Month: December 2013

Recent reports indicated that India’s Department of Atomic Energy (DAE) is in an uncomfortable situation as the cost of power from its new nuclear power projects appears to be too high (refer). It has been reported that the cost per unit at the 9,900 MW Jaitapur Nuclear Power Plant is around INR 9 (EUR 0.11/ USD 0.15) per kWh. At the 6,000 MW Mithi Virdhi Nuclear Power Plant costs may even be as high as INR 12 per unit (EUR 0.15/ USD 0.20).

Due to the risk perception of nuclear power, many projects face opposition from the public leading to significant delays

Renewable sources of power are much more promising in terms of cost and speed

Currently, India needs to look at all available sources of power, including nuclear, to meet its power deficit and rapidly rising demand

The high cost of nuclear power is explained by the capital costs of installing nuclear power plants which are in excess of INR 300 million (EUR 3.75 million, USD 5 million) per MW, with the Mithi Virdhi Nuclear Power Plant costing nearly INR 400 million (EUR 5 million, USD 6.7 million) per MW. Capital costs for the American made reactors are substantially higher than the INR 220 million (EUR 2.8 million, USD 3.7 million) per MW negotiated price with Russia for units at the Kudankulam nuclear plant in Tamil Nadu. Besides including waste disposal costs, the higher cost of nuclear power is also explained by India’s nuclear liability clause, which has increased insurance expenses for cautious international firms (refer). The projects are implemented in collaboration with international companies such as Areva from France and Westinghouse Electric from the US.

Average consumer power tariffs in India are currently at around INR 5.5 per unit (EUR 0.07/ USD 0.09). The average pool purchase cost at which utilities buy power is around INR 4 per unit (EUR0.05/ USD 0.06) for new projects. Moreover, due to the risk perception of nuclear power, many projects face opposition from the public, which in turn may lead to significant delays. In theory, a nuclear power plant takes five to seven years for commissioning. In reality, however, this timeline is often much longer, even decades as in the case of the Kudankulam nuclear plant in Tamil Nadu. A look at India’s ambitious five year plan projections for nuclear power since the 1950s as compared to the reality, shows that nuclear power has time and again failed to meet expectations.

Renewable sources of power, by comparison, are much more promising. They are, to begin with, significantly cheaper. Wind power is already competing with coal power across India at prices of INR 4.5 per unit (EUR 0.06/USD 0.08). The cost of solar power is now at around INR 8 per unit (EUR 0.10/ USD 0.13) and this is expected to fall in the long run. A second major advantage is speed: EPC companies across India are now constructing utility-scale solar projects in a matter of months, if not weeks.

In the current context, India needs to keep its energy portfolio diverse and look at all the sources of power available, including nuclear, to meet its power deficit and rapidly rising demand. However, the strategic emphasis should be on renewables. Solar power is even more uniquely positioned as it can be generated in a distributed manner. This means that it competes with the cost of power at the consumption end as compared to the generation end and that the significant commercial and technical grid losses can be avoided.

Solar power will require strategic emphasis beyond a certain limit, as it will require investments in strengthening of the grid in terms of green corridors and smart grid implementation. Solar power being an intermittent power source provides supplementary power when compared to nuclear which provides base load (firm power). Therefore, as the focus on renewables increases, smart grids and ancillary grid infrastructure will be required to balance out the variability of generation and provide a stable and more efficient power.

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.

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 Across the globe, renewables are entering into their second phase: no longer driven by subsidies or even climate concerns, they directly compete with existing fossil fuel based power. So far, few utilities have been able to manage even the first phase successfully. And they seem to be struggling to strategize the second. Why is that the case? Should they oppose or embrace renewables? This is Part 3 of a three part series on utilities and renewables, looking at what utilities need to do to survive and succeed. To refer to part 1, click here. To refer to part 2, click here.

Utilities need to become more flexible organisations to succeed in a more flexible market

New business models need to be mastered and a different risk profile needs to be developed

Smaller utilities might be at an advantage, if they are able to more quickly adapt

Utilities are currently failing to change with the times, to see the future coming. They sometimes remind one of the IBM of the 80s, before the spread of PCs and the growth of Microsoft and Apple. Or perhaps of the formerly monopolistic fixed line phone operators, who were forced to live up to fast changing regulatory, technological and competitive circumstances, driven by privatization and the growth of mobile telephony. Some of the big traditional phone companies have survived and found a new role for themlselves (as has IBM). Others have failed.

Like the phone operators, utilities were profoundly risk-averse and used to very stable market conditions with established (if complex) technologies. Now the certainties are gone. The rate of change in the industry has stepped up several notches and its very structure and business models are being revised.

