Month: February 2015

This is Arvind Kejriwal’s plan to provide power to Delhi: He has asked the government to supply a coal block for a new ultra mega power plant. This plant would then be operated by a private company and would sell cheap and reliable power to Delhi. What a nice thought! Except, we don’t live in fairyland. Better idea: let power prices be determined by the market and give Delhi a workable regulatory framework to build rooftop solar.

AAP wants a dedicated, privately run 4 GW coal plant for Delhi

The center (BJP, pro-market) is very unlikely to grant Delhi (AAP, cheap power populism) that wish

Instead of bad ideas from the past, the Delhi government should look at good ideas for the future – e.g. solar 

Here is flash from the past: a party gives a populist election promise of cheap power, then turns to India’s public resources (coal) to give them away at rock-bottom prices to a private enterprise in the (really?) hope that they will build it quickly and sell the power at very cheap rates to Delhi so that the government can then supply it (reliably and for free?) to its citizens. In the words of Delhi’s chief minister, Mr. Kejriwal: “We have requested the GoI (government of India) to give a coal block to us, wherever it may be available. We will soon send a formal request to them about this. Our plan is to have 4,000 mw power of our own over the next four-five years”.

Quick reality check: Firstly, the national government is thinking along exactly opposite lines: they want to rationalize the electricity market, raising consumer tariffs to make the operations of India’s utilities profitable in order to allow for much needed investment into grids and new generation capacity. Secondly, the central government (BJP) is unlikely to support the demands of Delhi’s government (AAP) purely on political grounds. And, even if it were inclined to do so, is there any good reason why Delhi – one of India’s richest states – should get cheaper access to India’s natural resources than any other state? Thirdly: if the past is a relevant guide to the future, a look at the history of coal ultra-mega projects and private, captive coal blocks should be very discouraging.

That raises the question of whether the AAP is either not on top of the game or whether this might just be political posturing. In either case, this is a great shame, because with the overwhelming mandate the party won in the recent state elections, it could be much, much more innovative. They should look to new solutions within Delhi, rather than wasting time with what did not work in the past and is not in their hands.

For instance: we have created a detailed mapping of Delhi’s available rooftop space and a road map for the city going solar (refer). The potential is more than 2 GW. Why not make that effort? Implementing a viable rooftop policy, which addresses net-metering, grid access rules and building codes would be a great start.

 Tobias Engelmeier is the Founder and Director at BRIDGE TO INDIA

India can build excellent rockets. Last September, it successfully sent a space mission to Mars – and that, too, at a slim $74 million. Now, India’s government is again reaching for the stars. Actually, it is reaching out for a specific one, the sun. Mr. Modi has announced that India wants to build 100 GW of solar power in five years. That is nothing short of spectacular. Only, we have no idea of what rocket will take us there. Now all eyes are on the budget, due on the 28th of February. What can we expect?

The focus needs to be on building the solar market, not on building solar projects

Building the solar market is directly linked to cleaning up India’s energy market and growing the economy

Despite the government’s large announcements, we cannot expect a rocket to be built for us. But that is not needed, anyway

I know, it’s solar. But let me digress to another celestial object, the famous mission to the moon, the Apollo Program. It started with US President Kennedy formulating in 1961 the national goal: “Landing a man on the moon, and returning him safely to the earth”. The goal was accomplished in 1969, when three US astronauts landed on the moon’s surface and then came back. This moment of incredible achievement was televised throughout he world. Some say, it was a transformative event in human psychology – it gave us the feeling that everything is possible, if we only think large enough, then focus, fully dedicate ourselves and our resources to it, plan and execute well. Such great, transformative national achievements came to be known as “moon shots”. Today, they might refer to Germany’s energy transition, China’s high-speed railway program or the global eradication of certain diseases. India’s 100 GW solar goal is also such a “moon shot”.

The government has clearly defined the goal. That is a good start. Also, building a large backbone of solar power plants in India has a more direct relevance to people’s lives than the more phallic, original moon shot ever had. However, while the Americans immediately got down to work on the details of achieving the goal (as the Indians had similarly done to make the mission to Mars a success), there has been complete silence on how to achieve the solar target. Observers start to wonder: what’s next? Where, Mr. Modi, is our rocket? Will the budget provide it and give the industry a cozy ride to fame and fortune? I don’t think so.

