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Weekly Update: Solar Power Developers’ Association meets Dr. Farooq Abdullah

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On 29th January 2014, associates from the newly organized Solar Power Developers’ Association (SPDA) met Dr. Farooq Abdullah, Minister of New and Renewable Energy (MNRE), and Tarun Kapoor, Joint Secretary MNRE, for the first time to discuss and examine critical issues from the perspective of the project development and investment community in India. For this meeting, SPDA was represented by associates from Welspun, Azure Power, Green Infra and BRIDGE TO INDIA. These were the main topics discussed:

Incoherence in state level allocations and targets vis-à-vis the national policy

Unrealistically low capital cost estimates for solar PV by CERC for the FY 2014-15

Need for green corridors

Impact of possible anti-dumping duties on the on-going NSM bids

Incoherence in state level allocations and targets vis-à-vis the national policy

The developers pointed out that the state level allocations are not in sync with the national mission and not all states have taken initiatives to help meet their share of targets. As per the NSM targets, state level projects should account for a capacity addition of 5.4 GW. Over and above that, 3.6 GW capacity is to be allocated by Center through phase two of the NSM until 2017. Associates from the SPDA pointed out that several states are not serious about promoting solar power and for those that have policies, often, the allocation mechanism is not well thought-out, leading to delays and cancellations. Dr. Farooq Abdullah acknowledged the issue and proposed to involve the Prime Minister’s Office to initiate formalized co-ordination with the states. Also, the Joint Secretary pointed out that a template for a sample bidding document for procurement of solar power has been submitted to the Ministry of Power. This could help to standardize, professionalize and streamline to the allocation processes in the states.

Unrealistically low capital cost projections for solar PV by CERC for the FY2014-15

The Central Electricity Regulatory Commission (CERC) has recently released a tariff order (refer)which estimates the capital cost for solar PV in India at INR 61.2 million/MW (USD 1 million/MW or EUR 724,000/MW) for the financial year 2014-15. The CERC estimate is significant as it likely forms the baseline for any upcoming solar auction processes. Developers alleged that it has two inconsistencies: (i) the calculations consider module prices from imported equipment that faces a risk of imposition of anti-dumping duties, and (ii) the depreciation of the INR in recent months (and the risk of continuing volatility) is not adequately reflected. The minister acknowledged that this needs to be looked into and the impact of currency depreciation should be accounted for, if not already done.

Need for green corridors

Developers cited the example of wind projects in Tamil Nadu, where evacuation infrastructure constraints often force wind projects to stop supply of power. Developers fear that solar projects under the NSM might face similar issues in Rajasthan, causing financial losses and eroding the viability of projects. Investment into green energy corridors that allow for transmission of power over long distances is perhaps the best way to avoid such a scenario.

Impact of possible anti-dumping duties on the on-going NSM bids

The impact of possible anti-dumping duties on the ongoing allocation process was also taken up. Any such duty poses a significant risk to the bids currently submitted. In a clear message, the MNRE informed that based on their discussions with the Ministry of Commerce (the ministry responsible for the investigations), it is highly unlikely that these allocations will be impacted by the ongoing anti-dumping investigations.

SPDA promises to be the only functional investor and developer focused platform for the discussion issues critical to the development of the solar sector in India. SPDA plans to meet at least once in every two months and provide discussion forums for stakeholders from the government, financial institutions and regulatory bodies.

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Weekly Update: Tamil Nadu solar market in peril

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In Tamil Nadu (TN), the Solar Purchase Obligation (SPO) order, mandating HV power consumers to buy 3-6% of solar power, has been set aside by a TN appellate tribunal on technicalities. To that extent, the judgement is a temporary win for the consumer bodies TNECA and TNSMA. The cornerstone of the judgement is that there was poor coordination between the various state and regulatory bodies, primarily the TN government, the state utility (TANGEDCO) and the electricity regulatory commission (TNERC). This is apparent from the following tribunal observations.