At the same time, utilities are under significant pressure to invest. They need to replace old grids and reduce costs (in developed countries) or expand them and upgrade them to carry more loads and reduce losses (in developing countries). At the same time, grids need to be made smart enough for intermittent renewable supply. In rapidly developing countries like India and China, vast new generation capacities need to be added.

Utilities can only succeed, if they become operationally better and more flexible. Power systems used to be run almost on autopilot. In future, they will resemble fast paced computer games or hectic stock market trading floors.

Becoming operationally excellent means becoming much more efficient in the way the established business is conducted. (Many are still used to the glacial pace of quasi-governmental institutions.) It also means innovating and constantly improving processes. A much more refined load-demand forecasting would help. As would a state-of-the-art maintenance strategy that strikes the right balance between quality and cost by stringently differentiating between components that are best served by corrective maintenance versus those that require time-based, condition-based and reliability-centered maintenance. Most importantly, organizations need to be rewired to provide the kind of flexibility needed for a more complex electricity market. This relates to how research is conducted, how investment decisions are made and how much time decision-making takes, among other things. It also requires a shift in focus: away from the centers of political power (and lobbying) and towards the power customers.

But is this enough? In addition to managing their core business, utilities need to simultaneously re-invent themselves to service future businesses. For this, they have to become risk takers. There are new, exciting market opportunities in storage, power trading or grid-management. New services for the more complex power economy need to be provided for instance in maintenance, or software solutions. New types of power purchase contracts are emerging and new generation and transmission capacities will be funded in different ways. Energy efficiency on the generation and consumption side remains a huge, still largely untapped opportunity. It could be unlocked by new business models, which the utilities, with their wealth of data and experience as well as their still unrivaled customer access, are very well placed to develop. They are also in a good position to link the second major energy revolution, the shale gas revolution in the US as well as in future probably in China and other countries, with the renewables revolution. In addition, they need to start thinking about small, distributed solutions that can be scaled. These are fundamentally different to the infrastructure investments utilities are used to and more akin to selling cars or white goods (or fleets of cars and bundles of white goods). Money here will be made through scale, maintenance contracts and related financial services. Utilities will need to build brands that end customers like and trust. Since, there is still a high degree of uncertainty about what models will work in future, utilities will need to place more bets on new ideas. They need to develop a bold, nimble institutional mindset.

This, they will only be able to do so, if they embrace the change at a deep level; not grudging acceptance, not fearful tugging-along. They need to become credible stakeholders in the future energy system. If they can succeed in this, they will not only retain their ‘license to operate’ but, more importantly, win the influence to shape the system and perhaps bring back some strategic certainty to their business. They have been consistently too conservative with respect to renewables and the change they bring. Can they develop a progressive vision, outlining not only the risks (which is important), but also the opportunities? With an ambitious roadmap?

Refer to part 1 of the blog series here.

Refer to part 2 of the blog series here.

Tobias Engelmeier is the Managing Director at BRIDGE TO INDIA.

What are your thoughts? Leave a comment below

Last week, Solar Energy Corporation of India (SECI) announced results for third phase of allocations under the rooftop PV projects scheme in select cities. A capacity of 8.75 MW has been allocated across 21 projects in nine cities: Chennai, Coimbatore, Delhi, Kolkata, Mumbai, Pune, Palatana, Chandigarh and Gwalior. Capacities allocated to individual project developers range between 250 kWp to 1.75 MWp with highest capacities allocated to TATA Power Solar (1.75 MW), Ravano Solar India (1.5 MW) and Waaree (1.25 MW).

Rooftop PV projects scheme is different from the off-grid capital subsidy scheme since projects have to be connected to the grid

In rooftop PV projects scheme, disbursement of subsidy is linked with plant performance

If restriction on the city of installation is removed, this mechanism would be suited to take over the capital subsidy scheme

Under this scheme, SECI provides a capital subsidy of 30% to the bidders who are required to provide a turnkey solution including operation and maintenance (O&M) for a period of two years and sell the power at INR 6/kWh for private consumers. The scope of work for the bidder includes the identification and leasing of the buildings suitable for the rooftop plants. This model is different from the off-grid capital subsidy scheme of the Ministry of New and Renewable Energy (MNRE) in two important ways – 1) The projects have to be connected to the grid and sell power to a third-party; and 2) disbursement of the subsidy is linked to performance of the plants: 20% will be disbursed at the time of commissioning subject to minimum performance ratio of 75%; further 5% will be disbursed after 1 year, and another 5% after 2 years, if Capacity Utilization Factor (CUF) of the project exceeds 15% for the two years.