So what can we expect? (I am now leaving behind the metaphors.) Anyone hoping for financial subsidies in the form of feed-in-tariffs, capital subsides or tax breaks will be disappointed. India cannot afford to subsidize even 10 GW of solar, let alone 100 GW. Keeping the budget deficit in check is key to stabilizing and growing the Indian economy, which, in turn, is key to driving demand for energy – including for solar.

Solar is one (very good) solution to India’s energy problem, not a national goal in its own right. India needs vast amounts of energy to make its industrialization and development happen. At the same time, India does not have to too many energy options. Solar PV – a rapidly built, modular and simple technology that can harness energy available in plenty on Indian soil and rooftops – is a logical winner. It will likely become the backbone of India’s energy economy within the next 20 years. In that case, we will not be discussing 100 GW (the equivalent of 20 GW of coal), but much more than that.

To get there, India’s overall power market needs to become ready for investment. That would take a couple of very ambitious reforms, mainly around power pricing: power tariffs need to reflect the cost of power generation and the cost of maintaining and expanding the grid infrastructure. That would mean rising average tariffs and perhaps reducing cross-subsidization between industrial/commercial and agricultural users. This is politically very hard to do, but extremely important. It’s a moon shot. It would ensure that utilities are healthy again, become bankable contractual partners, can buy more power, expand the infrastructure and invest into making it smarter (matching demand and infirm supply from renewables). It would also help solar reach parities quicker to become an attractive option for utilities and end consumers. At the same time, it would reduce the burden on the central government to regularly bail out state utilities. It would be unrealistic to expect such momentous change from one budget, but a clear signal that India is going in that direction would fuel the market. (I am not even going into land reform, here.)

A second key measure that the budget should provide is investments into the power infrastructure to make integration of large amounts of renewables feasible. It takes at least three years to build a new transmission line, but less than a year to build a large solar or wind park. Therefore, to avoid bottlenecks, the transmission infrastructure needs to be ramped up now.

A third angle is making the power market more conducive to solar investments. It needs to be genuinely opened up, allowing power consumers and generators to buy and sell freely (they can pay for using the grid). Time-of-day charges would help greatly, as would well-implemented net-metering policies. Another key driver is a flexibilisation of power sale: a solar generator should be easily able to switch between selling power to the grid, selling power to another consumer and captive consumption.

India achieved the cheapest ever interplanetary flight. It can now build the cheapest ever solar economy, if it only provides the ecosystem for the market to do its magic.

Punjab had floated a tender in December 2014 (refer) for the second phase of allocations in the state for 250 MW of solar PV projects. The state received eligible bids for over 300 MW (our estimate 344 MW) but details have not yet been officially released. Projects were divided in three categories: category one was for a total of 50 MW with project sizes between 1 MW and 4 MW, category two was for 100 MW with project sizes between 5 MW and 24 MW and category three was for 100 MW with project sizes between 25 MW and 100 MW.

Despite severe land constraints in Punjab, developers prefer larger projects with comparatively lower transaction costs and more options for financial engineering

Among the prominent developers that have participated in the bidding were Solairedirect, Acme, Azure and Welspun

Post the Punjab allocations, new state level allocations are now expected only in Uttar Pradesh and Tamil Nadu

Based on unconfirmed information, the category one (for smaller projects) has been undersubscribed with eligible bids being received for less than 35 MW, category two (for mid-sized projects) has received bids for a little more than the available 100 MW and category three (for large projects) has been twice oversubscribed. Even in the second category of projects, almost all bids have been for 24 MW of capacity, i.e. the maximum possible allocation under that category. Despite severe land constraints in the state, this result underlines the trend that developers prefer larger projects with comparatively lower transaction costs and more options for financial engineering.

Among the prominent developers that have participated in the bidding were Solairedirect, Acme, Azure and Welspun. Interestingly, Punj Lloyd, which has not participated in other bids in the country after its early project under batch one of phase one of the NSM, has made a comeback. RattanIndia Power (formerly known as Indiabulls Power) also participated in the process (RattanIndia Power has also recently launched a rooftop solar subsidiary called “Apna Solar”). The lowest bid of INR 6.88/kWh (USD 0.11/kWh) has been submitted by Solairedirect for a 24 MW project under category two and a 30 MW project under category three.