TNERC issued the SPO order at the behest of the TN government without any independent analysis and in breach of its duties. The SPO order contradicted RPO regulations and instead of imposing both RPO and SPO at the same time, TNERC should have amended the RPO regulations

TNERC issued the SPO order without any regard for state solar capacity or consequential impact on issues such as banking of power, transmission and wheeling charges, cross-subsidy surcharges (CSS), etc

The SPO order was discriminatory as it applied only to HT and LT consumers, and not to TANGEDCO, in violation of RPO regulations

The ruling is a serious setback for the TN market, for which the SPO was the main short term driver. The judgement is final and the TN government will now have to go back to the drawing board with its solar policy. PPAs for 690 MW of LOIs for solar projects will likely not be signed. This is a sorry end for a policy initiative that was bold but flawed.

As the Tribunal noted TNERC did not consider detailed implications of the SPO order rendering it difficult to implement and open to disputes. However, none of the grounds on which the decision has been based is insurmountable.It is obvious that TN is facing a severe power crisis and there is strong political will behind greater thrust on renewable energy. We believe that this is eminently sensible, particularly, in a radiation rich state such as TN.  And while the policy makers, in their haste, may have stepped on a few banana skins, they will ultimately get their act together and implement the SPO regime, admittedly with a time lag of possibly 1-2 years.  But by that time, we should be approaching grid parity, hopefully.  And who knows, we may not even need SPO then!

We recall Mahatma Gandhi’s famous quote, “First they ignore you, then they laugh at you, then they fight you, then you win.”

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National Solar Mission allocations showcase positive trends for solar in India

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On 20th January 2014, Solar Energy Corporation of India (SECI) opened bids for the allocation under batch one of phase two of the National Solar Mission (NSM). A total of 68 bids were received from 58 developers, covering 122 projects and having a cumulative capacity of 2,170 MW. Of this, 36 projects with a capacity of 700 MW opted to bid under the Domestic Content Requirement (DCR) part of the bidding process and the remaining 86 projects with a capacity of 1,470 MW opted for the open bids.

Domestic content requirement (DCR) part of the bids has been oversubscribed

State power companies have also shown interest to invest in solar assets

Pure-play solar IPPs get a level playing field

The following trends emerged from the bid process:

Domestic content requirement (DCR) part of the bids has been oversubscribed

A total of 36 projects with a capacity of 700 MW bid for the DCR part of the allocations, making it oversubscribed two times over. International developer, SolaireDirect, bid for a 30 MW capacity under the DCR part, based on its tie up with Websol Energy, from where it bought modules for its project under phase one. Module manufacturers such as TATA Power Solar, Waaree and Moser Baer also opted for the DCR part of the bidding. Most other developers opted for the DCR part along with non-DCR projects to increase their chances of getting an allocation. There has been widespread speculation that Indian suppliers might not be able to supply quality products within the required time frame owing largely to financial constraints on availability of working capital. Some of the developers we had spoken to pointed out that in the financial bids, they have prioritized their bids in such a way that the DCR allocations get second priority and their base line against most risks are covered. This means that the Viability Gap Funding (VGF) requirement for the DCR part will be significantly higher than the non-DCR bids. Many developers such as Green Infra, Renew Power and Essel Infra decided to stay away. However, many other prominent developers such as SolaireDirect, Azure Power, ACME, TATA Power Solar have taken the chance. This is a positive development for the domestic manufacturing industry.

State power companies have also shown interest to invest in solar assets

Green Energy Development Corporation of Odisha, Gujarat Power Corporation Limited, Karnataka Power Corporation Limited and West Bengal Power Development Corporation Limited, all participated in the bidding process and bid for a capacity of 10 MW each. Even though they might seem less ambitious than their private sector counterparts, the message, that state owned utilities have thrown in their hats to become a participant in the solar story, is a powerful one. This signifies a more conducive approach towards solar by state utilities, going forward.