Phase two of the National Solar Mission (NSM) (2013-2017) has a target of installing 200 MW of rooftop based capacity. Earlier, this was envisaged to come through the capital subsidy mechanism. However, we know that the process for capital subsidies has been held up for some time now and we believe that MNRE is likely to altogether move away from this model. Currently, this bidding based rooftop scheme allows developers to also sell excess power to the distribution company at Annual Pooled Purchase Cost (APPC).

However, as net-metering becomes a reality across different locations, these projects are expected to be the first ones to transition into net-metering.

Given the higher transparency and competitive process followed and use of performance based criteria, we believe that this scheme is significantly better than the existing capital subsidy scheme. If the restriction on the city of installation can be removed, this mechanism would be ideally suited to take over the existing capital subsidy mechanism for good.

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.

Across the globe, renewables are entering into their second phase: no longer driven by subsidies or even climate concerns, they directly compete with existing fossil fuel based power. So far, few utilities have been able to manage even the first phase successfully. And they seem to be struggling to strategize the second. Why is that the case? Should they oppose or embrace renewables? This is Part 2 of a three part series on utilities and renewables, looking at how utilities should respond to this new scenario. To read part one, click here. The third looks at how utilities can successfully re-invent themselves. Click here to read part 3.

Utilities in many countries are trying to block policies that promote renewable energies, distributed generation and competition

They should, however, embrace the inevitable and make an opportunity out of a threat

While this is not a guarantee for their future success, it is probably their best bet

Electricity utilities can still portray themselves as ‘systemically relevant’ and ‘too big to fail’ in the way large banks do. They are tasked with ensuring that electricity is always available and that there are no blackouts by maintaining and expanding the grid and balancing the flow of power in it. It would, however, be unwise for utilities to overplay this position as they may rapidly lose it, if they do not quickly set themselves up for success in the new energy world, where renewables will make up half of the additional power generation capacity to be built globally until 2035 (IEA estimate).

Utilities today see renewables no longer as an insignificant fad. Instead, depending on the level of renewable penetration in a country, they see it as either a nuisance or a threat. And the position is all too often one of opposition. They fight ‘unjust’ subsidies or other privileges for renewables, forgetting that fossil fuels and nuclear power have since long been supported by governments. In fact, the IEA estimates that global fossil fuel subsidies in 2012 amounted to USD 544 bn as compared to USD 100 bn for renewables. They decry the high cost of renewables, forgetting that the pricing of traditional power falsely fails to include very expensive externalities such as effects on local pollution levels, habitats and livelihoods, climate or the cost of securing fuel imports. They warn of the destabilizing effects of infirm power on the grid, while good grids (e.g. in Germany) work well with high penetration levels of renewables and unreliable grids (e.g. in India) are unstable even without renewables and distributed generation might actually help stabilize them.

In Europe, utilities are still opting for investments into coal generation plants, driven by falling coal and carbon prices. While this might give short term respite from commercial bottlenecks, it is a strategically flawed choice. Coal-fired plants are simply too inflexible. This shows the increasing divide between the choices of traditional power generators, whose path-dependency both of past investments and current mindsets ties them to centralized generation and the likely electricity architecture of the future (distributed, smart). In Germany and California/US, rooftop solar is an increasingly attractive option for households based on the costs of solar and grid power alone. In both places, utilities are very uneasy about this development and try to stall it through imposing adverse regulations and requirements. In India, too, in the state of Maharashtra, where power tariffs are highest, the state utility is fighting private generators through various petitions and tariff orders.

There is an alternative choice for utilities: Rather than wasting efforts to stymie renewables, they should actively create the energy future. This would put them in a much better position to voice legitimate concerns. Firstly, utilities need long-term visibility on a national energy strategy. That will allow them to make corresponding investment choices into grids and power generation capacities. Currently, almost no country has a clear, long-term strategy on how to manage the big transition from old to new energy systems. Secondly, they need to know how balancing and spinning reserves will be priced during this transition and who pays for these services (and they should be paid for). Thirdly, they should have more clarity on the pricing of carbon.

At the same time, utilities should seek to play a much stronger role in renewables themselves. There have been some investments into large off-shore wind and solar parks, and of course large utilities develop hydro power plants. However, portfolios are still highly lopsided. Even if they are not used to it, utilities are in a good position to go into distributed, renewable power generation. They have vast experience in managing grids. More importantly still, they often have direct access to the power customers. In the new energy system, this will be the crucial advantage as the consumer will increasingly be able to choose where to get power from.

Refer to part 1 of the blog series here.