In the six months preceding the allocations in Punjab, the states of Telangana, Andhra Pradesh and Karnataka had already allocated projects. With the closure of the Punjab allocations, new state level allocations are now expected only in Uttar Pradesh and Tamil Nadu. 2015 is likely to be dominated by central government allocations as states will likely take a back seat for most of this year.

India has 3+ GW of solar installed. On the basis of that, in the last years, the country has built a broad ecosystem of manufacturers, installers, project developers and financiers. This sounds like a healthy launch pad for a big jump in capacity addition (perhaps even to an incredible 100 GW) – but it isn’t. Very few players in the market so far have made a good return. A common concern in the industry is the unavailability of finance. The government is focusing on solving that. However, finance follows returns (and low risk, but that is no longer the main concern). As soon as returns are attractive, there will be plenty of finance for the industry.

Most solar players are not earning reasonable returns from their solar business in India

A “strategic” rationale for investing into the solar industry has some merit, but cannot sustain the market

If India is serious about building a 100 GW (or even a 10 GW) market, it needs to offer solid returns from solar projects

Over the last years, the Indian solar market has been dominated by a host of mostly domestic players in manufacturing, installation and investment. Initially, the market was mostly populated by what we called ‘cowboys’ – businesses hoping for low hanging fruits and quick wins, no matter in what industry. Now, many cowboys have exited the market (most of them disappointed) in favor of more strategic, Indian players. Many of India’s leading business houses, such as Reliance, Tata Power (not to be confused with Tata Power Solar, the EPC arm) or Birla, that have long been standing on the sidelines, are now jumping into the fray. With few exceptions (the developer and EPC Sun Edison and inverter manufacturers being the most notable), international players and investors have been notably absent. Why? The reason is that the market does not yet offer sufficiently attractive returns.

Solar capacity addition in India has been stagnant at around 1 GW per annum for the last three years. Competition is intense. Planned equity returns at the project level hover between 13-16%. At a debt cost of 12-13%, this is too little. Driven by low project-level returns, it is very difficult for anyone in the preceding value chain (installers, manufacturers) to earn money on Indian projects. Prices are pushed lower and lower (India has seen some of the most competitive solar tariffs). Execution quality often suffers. As a result, many plants generate less than expected and returns are lower than planned for.

So, if returns are low, why is competition so intense? Of course, there is number of “irrational” or simply ill-informed players and there is a tendency to by over optimistic about plant performance. Leaving that aside, there seem to be four different strategies currently driving the market.

 1. Strategic entry

Some players wish to build a solar business, because they understand the magnitude of the long-term opportunity and believe that building a position in the market now helps them capture a larger share of the pie later. They might understand that returns, whether in manufacturing, installation or plant ownership, are not yet attractive, but are ready to take a hit now as they believe in some version of an early-mover advantage. Such an advantage may be in building a track record and brand to help in future pitches, in gathering experience and on-ground data or in building a team. There is a certain first mover advantage, especially for new entrants and less well-known companies. However, it is limited and a couple of projects might suffice. It will not drive the market.

2. Solar as a means to earn non-solar revenues

Some companies may not be interested in the revenue from the solar business at all, but may instead look at earning money in various other ways, related to the solar business. This could be: getting access to subsidies, getting access to land, or making use of accounting and taxation benefits and opportunities. Investing into solar is also a way to curry favor with political decision-makers (solar is a political buzzword). This can be used for other business ventures.