Pure-play solar IPPs get a level playing field

The advantage of scale and separate tariffs for companies claiming accelerated depreciation (AD) and not claiming AD has given pure-play solar independent power producers (IPPs) a level playing field (refer to our blog on how pure-play solar IPPs have been at a disadvantage in most state policies). Among the bids received, we have seen that almost 60% of the capacity has been bid for by serious companies that aim to build an IPP company for solar assets. This is significantly higher than most other allocations that have taken place before this.

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: As international solar manufacturing companies boom, India gets left behind

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The year 2013 has been good for investors in solar companies listed on the US stock market. Manufacturers like SunPower, Yingli, Jinko, First Solar, ReneSola and Trina have all had a spectacular bull run with share values of companies like Trina more than tripling over the year. SolarCity, the rising star of distributed installations in the US, has seen a five-fold jump in stock price. All this is good news for the market as a whole as well. The global solar market seems to have now stabilized from its over-capacity in 2012 and 2013. New installations in 2014 are expected to grow beyond 40 GW, largely driven by the US, China and Japan.

Jinko recently announced that it would completely separate its projects business from the manufacturing business

Stock prices of Indian solar companies had been in a free fall during the greater part of 2013 until the announcement of Domestic Content Requirement (DCR)

Improving global demand for solar is likely to help with export that has been the lifeline of manufacturers in India

Due to over-capacity and dwindling margins, most large global manufacturers had to integrate downstream into project development to create an in-house demand for their modules. Now, these companies are viewing their project development businesses as a separate opportunity in itself. As an example, Jinko recently announced that it would completely separate its projects business from the manufacturing business and it will acquire a 500 MW production line, currently owned by Topoint Group (refer).

This global trend is currently not replicated in India. Even though India has grown to become a 1 GW market in 2012 and 2013, domestic manufacturers haven’t been as lucky as their international counterparts. The stock prices of the few publicly listed companies like Moser Baer, IndoSolar and Webel Energy had been in a free fall during the greater part of 2013, until the announcement of Domestic Content Requirement (DCR) for phase two of the NSM provided a small relief rally. This too is fizzling out in the early days of 2014.

Despite a couple of bad years that have inflicted a lot of damage on some of the manufacturers, some of whom were even forced to shut down manufacturing lines, there is still a silver lining. DCR is expected to provide these manufacturers some breathing room and allow the closed cell capacity to restart again. Over and above that, the improving global demand is likely to help with export that has been the lifeline of manufacturers in India to begin with.

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.

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Kerala’s rooftop programs – Lessons for other states

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Media reports claim that Kerala’s ambitious rooftop plan to set up 10,000 off-grid solar power plants would be missing the deadline. However, based on our interaction with the officials, it seems that the program is likely to be completed well ahead of schedule as per the December 2014 deadline set by MNRE. As of now, around 6,000 plants have been commissioned and the rest are already in pipeline. However, another program announced last year that aims at installing 25,000 grid connected rooftop power plants, faces delays and no power plant has been commissioned under the policy as yet.

The 10,000 rooftop program proposes attractive incentives to consumers by allowing state subsidies apart from the central ones

The 25,000 grid connected power plant program will probably be delayed due to issues with net metering, energy accounting and handling grid connectivity

The key learning from delays in subsidy disbursement in Kerala is to make a policy not dependent on central government grants

The 10,000 rooftops program (refer) is the first of its kind in India to incentivize off-grid power plants at this scale. It not only makes a lot of sense for Kerala, considering the substantial power deficit in the state, but also proposes attractive incentives to consumers by allowing state subsidies apart from the central ones. Despite the fact that there have been significant delays with the subsidy disbursement (complete subsidies have only been disbursed to around 1,000 systems) and issues with facilitation of low cost interest loans, the rooftop program is on track. The timely implementation of the project can be attributed to the streamlined processes under the program in terms of selection of vendors, dual subsidy mechanism, price benchmarking and quality assurances.

