changing power market. In the long run, it can become relevant only as a measure of success in implementing renewables in India, not as a specific driver for them. The following are notes taken during an excellent, closed-door roundtable on the subject organised by Ashwin Gambhir of Prayas in Delhi on the 10th of June 2013.

The RPO mechanism does not yet create a functioning market, its future is uncertain

Renewable Energy Certificates (RECs) equally are not yet a functioning market. They are regarded as a potential upside by investors, but not as a foundation or driver for a business decision.

As parity of renewables has arrived and will continue to deepen, RPOs will become a measure of success, rather than a driver of policies. The REC market might well become irrelevant.

There are a number of factors that undermine the current RPO market and by extension, the REC market in India. The most obvious and important is the fact that (now that almost all states have set themselves RPO targets), non compliance is not penalized; and if it is penalized, the penalty would have to be paid by mostly indebted state electricity boards. This is compounded by another, counterproductive trend: RPO targets are not ambitious enough to create a market pull. Some states such as Rajasthan have reduced their target to match the actual renewable energy production. Very few states have escalating RPO targets. Tamil Nadu has set a target lower than its (considerable) renewable power generation.

The REC market has its own challenges, over and above the unpredictable demand from RPOs. There is an illusionary offtake stability given the floor and forebearance prices. However, as prices are fixed, volumes traded become volatile. Only around 50% of RECs are actually sold, trading languishes during the early months of a financial year. This makes RECs not-bankable. Most developers pursuing REC projects get their returns through the accelerated depreciation benefit. RECs, if they generate revenue, are a potential upside. There are a number of further bottlenecks and open questions, involving, for instance the lack of market aggregators (trading is only allowed through the energy exchanges), the discussion about vintage RECs or clarifications on whether captive and off-grid renewable energy plants can generate RECs.

Various public institutions, including the CERC, the SERCs, the Ministry of Power, the Planning Commission and the PMO are working hard to fix the various challenges around the mechanism. The challenges can all be fixed.

However, there looms a larger question on what the role of RPOs can be under conditions of grid parity, when renewables no longer need to be incentivised but make commercial sense on their own. In such a scenario, REC revenues would be an additional ‘green benefit’. India needs to decide whether it wants to reward and pay extra for renewables just for being ‘green’. There is no political consensus on that. Under parity, the RPO mechanism would presumably evolve from being a market driver (through penalization and encouraging of incentivising policies) to being a measure of success.

Parity in renewables does not necessarily mean rapid adoption. The governments still needs to create a level playing field for them with respect to grid access. In turn parity needs to account for related costs of grid upgradation and balancing. Investment risks are still substantial in heavily frontloaded renewables projects. Reducing those and improving financing conditions will be a key concern. Also, as long as the costs of renewables keep falling, there is an ‘incentive to wait’. Here, RECs could play a role in creating an early mover advantage through a falling additional green benefit.

Tobias likes to write about solar business models, solar and energy policy and wider issues of sustainability, development and growth.

What are your thoughts? Leave a comment below.

In December 2012, Tamil Nadu had announced a bidding process for a capacity allocation of 1,000 MW. Issues such as low bankability of the Power Purchase Agreement (PPA), limited time available for planning and commissioning and the need for developers to meet the lowest quoted tariff for successful allocation caused the allocations to be undersubscribed (refer).

Developers asked to meet a ‘workable’ tariff of INR 6.48/kWh with an escalation of 5% per year for 10 years

TANGEDCO gets proposals for a cumulative of 690MW on extending deadline for developers to 31st May 2013

A new response on deadline extension was seen because of more available time for developers to scout for evacuation capacity, to plan and commission projects

Bids were received for only 499 MW. Developers were subsequently asked to meet the lowest submitted tariff which came out at INR 5.97/kWh with an escalation of 5% per year for 10 years – an unattractive tariff for most developers. To avoid a complete failure of the process, the state decided to offer a ‘workable’ tariff of INR 6.48/kWh with an escalation of 5% per year for 10 years (read BRIDGE TO INDIA’s April edition of the India Solar Compass to read more). Even at this tariff, initially, interest was limited. In February 2013, Tamil Nadu Generation and Distribution Corporation (TANGEDCO) cleared proposals for the first batch of bidders with a cumulative capacity of 226 MW.