3. Taking a bet on the future

Another possible strategy is to take a bet on the future. A project, for example, might only yield an equity return of 14% today. However, there may be ways of increasing this in the future. Perhaps lending costs will fall, making it possible to refinance the project? Perhaps grid tariffs will rise much more and PPAs will not have to be honored (contractual security in India is weak), opening up a new route to selling power for a higher price to a new off-taker in the future? Perhaps carbon will be priced in some way in the future, opening up an additional revenue stream? Perhaps the dormant REC market in India will be revived? Perhaps modules will become so cheap and efficient in a couple of years so as to make re-powering of plants a viable option? Perhaps, if returns are not sufficient now, political influence can change parameters to make them sufficient in some way later on? Given that India is a very dynamic economic and energy landscape, such bets on the future are, perhaps, more reasonable than in more settled environments, such as the US or Germany. There are, of course, the inverse risks, too: There might be retroactive charges for grid-utilization or PPAs might not be honored by if they can buy solar for half the price some years down the line.

 4. Valuation game

A solar player might hope that in the future, because of the vast long-term potential of solar in India, an investor will be willing to pay a premium for a solar business or for a bundle of solar projects. This premium might be sought through a strategic sale, through a sale to a financial investor or (most commonly) through an IPO. Whether or not a valuation which exceeds the business fundamentals (in the case of projects, the average returns of the projects) is justified, depends on whether the factors in points (1.) to (3.) are considered valid. In general there seems to be a widespread hope that investors’ enthusiasm will be high.

 What is common to all the above strategies is, that they are not based on the simple, core business of generating and selling solar power at an attractive rate of return (above 16% EIRR).

 The government has marked out the lack of finance (primarily debt) as a key bottleneck in the industry. It is true that there is not enough debt. However, this is a symptom not the cause. The cause is the low profitability of the solar industry. Once that is achieved, debt and equity (including international investment), will follow. To move from the current 3 GW to 100 GW will crucially depend on that. How can solar become profitable? Moving from the current reverse bidding process to a clear, feed-in tariff based process (solar costs are now well known and quite stable) would help; as would a move from the many different allocation processes to a standardized framework across the country.

Tobias Engelmeier is the Founder and Director of BRIDGE TO INDIA

On Sunday (15th February 2015), India’s first government organised renewable energy investment summit got underway. Prime Minister Narendra Modi inaugurated the event at Vigyan Bhawan, New Delhi, in the presence of Indian and global industry stakeholders. Minister for New and Renewable Energy, Piyush Goyal, called it a ‘historic day’ that will pave the way for making India the ‘renewable energy capital of the world’ and the Prime Minister related the ambitions to energy access for all (see Prime Minister’s address here). The country aims for 100 GW of solar, 70 GW of wind and significant additions of small hydro and biomass power.

Solar think tanks presented several valuable ideas and suggestions at the REINVEST 2015

Andhra Pradesh announced a concrete policy on the first day, a target of 10,000 MW of renewables by March 2019

Industry stakeholders opined that 100 GW is a desirable and feasible target but very ambitious and will require a step change in policy commitment

The panels and speeches discussed, in broad terms, the business fundamentals needed for a functioning market place. The main topics were: how to lower the cost of finance, investment commitments in projects and manufacturing and how to bring the states on board for a smooth center-state coordination. During the conference sessions, several valuable ideas and suggestions were presented by the panelists. You may want to follow these updates from twitter handles such as @RE_Invest2015 and @MNREIndia and the hash tag #REInvest2015.

The Prime Minister collected vague, GW-sized, public commitments from states, public and private sector companies. This might sound anachronistic, but we would not be surprised, if the PMO actively follows up on those in the coming years.

Those attendees who were expecting the government to announce specific, new policies and a road map for the industry to reach the ambitious targets, were disappointed. The only concrete policy announcement on the first day came from Andhra Pradesh, which announced a target of 10,000 MW of renewables by March 2019 (refer). The state chief minister, Chandrababu Naidu subsequently interacted with the investors.

BRIDGE TO INDIA met several industry stakeholders to get an industry pulse and their thoughts on the 100 GW target for solar. Most stakeholders thought that it is a desirable and feasible target but very ambitious and will require a step change in policy commitment. One panelist described the situation very well, when he said: “India needs to act quickly to retain the mind space it has attracted.” Similar interest was created in the Saudi Arabia and Mexico markets but because of lack of tangible progress, they lost that mind space. The same should not happen in India. Even though it is difficult, we hope that a step change in government action will follow all the enthusiasm, attention and investment willingness that has been seen at the event.