On the other hand, the 25,000 grid connected power plant program will likely be delayed due to issues with net metering, energy accounting and handling grid connectivity. As per BRIDGE TO INDIA conversations, the state electricity board in Kerala is hesitant to connect the rooftop power plants below the 11 kV line as it might face energy accounting challenges. Kerala now wants to increase the cut-off size of individual rooftop projects to have them connected to the 11 kV line.

Nevertheless, being the first state to announce and implement a distributed solar program in India at this scale, it is noteworthy that Kerala might successfully complete the 10,000 rooftop program ahead of schedule. It is a good case study for the other states that have recently announced or are in the process of formulating their rooftop policies or schemes. These include Tamil Nadu (refer), Uttarakhand (refer), Gujarat (refer) and Karnataka.

The key learning from delays in subsidy disbursement in Kerala is to make a policy self-reliant and not dependent on central government grants. Secondly, a policy for grid-connected rooftop projects needs to be accompanied with timely implementation of net metering. States that have communicated ambitious plans need to now focus on solving the ground level challenges such as grid connectivity, improvement of grid infrastructure and reducing the power deficit. This will enable a successful transition of solar in India from centralized large scale to small-scale rooftop.

This post is an excerpt from this week’s INDIA SOLAR WEEKLY MARKET UPDATE.

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The market for solar irrigation pumps in India

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Solar irrigation pumps in India could be a very attractive market. They could replace diesel powered pumps in many parts of India’s agricultural heartlands, especially in the under-electrified Gangetic plains. They could even increase agricultural output by making more irrigation water available to farmers. However, at the moment, neither the products nor the distribution chains are anywhere near maturity. I recently served as a jury member on a Greenpeace Innovation Challenge to develop a new solar pump. The challenge was initiated by the Greenpeace Innovation Lab and conducted online, across the world and in a collaborative manner. This blog is part one of a three part series, in which I look at the market. The other two parts look at the new pump design and at how online innovation processes can help identify and spread solutions.

Around 300 million Indians still have no grid power. Another 300 million have only very unreliable grid power. Most of them live in rural areas

Only 12,000 solar pumps were sold in 2012, indicating that the current product designs find it hard to compete

The market for diesel pumps in India is ca. 2 million pumps at ca. INR 80bn (USD 1.3bn) per annum

It was my first trip to Patna. The capital of the state of Bihar and formerly of the ancient empire of Magadha, cannot be described as a beautiful city. It offers its 2 million inhabitants barely a village infrastructure. Pollution and noise are at extreme levels. So is population density. I got stuck for an hour in a honking traffic inferno next to a park designed for meditation. Despite its fertile soil, its famously brainy people and the good efforts of a competent government, Bihar is still a desperately poor part of the world.

A two-hour drive out of the city brings me to a small village. The countryside is lush green and the air is clean. Large power transmission lines run over the fields. Bihar used to be a major center for coal mining and is in India’s most resource rich region. However, none of the electricity seems to be intended for the people here. The village we come to has no grid power. There is an old distribution line, so it presumably counts as ‘electrified’, but it is defunct.

It is villages such as this, one of thousands in India, where people need off-grid power solutions. Almost 600m Indians still don’t have reliable grid power supply. A couple of houses in the village have individual solar modules on the roof. They can be bought at the local market and power mobile chargers, light bulbs or fans. Greenpeace wants to set up a solar and biomass fueled micro-grid here, together with the local energy pioneer Husk Power Systems and the microfinance company Basix.

It could also be an ideal place for solar irrigation pumps. Water is currently pumped either manually or using expensive diesel. Land for solar is available. Pumped water is a great ‘storage’ solution for the intermittency of solar. The cost of solar panels has plummeted in the past years. A 10 W solar home system, which can light a bulb and charge a mobile phone, is currently offered in rural India at a price of around INR 3,000 (USD 50), barely more than a goat.