Seeing the low response, TANGEDCO provided additional time until 31st May 2013 to developers who originally chose not to accept the offered tariff and PPA being offered. Apart from this, new interests were also invited through a public advertisement. All new interests were to be made to the Chief Engineer (CE) at TANGEDCO. The new interests had to initially show the company’s financial strength to undertake the project and the availability of land and evacuation. Apart from this, they were supposed to submit a detailed project report. By the end of the deadline, proposals for a cumulative capacity of 690 MW have been submitted. According to unconfirmed reports, the key projects that now make up for the new capacity addition are a 110 MW project by Raasi Green Energy, a 100 MW project by L&T and a 40 MW project by Reliance.

None of these larger projects were a part of the initial bidding process. Of this, Raasi Green Energy had signed a Memorandum of Understanding (MoU) for a 100 MW project with Tamil Nadu Industrial Development Corporation (TIDCO) back in December 2012 but had also not participated in the bidding process.

Apart from this capacity of 690 MW, a 100 MW project by a Korean company, Shinsung , is expected to be awaiting final approval from the developers who are trying to narrow down on a low cost financing options before making the commitment.

No specific changes have been made to the PPA or any other term for agreement that make these projects more bankable than it was earlier. Under the bidding process, the maximum capacity for project size was limited by the evacuation capacity listed for each district in a list put out by Tamil Nadu Energy Development Authority (TEDA). Based on that, most projects were planned for a capacity between 1 MW and 10 MW with just one project that was as large as 50 MW. However, the newer projects had enough time to scout for evacuation capacity on their own. The larger capacity has potentially made these projects financially feasible for the developers. Other key reasons for the new response could be availability of more planning and commissioning time and no uncertainty with regards to tariff determination through a bidding process.

A capacity for 350 MW has been tied up for in Andhra Pradesh as well. Look out for a brief analysis on the same on our blog during this week.

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.

We observe a trend in the Indian solar PV project development space towards bilateral, open access, contracts (often under the ‘group captive’ model) for sale of power to industrial consumers.

Many project developers are keen on the market for bilateral sale of power, while some are already selling power directly to industrial consumers

Project developers plan for only a portion of Renewable Energy Certificates (RECs) to be sellable given the uncertainty of the REC mechanism

Rather than building a system at the client’s location, developers opt for a ‘group captive’ model, since it offers more bankability and flexibility

First Solar became the latest entrant to a group of prominent developers that have announced their interest in this market (refer). According to market sources, developers such as Kiran Energy, SunEdison, Moser Baer and Welspun are keen on the market for bilateral sale of power. In the past, we have already seen projects by M&B Switchgear in Madhya Pradesh and EMMVEE in Andhra Pradesh selling power directly to industrial consumers.

These projects typically rely on the Renewable Energy Certificate (REC) mechanism to become financially attractive. However, given the uncertainty of the REC mechanism, most developers have planned for only a portion of the RECs to be sellable. For example, while calculating a project’s financial viability, a developer may consider a sale of only 50% of the RECs generated by 2017. Based on such assumptions, developers have been able to offer a tariff of INR 4.00 – 8.00/kWh to industrial consumers. A focus is on states such as Madhya Pradesh and Andhra Pradesh, where the open access charges for solar power have either been waived off or are below INR 1.50 per kWh.

Since, there are significant risks associated with supplying power to a single customer and building a system directly at a client’s location. To mitigate this risk, many developers are more comfortable with providing power through the grid to multiple off-takers located in industrial clusters. The plant would be set up nearby. This is called a ‘group captive’ model. Under this model, in case of a dispute with one or more of the off-takers, a developer can easily find another off-taker for that share of power, making the model more bankable. It can also give the developer some flexibility to sign short-term power purchase agreements (PPAs), opening up a new customer segment. Along with flexibility and bankability, this model also provides scale (project sizes are typically 10 MW and above), which can help bring down the tariff, if the scale effect is larger than any additional grid charges.

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.