Can India achieve 100 GW of solar in five years? Technically: yes – if politicians are willing to put enough support behind it. Realistically: not likely – there is still no strategy in place for achieving this number. Does that matter? No. As solar becomes ever more viable and India’s energy demand rises rapidly, the mountain will come to the prophet. However, it will be a market by default, not by design. My conversations at REINVEST suggest that most players are aware of that and are willing to use the positive mood created by the government and the event to drive their different business models.

The grid-connected market will be driven by public sector companies; project returns are ok, but unexciting.

The distributed and “solar as a solution” market is still too small for most larger players and investors, but holds the greatest promise.

In the past, faulty market designs (REC, rooftop subsidy) have been counterproductive and stopped the default markets from taking off. This has to be avoided.

I had many very interesting conversations at REINVEST in Delhi over the last three days. It was clear that there is a sense of optimism in the market. Great optimism from afar, and more cautious optimism, the closer you got to the details. But still: there is an air of possibility that has been lacking for the last years. One immediate achievement of the government’s drum-beating was that there was a new set of players around: large Indian business houses and international investors who now see a chance for projects big enough to warrant their time and efforts. Also, Indian manufacturers have not been so happy in a long time. They can expect sizable and stable orders from public sector companies in the coming years. Another visible change was the presence and active involvement of financial institutions. They finally seem keen to actively develop this market. A fourth positive momentum was provided by the Andhra Pradesh government around Chief Minister Chandrababu Naidu who was beleaguered by developers ready to invest in solar in his state.

Does all this add up anywhere near to the governments 100 GW target? No. There were commitments given by Indian private sector companies to develop 166 GWs of solar, but they have no legal basis and hardly reflect more than a broad, general, and in some cases quite unfounded ambition. At the same time, the big question of: who will be the bankable buyer of these large amounts of solar, remains unanswered. India today is a 1 GW a year solar market. Under the current policy design, it could grow to become a 3 GW a year market in the next three years. That would make it larger than the German market and most existing players would be quite happy.

But take a moment to look at this from another perspective, the perspective of what is needed. Even 100 GW of solar would only provide around 10% of the power India will likely need in five years. The country’s power demand is enormous – and it will grow even faster, if a much-needed process of industrial growth can be triggered. And how will that power be provided? Today, coal is the backbone of India’s energy system. Due to changing economics, environmental concerns and infrastructural bottlenecks, solar has the potential to become that backbone in 10 years time. That would then require much more than 100 GW. It would also require grid management skills, storage and demand management – but that should be feasible by then. A lot of it (as the government already proposes) would be distributed, where power is consumed near to its point of generation.

Such a market would start as a default market. For more and more energy-starved customers, solar will offer the best solutions. While these markets (private PPAs, mostly captive, for industries or telecom towers or appliances) are still small, they will scale up as tariffs rise, as consumer awareness and confidence grow and as sales and maintenance channels become established. They can offer companies a chance to innovate, excel and drive customer value, and by extension provide investors with more attractive returns.

In the meantime, it is important that policy design focus on enabling the market. Net-metering helps a lot, but has to be implemented well. Higher duties on diesel will become very effective when oil prices will rise again. An environmental tax on fossil fuels like the coal cess is good. Feed-in tariffs, capital subsidies or RECs are not really needed and, if not reliably paid out, are counterproductive. The energy access market will arguably need some support to reduce the share of energy spending in the budgets of poor households. Many of the industry stakeholders I spoke to, left aside the government targets and got on with the business of creating value for their customers and a sustainable business model to service India’s long-term energy needs. That, to me, was the best news at the conference.

 Tobias Engelmeier is the Founder and Director of BRIDGE TO INDIA

In the build-up to the government-sponsored renewable energy investment summit, RE-INVEST 2015 (refer), the organizers asked participating companies to provide non-binding investment indications for the Indian renewable market. The results show a general willingness to set up a whopping 166 GW of solar power generation capacity and 5 GW per year of solar manufacturing capacity (refer).