India wide, there are currently around 10 million diesel pumps in operation. The average lifespan of a pump is approximately 5 years. Older models burn diesel to directly run a ground-mounted pump. Newer, more efficient models are submersible and run on electricity from a diesel gen-set. Depending on the depth of the water table, they are rated at between 1 and 10 horsepower (0.7-7 kW). Installation of a diesel pump costs anywhere between INR 20,000-80,000 (USD 300-1,300). If the average price is INR 40,000 (USD 667), this is an INR 80bn (USD 1.3bn) market each year. If the average pump size is 3 kW, the total installed diesel pump capacity in India comes to 30 GW, equivalent to almost 1/6th of the country’s total installed power generation capacity.

Diesel pumps, however, have four disadvantages: their fuel is costly; they deplete the water table more than necessary by pumping heavily at short intervals; they create local pollution and carbon emissions; in addition, diesel is often a hassle to get. Solar based pumping systems would be better on all four accounts. Yet only around 12,000 systems were installed in 2012. That is a market share of less than 1%. Why is that the case?

Solar pumps, so far, typically have the following flaws from a consumer’s perspective: First of all, they are too expensive. This is not so much an issue of the lifetime cost, but rather with liquidity. Diesel is expensive, but cash outs are spread over time, as fuel has the major share of the lifetime cost. Solar has to be paid for upfront. In addition, diesel pumps are a highly standardized, off-the-shelf-product. This reduces cost. Solar pumps are still at an early stage of product maturity. Secondly, diesel pumps are an established product. They have sales channels and consumer finance solutions. Many distributors and banks are still reluctant to bet on a new product like solar as long as the old one is being sold just fine. This point is also important from a customer trust perspective: diesel pumps are proven. Anyone thinking of buying one can see it in operation on a neighbor’s plot. Thirdly, diesel pump sets are portable. Solar pumps are not. Portability is important as it protects the system from theft (can be stored at night) and it makes it easily usable across different locations and users. It can be rented out and it can be easily brought to villages for demonstration purposes.

In order to encourage designs that can overcome these drawbacks and make solar water pumps attractive, Greenpeace started the innovation challenge. In my next blog, I discuss how this challenge was framed and what the resulting solutions were.

Tobias Engelmeier is the Managing Director at BRIDGE TO INDIA.

What are your thoughts? Leave a comment below

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Weekly Update: Kerala’s rooftop programs – Lessons for other states

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Media reports claim that Kerala’s ambitious rooftop plan to set up 10,000 off-grid solar power plants would be missing the deadline. However, based on our interaction with the officials, it seems that the program is likely to be completed well ahead of schedule as per the December 2014 deadline set by MNRE. As of now, around 6,000 plants have been commissioned and the rest are already in pipeline. However, another program announced last year that aims at installing 25,000 grid connected rooftop power plants, faces delays and no power plant has been commissioned under the policy as yet.

The 10,000 rooftops program is the first of its kind in India to incentivize off-grid power plants

State electricity board in Kerala is hesitant to connect rooftop power plants below the 11 kv line

State policies for rooftop solar should be made self-reliant and not dependent on central government grants

The 10,000 rooftops program (refer) is the first of its kind in India to incentivize off-grid power plants at this scale. It not only makes a lot of sense for Kerala, considering the substantial power deficit in the state, but also proposes attractive incentives to consumers by allowing state subsidies apart from the central ones. Despite the fact that there have been significant delays with the subsidy disbursement (complete subsidies have only been disbursed to around 1,000 systems) and issues with facilitation of low cost interest loans, the rooftop program is on track. The timely implementation of the project can be attributed to the streamlined processes under the program in terms of selection of vendors, dual subsidy mechanism, price benchmarking and quality assurances.

On the other hand, the 25,000 grid connected power plant program will likely be delayed due to issues with net metering, energy accounting and handling grid connectivity. As per BRIDGE TO INDIA conversations, the state electricity board in Kerala is hesitant to connect the rooftop power plants below the 11 kV line as it might face energy accounting challenges. Kerala now wants to increase the cut-off size of individual rooftop projects to have them connected to the 11 kV line.