Refer to part 3 of the blog series here.

Tobias Engelmeier is the Managing Director at BRIDGE TO INDIA.

What are your thoughts? Leave a comment below

Tata Cleantech Capital recently announced that it may provide funds for as much as INR 2.5 billion (EUR 30m) of renewable and energy-efficiency projects in India (refer). The key new opportunity highlighted has been the parity driven market for a combination of power tariffs and diesel cost.

The LCOE for diesel based generation is much higher than that of solar power

The diesel consumption however, does not fall in proportion to the operating load

Several companies are working on solutions that can intelligently manage different sources of power as per load requirements

India has a very large installation base of diesel gen-sets. Some industry estimates peg the market size to be around 60 GW. The typical levelized cost of energy (LCOE) for diesel based generation can be anywhere between INR 12/kWh to INR 18/kWh (EUR 0.14/kWh to EUR 0.22/kWh) (or significantly more for remote sites) and the grid commercial and industrial tariffs can be as high as INR 9/kWh (EUR 0.11/kWh) in many locations. Compared to this, the LCOE of solar power is around INR 8/kWh (EUR 0.14/kWh) for solar PV systems without storage.

Intuitively, it makes a lot of sense for companies with high diesel consumption to go solar. However, there is a technological catch in this proposition: Diesel consumption does not fall in proportion to the operating load. This means that the LCOE of diesel generation at say 40% operating load will actually be higher than the LCOE at 80% operating load. Also, as solar power is an intermittent source, in most cases it is not suggestible to shut down a part of the diesel generation in lieu of solar power as a minimum ‘spinning reserve’ (refer) for diesel based generation is usually required.

Several companies are already working on developing solutions that can intelligently manage the different sources of power as per the load requirements of a consumer. SMA has launched its ‘Fuel Saver’ product for the Indian market (refer). This solution is said to be economically viable for project sizes greater than 500 kWp. Some other companies who have a similar offering in the international market are also looking to launch products for India. In addition, new entrants are developing similar products.

BRIDGE TO INDIA is currently verifying the actual savings potential of such products. New, cost effective solutions that will provide significant and reliable savings on diesel costs to consumers can unlock a large diesel abatement market for solar PV 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.

What are your thoughts? Leave a comment below.

As a part of the central government’s debt restructuring process, four states – Haryana, Uttar Pradesh, Rajasthan and Tamil Nadu – have begun the process of taking over their short term liabilities from the respective power distribution companies (refer). According to the approved scheme, 50% of the liabilities would be taken over by the state governments. This would be converted into bonds issued by the Discoms (power distribution companies) and backed by a state guarantee.

As a part of debt restructuring process, the central government will provide Transitional Finance Mechanism for liquidity support

Solar power is becoming increasingly competitive across many states for commercial and industrial consumers

Market participants now view the subsidy mechanism as a roadblock more than an incentive

The central government will provide the Transitional Finance Mechanism (TFM) for liquidity support and a capital reimbursement support of 25% of the principal amount if all terms are met. As per the requirements, these Discoms will need to become financially sound in a time bound manner, primarily by raising tariffs. For example, Tamil Nadu has already raised power tariffs by 37% last year (refer) and Uttar Pradesh by 40% (refer) this year.

Apart from these four states, Andhra Pradesh, Jharkhand and Bihar have also been given an extension to join the scheme (refer), taking the total tally of states to seven. Rising tariffs in these states will bring them at par with other states that have already raised tariffs. Bihar, for example, has now proposed to increase the electricity tariff by 55% for all categories of consumers in the next financial year (refer).

Given the unsustainable losses and debt of most state power distribution companies, the central Ministry of Power hopes that the State Electricity Distribution Management Responsibility Bill, 2013, will be tabled in the winter session (beginning 5th December 2013). This bill is expected to force state electricity distribution companies to revise tariffs more frequently (refer). Furthermore, after the ongoing state elections in four Indian states and national elections in May 2014, power tariffs are expected to rise across the board.

In a high power tariff regime in India, solar power is becoming increasingly competitive across many states of India. This is especially true for the commercial and industrial consumers who end up subsidizing tariffs for rural and small urban consumers. Commercial consumers in four Indian states – Maharashtra, Andhra Pradesh, Kerala and Delhi – have already achieved parity with solar power. Many more Indian states are expected to join this list in the next one year. In our latest product, the India Solar Navigator (click hereto download), BRIDGE TO INDIA has carried out an analysis that predicts which states are expected to be favorable for adoption of solar power over the next five year.

As a part of the overall analysis, we have looked at the future trend for power prices based on factors such as losses of distribution companies and their debt-restructuring plans.