 Private solar developers have indicated announcement of substantial plans during RE-INVEST 2015

Indian manufacturers namely Vikram Solar, Waaree Energies and Emmvee Photovoltaic also to announce their plans

Overall, the mood in the Indian solar market is upbeat and even if a fraction of these intentions stand the test of time, it is very good news for the sector

Prominent and already active private solar developers that have indicated significant plans include Essel Infra Projects (12 GW), Azure Power (11 GW), SunEdison (10 GW), Welspun (8.7 GW), Renew Power (7 GW) and First Solar (5 GW). Ambitious plans have also been submitted by large Indian conventional power companies such as Adani Power (6 GW) and Reliance Power (6 GW). Even though they have forayed into solar project development in the past, these ambitions mark their serious entry into the Indian solar project development landscape. Apart from this, Raasi Solar Energy, a company promoted by a former Member of Parliament has indicated plans for 10 GW (refer). Sky Power Global, a large Canadian project developer, aims for 9.9 GW. CPEC, a less known player, that had earlier commissioned a project under the Gujarat Solar Policy, has indicated plans for developing 9 GW. Amongst public sector companies, significant interest has come from NTPC (3.3 GW), NEEPCO (2.5 GW), Coal India (1 GW) and Satluj Jal Vidyut Nigam (1 GW). In total, 140 developers have made project development commitments (see full list here).

On the manufacturing side, three existing Indian players have indicated their ambitious plans: Vikram Solar (2.3 GW/year), Waaree Energies (2 GW/year) and Emmvee Photovoltaic (750 MW/year). On the finance front, L&T Finance indicated that it wants to finance 6.5 GW and Yes Bank 5 GW of renewables.

On the face of it, these are very impressive numbers and figures. However, in BRIDGE TO INDIA’s opinion, for a large number of commitments on the list, not much thought has gone into arriving at the stated numbers. The exercise serves mainly as a measure of the companies’ ambitions, rather than of specific, actionable strategies. On the other hand, there will be many more investors, developers, financiers and manufacturers in the Indian solar market than those who have here stated their intentions.

Overall, the mood in the Indian solar market is upbeat and even if a fraction of these intentions stand the test of time, it is very good news for the sector. The limited intentions coming from finance, both on this list and in real life, continue to be of concern. However, what is needed much more than intentions to build solar power, are intentions to buy solar power at viable tariffs and with solid PPAs.

On Saturday (31st January 2015), the Minister for New and Renewable Energy, Piyush Goyal, called for a meeting with solar developers and manufacturers to discuss various aspects related to structuring of accelerated depreciation (AD) mechanism to ensure a level playing field for developers. The minister announced that the government is considering proposals to provide interest rate subvention for developers who don’t claim AD.  Separately, there is a proposal to consider how private developers can raise capital through green bonds. But it appears that the developers’ demands for a universal tax-credit structure, like the one in the US, or for waiver of Minimum Alternate Tax (MAT) for solar projects might not be approved by the Ministry of Finance.

 The Indian government has announced several sound plans but the implementation process and policy clarity is not yet matching up

 BRIDGE TO INDIA believes that interest rate subvention may appear to be a fundamentally sound concept but the practical implementation and monitoring would be very challenging

 There is an urgent need to back up mega plans with detailed policy measures

The Indian government has announced several bold initiatives to grow solar energy in India in the last few months –new solar targets for 100 GW, strong focus on rooftop segment, setting up of government solar parks for utility scale and ultra-mega scale projects, significant increase in renewable purchase obligations (RPO) and attempts to reduce the cost of financing for solar projects. These are fundamentally sound plans but perhaps unsurprisingly, implementation process and policy clarity is not yet matching up.

In one of our previous blogs (refer),we also discussed how the allocation process for the upcoming NSM projects does not seem very well planned. The guidelines for these projects have gone through multiple rounds of changes and the timeline has already slipped considerably. Even on the issue of creating a level playing field for developers who are notable to claim AD, BRIDGE TO INDIA believes that interest rate subvention may appear to be a fundamentally sound concept but the practical implementation and monitoring would be very challenging. Disappointingly though, the differential tariff structure for AD and non-AD projects has been done away with before any an interest rate subvention scheme or any other such plan is implemented.

We understand that the Indian solar policy environment has been very dynamic since the new government took over but there is an urgent need to back up mega plans with detailed policy measures and simplify allocation and other investor interfacing processes.