Nevertheless, being the first state to announce and implement a distributed solar program in India at this scale, it is noteworthy that Kerala might successfully complete the 10,000 rooftop program ahead of schedule. It is a good case study for the other states that have recently announced or are in the process of formulating their rooftop policies or schemes. These include Tamil Nadu (refer), Uttarakhand (refer), Gujarat (refer) and Karnataka (refer).

The key learning from delays in subsidy disbursement in Kerala is to make a policy self-reliant and not dependent on central government grants. Secondly, a policy for grid-connected rooftop projects needs to be accompanied with timely implementation of net metering. States that have communicated ambitious plans need to now focus on solving the ground level challenges such as grid connectivity, improvement of grid infrastructure and reducing the power deficit.  This will enable a successful transition of solar in India from centralized large scale to small-scale rooftop.

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Weekly Update: How will financing of NSM projects work?

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Developers are in the process of finalizing their bids for National Solar Mission (NSM) projects. The use of Viability Gap Funding (VGF) mechanism for the first time, resulting in significantly different cash flow profiles, poses many interesting questions for developers. Financial structuring will play a very important role in determining bid outcomes.

SECI has the right to claw back VGF in case of project underperformance. Hence, lenders will not allow VGF to be used for capital repayment to a developer

Top-tier sponsors that can provide corporate guarantees or recourse to lenders will likely benefit from most competitive financing

If adequate sponsor support is not available, the lender is directly concerned with the risk associated with the treatment of VGF disbursement

As VGF is disbursed only after construction, developers need to finance the entire capital cost upfront. It is worth bearing in mind the key headline numbers: i) normative capital cost of a plant of INR 65m/MW (USD 1m/MW, EUR 0.8m/MW); ii) VGF of INR 10m/MW (USD 160,000/MW, EUR 120,000/MW); iii) Solar Energy Corporation of India’s (SECI’s) minimum equity investment stipulation of INR 15m/MW (USD 240,000/MW, EUR 177,000/MW); and iv) lenders expect to provide no more than 70-75% of total project cost as senior debt.

Project developers might argue that subject to satisfaction of key lender covenants, the bulk of the financing requirement above their minimum equity investment of INR 15m/MW (USD 240,000/MW, EUR 177,000/MW) should come from debt financing. And in order to improve their bid competitiveness, they would like the VGF disbursement to be used to distribute capital back to themselves as equity providers (suggesting possible use of preference capital or shareholder debt structures).

The problem, however, arises due to SECI’s right to claw back the VGF in case of project underperformance. Senior lenders will likely see a serious risk in this and will therefore not allow VGF to be used for capital repayment to a developer. They may even argue that VGF is pure equity risk. Notwithstanding the recent revision, whereby SECI has accepted second claim on project assets, they may want to see a structure that has sufficient cushion for both senior debt and VGF in an underperforming project. This opens up opportunities for gaining a competitive advantage through financing structures around, equity structures, letters of credit, corporate guarantees, etc. For example, top-tier sponsors, which can provide corporate guarantees or recourse to lenders, will likely benefit from the most competitive financing. This puts pure play solar IPPs at a disadvantage vis-a-vis larger industrial houses. (And they are already limited by not being able to make effective use of accelerated depreciation options. See our previous blog here.)

In addition, if adequate sponsor support is not available, the lender is directly concerned with the risk associated with the treatment of the VGF disbursement: Should VGF stay in an escrow account for the lenders security (very inefficient from the point of view of the developer)? Or should it go to repay senior debt? Or will debt/equity be able to come to a mutual agreement? Could strong EPC/O&M guarantees provide some answers? Interesting possibilities!

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.