Regulations to increase the adoption of solar power are also on the anvil. Pondicherry has successfully piloted net-metering in India. Tamil Nadu and Andhra Pradesh have notified their net-metering policies. Punjab, Delhi, Kerala and Chandigarh are expected to adopt net-metering soon.

According to BRIDGE TO INDIA research, around 120 MW of rooftop solar has already been installed in India. The rooftop market saw a slowdown in the last eight months because of the unavailability of MNRE’s subsidy funds. Now, many market participants view the subsidy mechanism as a roadblock more than an incentive. The subsidy overhang is coming to an end and EPC companies are known to be finalizing orders for installations without subsidies. Many companies and solar specific task forces in trade associations have also been voicing their opinion to completely do away with the subsidy mechanism as it is doing more harm than good in its current form. Parity based adoption of rooftop solar in India will be spread out across states and consumer types. With rising tariffs of conventional power and favorable regulations, the adoption for solar will pick up pace.

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.

Across the globe, renewables are entering into their second phase: no longer driven by subsidies or even climate concerns, they directly compete with existing fossil fuel based power. So far, few utilities have been able to manage even the first phase successfully. And they seem to be struggling to strategize the second. Why is that the case? Should they oppose or embrace renewables? This is Part 1 of a three part series on utilities and renewables, looking at their dilemma. The second part will look at the choice of obstructing vs. embracing change (Read here). The third looks at how utilities can successfully re-invent themselves (Read here).

Traditional utilities are still the backbone of energy systems

Many face rapidly falling market capitalization and profitability in electricity generation

They have no real strategy of their own for redesigning the future of energy and thus are constantly driven by other stakeholders

Over the course of the 20th century, the generation and distribution of power had become an increasingly centralized affair. Grids grew in size and linked up with one another. Ever larger power plants, fired by coal or nuclear reactions, fed power through them. Often, generators and distributors were the same. Often, these were public sector monopolies. The future seemed predictable and investments safe. Then, new regulations lead to tectonic shifts in the world of utilities. First, competition was encouraged through unbundling and privatization. Then, new distributed, smaller power plants, based mostly on renewable energy technologies began to emerge. These were initially belittled, as their contribution to the power supply was still tiny and their infirm nature gave them an air of fundamental impracticality. However, as the costs of fossil fuels rose and climate concerns grew in the 90s and early 2000s, their development was rapid and suddenly they changed the game. Utilities – out of arrogance or ignorance or inertia – were left wrong footed. They had bet on the traditional model of power generation and sale and seemed quite incapable of adapting to the new business models that emerged. While new, often profitable energy companies popped up across the globe, many traditional utilities began to lose money.

In Germany, a pioneer in the field of renewables, this development was particularly pronounced. Generators of solar, wind or biomass power were given preferred access to the grid. They did not have to worry about balancing fluctuating power, but could supply power whenever available. At times, this could lead to oversupply of power. On June 16th 2013, Germany had to sell power at a price of minus (!) 100 Euro per MWh to get rid of excess generation and keep the grid stable. Wind and solar made up over 60% of the power at that point in time. Coal and gas fired power plants reduced their generation to just 10%. While the renewable power generators were still paid through the FiT, the coal and gas fired plants made heavy losses.

Utilities are still the backbone of the electricity system, providing base-load power, spinning reserves and managing the grid. However, a deep structural shift is taking place in this highly conservative industry. Utilities are not driving the debate; they are driven by it. That might be their main failing: a lack of imagination, innovation and strategy. As a result, industry developments are not going in their direction.

While renewable energy generators have the privilege of stable framework conditions, fossil fuel plants are increasingly denied long-term visibility. In Germany this had lead to the phenomenon of high and rising consumer power prices (driven among other things by a renewable energy surcharge) while at the same time, power prices at the power exchange have dropped to a long time low, making it unviable for utilities to sell power. By now, and this is the second phase of their development, renewable power is increasingly competitive and will be bought by consumers even without government support, exponentially creating a more complex web of generation and distribution to which the traditional infrastructure seems increasingly ill-fitted. As their core business is threatened and unrelated strategic mistakes have piled up, utilities have so far failed to sufficiently tap into the new opportunities. Markets are skeptical about their prospects to do so in the future. Germany’s largest utilities E.On and RWE have lost over 60% of their market value in the past five years. Their very survival is called into question.

Refer to part 2 of the blog series here.

Refer to part 3 of the blog series here.

Tobias Engelmeier is the Managing Director at BRIDGE TO INDIA.

What are your thoughts? Leave a comment below