Month: March 2015

Based on a recent report (refer), the government seems to be considering to cut solar tariffs in India by offering power purchase agreements through bids in dollar terms. The idea is that the ministry would help create a (real) hedging fund with a corpus of INR 60 billion (approximately USD 1 billion) primarily by charging developers a hedging fee of INR 0.90/kWh (1.5 US cents/kWh). Such a scheme would help developers access international capital and avoid reduce the currently high hedging costs of around 6%.

Pooling of hedging costs coupled with government’s support likely to  make solar option attractive to discoms

According to BRIDGE TO INDIA, a realistic expectation for solar tariff would be INR 5.8/kWh, around 9% lower than current tariffs

We believe that government to focus on increasing the tenor of debt financing from ca. 14 years to 20 years, that alone could reduce solar tariffs by about 7%

The thought behind this is that pooling the hedging costs and putting the government’s weight behind it, will significantly reduce the cost of currency hedging in the market. This would reduce the cost of capital and thereby the cost of solar power, making it more attractive to distribution companies. This is a creative, new idea and shows that the government is thinking out of the box to make its ambitious solar targets real.

The report states that the mechanism could reduce solar tariffs by as much as 40% to bring the down to INR 3.60/kWh (6 US cents/kWh). With the proposed hedging cost of INR 0.90/kWh (1.5 US cents/kWh), effective tariff would be INR 4.50/kWh (7.5 US cents/kWh), very close to the world’s lowest as currently seen in the Gulf region.

BRIDGE TO INDIA’s own calculations show that with an effective interest rate of 5%, the tariff for a 50 MW solar project could be in the range of INR 4.9/kWh (8.3 US cents) to INR 5.5/kWh (9.2 US cents/kWh). This is 14-23% lower than the current tariff/kWh of about INR 6.4 (10.6 US cents/kWh) but considerably higher than the government’s estimate of INR 3.60/kWh (6 US cents/kWh). With the hedging cost of INR 0.90/kWh (1.5 US cents/kWh), a realistic expectation for solar tariff would be INR 5.8/kWh, around 9% lower than current tariffs. To us, therefore, it seems that the numbers indicated by the government are too aggressive.

Another moot point is the level of international lending appetite for Indian solar projects. Our view is that apart from certain multi and bi-lateral financing institutions (for example, IFC, US Exim, KFW), there is actually very little demand for Indian solar projects in the international debt markets.  Hence, irrespective of the proposed cost benefits, any approach that targets hedging costs is unlikely to be a silver bullet solution for reducing the costs of Indian solar projects.

We believe that the government should instead be looking at developing indigenous financing solutions, particularly with a view to increasing the tenor of debt financing from ca. 14 years to 20 years. That alone could reduce solar tariffs by about 7%.

According to the researchers at IHS, global solar might hit 500 GW in total installed capacity by 2019. This year, 2015, global solar demand is projected to increase to 75 GW alone, a 66% growth rate against 2014. In 2014, the largest markets were China and Japan. The researchers think that they will also remain the largest markets in the next 5 years. India, in their view, will be only the 6th largest market.

500 GW of solar by 2019 projected, in 2015, there could be an additional 75 GW of solar built

Global demand for solar will stabilize as growth is driven by more markets and by economic fundamentals

Our view on India in the next five years is more optimistic (30 GW) than that of IHS (14 GW)

In addition to the demand predictions, IHS projects that the cost of crystalline solar cells will fall by another 27% until 2019 and that the market share of thin film will fall to 7% (refer).

On the demand side, the main growth is to come from China with over 85 GW, Japan with 45 GW and the US with around 40 GW. According to ISH, the UK and Germany will be ahead of India, which the researchers project will add only 16 GW in the next 5 years. This is 1/6th of the Indian government’s target of 100 GW.