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Tamil Nadu’s 10,000 solar rooftop policy: A winning proposition for residential consumers

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The Government of Tamil Nadu released a new scheme called the 10,000 solar rooftop scheme for domestic consumers on 2nd December 2013 (click here to access the scheme, and here to access the corrigendum document). The highlights of this scheme are:

The scheme is restricted to battery-less grid-tied systems. This is unlike Kerala’s 10,000 rooftop scheme which is restricted to off-grid (battery based) systems.

Tamil Nadu Government will provide a capital subsidy of INR 20,000 per kWp in addition to the MNRE subsidy (30% of the benchmark capital cost of INR 100,000 per kWp). This amounts to nearly 50% of the system cost. Unfortunately, the Tamil Nadu Govt. does not assume any responsibility for claiming the MNRE subsidy. This is left entirely unto the developers.

There is a Domestic Content Requirement (DCR) for PV modules for the entire allocation.

This policy comes immediately after the net metering policy was announced on 3rd November 2013 (read our analysis of the net metering policy here). The policy is aimed at LT-1 category residential (domestic) consumers. The total planned capacity is 10,000 rooftops x 1kW = 10 MW.

The scheme has significant variations over Kerala’s rather successful rooftop scheme. The following table summarizes the comparison:

Comparison of 10,000 rooftop scheme of Tamil Nadu and Kerala

Although the capital subsidy structures of both Kerala and Tamil Nadu are similar, the process of claiming this subsidy varies. The nodal agency of Kerala, ANERT already have the funds pre approved from both the MNRE and the Govt. of Kerala and is responsible for disbursing the funds to successful projects. However, TEDA, the nodal agency in Tamil Nadu does not assume responsibility in obtaining the MNRE subsidy and leaves it entirely unto the developers. BRIDGE TO INDIA reported earlier that the MNRE is facing a severe shortage of funds and its 30% capital subsidy program has been put indefinitely on hold (read our blog post here). Tamil Nadu’s 10,000 rooftop scheme requires developers to bear the subsidy risk. It is unlikely that developers would be willing to do so.

While the earlier policy on net metering allows domestic users to avail Generation Based Incentive (GBI) of INR 2.00/kWh for first two years, INR 1.00/kWh for next two years, INR 0.50/kWh for the subsequent two years , this policy does not allow GBI and capital subsidy (TEDA or MNRE) to be simultaneously availed. It therefore appears that consumers have two options.

Option 1: Net-metering with capital subsidy from Tamil Nadu State Government and MNRE

Option 2: Net-metering with Generation Based Incentive (GBI) (see our earlier blog post for more details)

From a purely economic standpoint, option 1 seems to be a better proposition since nearly 50% of the cost of the system is received upfront. However, it is unclear whether the Government of Tamil Nadu will grant subsidy if the MNRE subsidy doesn’t come. The Government of Tamil Nadu can take a leaf out of the neighboring state of Kerala and ensure that both subsidies are already available before it grants project applications. Despite these shortcomings, the policy is in the right direction.

Akhilesh Magal heads the Project Development team at BRIDGE TO INDIA. He likes to present his opinion on the policy environment in solar in India.

What are your thoughts? Leave a comment below

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Weekly Update: How will financing of NSM projects work?

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Developers are in the process of finalizing their bids for National Solar Mission (NSM) projects. The use of Viability Gap Funding (VGF) mechanism for the first time, resulting in significantly different cash flow profiles, poses many interesting questions for developers. Financial structuring will play a very important role in determining bid outcomes.

As VGF is disbursed only after construction, developers need to finance the entire capital cost upfront

Senior lenders will not allow VGF to be used for capital repayment to a developer due to SECI’s right to claw back the VGF in case of project under performance

If adequate sponsor support is not available, the lender is directly concerned with the risk associated with the treatment of VGF disbursement

As VGF is disbursed only after construction, developers need to finance the entire capital cost upfront. It is worth bearing in mind the key headline numbers: i) normative capital cost of a plant of INR 65m/MW (USD 1m/MW, EUR 0.8m/MW); ii) VGF of INR 10m/MW (USD 160,000/MW, EUR 120,000/MW); iii) Solar Energy Corporation of India’s (SECI’s) minimum equity investment stipulation of INR 15m/MW (USD 240,000/MW, EUR 177,000/MW); and iv) lenders expect to provide no more than 70-75% of total project cost as senior debt.

Project developers might argue that subject to satisfaction of key lender covenants, the bulk of the financing requirement above their minimum equity investment of INR 15m/MW (USD 240,000/MW, EUR 177,000/MW) should come from debt financing. And in order to improve their bid competitiveness, they would like the VGF disbursement to be used to distribute capital back to themselves as equity providers (suggesting possible use of preference capital or shareholder debt structures).

The problem, however, arises due to SECI’s right to claw back the VGF in case of project underperformance. Senior lenders will likely see a serious risk in this and will therefore not allow VGF to be used for capital repayment to a developer. They may even argue that VGF is pure equity risk. Notwithstanding the recent revision, whereby SECI has accepted second claim on project assets, they may want to see a structure that has sufficient cushion for both senior debt and VGF in an underperforming project. This opens up opportunities for gaining a competitive advantage through financing structures around, equity structures, letters of credit, corporate guarantees, etc. For example, top-tier sponsors, which can provide corporate guarantees or recourse to lenders, will likely benefit from the most competitive financing.

This puts pure play solar IPPs at a disadvantage vis-a-vis larger industrial houses. (And they are already limited by not being able to make effective use of accelerated depreciation options. See our previous blog here.)

In addition, if adequate sponsor support is not available, the lender is directly concerned with the risk associated with the treatment of the VGF disbursement: Should VGF stay in an escrow account for the lenders security (very inefficient from the point of view of the developer)? Or should it go to repay senior debt? Or will debt/equity be able to come to a mutual agreement? Could strong EPC/O&M guarantees provide some answers? Interesting possibilities!

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The transition of the Indian solar market from an incentive driven market to a parity driven market

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The January 2014 edition of BRIDGE TO INDIA’s quarterly publication, the India Solar Compass, has been released. The new edition focuses on the current state of the Indian solar market which is in transition from being an incentive driven market to a parity driven market. A gist of this edition of the Compass is given below.

A positive implication of the transition is a possible shift from utility scale market to a more distributed generation market

A drawback of the state rooftop policies is that most of them rely largely on funding support from the MNRE which is suffering a funding crunch

NSM will not result in any capacity addition in 2014 but will provide a renewed vigour for investments and rapprochements in the second half of 2014

A positive implication of this transition is a possible shift from utility scale market to a more distributed generation market. It is expected that 2014 will lay the groundwork for the rooftop solar market in India. Net-metering will be a crucial determinant of the same. In the policy space, it is encouraging to see that several state and central policies have announced measures to promote the rooftop solar market. Subsidies, feed-in-tariffs (FiTs) and net/gross metering concepts are being introduced across different policies.

One drawback of the state rooftop policies is that they rely largely on funding support from Ministry of New and Renewable Energy (MNRE) which has been suffering a funding crunch. With the general elections around the corner in India, no new fund allocations are expected before the new government is formed.

Outside of the rooftop sector, there has also been some action in ground mounted projects for captive consumption or third-party sale of power. Most of these projects are driven by accelerated depreciation (AD) or Renewable Energy Certificates (RECs). Given the challenges facing the REC mechanism, future of these projects is uncertain unless they can sign commercially viable PPAs with bankable counterparties. State level incentives such as a waiver of open access charges can play a significant role here.

In 2014, new solar PV capacity of 750 MW is expected in India. Tamil Nadu, Andhra Pradesh, Uttar Pradesh and Punjab will likely sign PPAs within the next few months. NSM will not result in any capacity addition in 2014 but will provide a renewed vigour for investments and procurements in the second half of 2014 with capacity additions materialising in 2015.

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