Our projections on solar in India are much more optimistic (even, if we don’t buy the government’s target numbers either). In our view, the main drivers in India are the strong economic fundamentals of solar, which is already competitive in a number of states, the rapidly rising power tariffs (discoms still have an accumulated debt of $ 50 bn) and the falling cost of solar. We think that India will in the next five years add around 8 GW of distributed rooftop solar. In addition, we believe that it can be a 3-5 GW a year market for utility scale projects in the next 5 years (it will be a 3 GW market in 2015), bringing the total to around 30 GW – even with half-decent government policies. That would make India the fourth largest market after the US with a market share of 6%.

Of course, making projections is very difficult, because politics still plays a crucial role. For instance, if the Indian government is serious about reaching the 100 GW target, it could achieve that through a mixture of policies such as enforcing renewable supply options (hitting mostly the financially stable public sector power generators), making available preferential, cheap and long term financing through interest rate subsidies, building large solar parks across the country or rationalizing India’s electricity tariffs. In that case, with 100 GW, India would be the world’s largest market.

 Tobias Engelmeier is the Founder & Director of BRIDGE TO INDIA

If India were to grow its electricity system based on coal (as China has done), would it derail the global climate? According to our calculations, under a “coal-heavy” scenario, India would need to increase is coal-fired power generation capacity from the 156 GW in early 2015 to 677 GW in 2035. What would be the CO2 implications of such a strategy?

Globally, we have used up 58% of the carbon space we have available to us, if we want to keep climate change to less than 2 degrees

India’s share of the carbon space should be high, based on its large population and low historical emissions

Still: a coal-strategy would break the bank, with potentially terrible consequences to the world and especially to highly vulnerable countries like India

India’s Power Minister, Piyush Goyal, has made it clear on a number of occasions that India plans to significantly ramp up its coal-fired power plant capacity in addition to the renewables. It needs to, he argues, in order to generate the vast amounts of power the country needs. In January 2015, India had a total installed capacity of 259 GW, of which 156 GW, or 60%, was coal (CEA, refer). Due to an above average plant load factor, coal contributed 67% to the electricity generation (World Bank, refer). If this were to grow to 677 GW of coal in 2035 to enable a 7% annual increase in power generation for a development growth trajectory, could the global climate cope?

First, let’s look at the carbon budget that is available to us as mankind. If we want to have a reasonable (2/3rd) chance of limiting global warming to 2 degrees (which would already have serious implications, but might not set in motion self-reinforcing effects), then our global carbon budget is 1,000 gigatons of CO2 equivalent. This is the total amount of greenhouse gases we can emit into our atmosphere starting at beginning of industrialization in the late 19th century, when we first burned large amounts of fossil fuels.

Until today, we have already emitted 589 gt of CO2e. That leaves us with 421 as our remaining global carbon budget (refer). At the current rate, we will have exhausted this sometime in the year 2039. Now, let us assume that India is historically unburdened and has not emitted anything yet and let us assume that it is entitled to 1/6th of the global carbon budget because it has 1/6th of the world’s population. Then, India’s total carbon budget would be 167 gt of CO2e.

Another way of looking at it is to take only the remaining budget into account (if you prioritize survival over justice). One could take the 421 and divide it by 6 to adjust it for India’s population. That would come to 70 gt of CO2e. To take into account historical emissions (fact is, that countries like the US, Germany or Japan have already exceeded their budgets), one could add, say, 50% to that. So India’s budget would be 105 gt of CO2e. Thus, taking into account both India’s population and historical justice, the carbon budget India has is limited to 105-167 gt CO2e.

Power generation typically makes up around 25% of a country’s greenhouse gas emissions. Applying that factor to India would give a range of 26-42 gt CO2e. Now, let’s assume that India goes for a “coal-heavy” scenario and builds an additional 521 GW of coal (on top of the existing 156 GW it already has). A best-in-class coal-fired power plant currently emits 790 kg CO2e per MWh (Indian plants emit on average more than 1,000). We can expect that efficiencies will improve due to technological process. So let us assume that India’s future coal plants will emit on average 600 kg CO2e per MWh.

Let us further assume that a plant’s lifetime is 30 years (currently many Indian coal-fired plants are significantly older) and that it runs for 6,500 hours per year (a 74% plant load factor). Then the emissions of these new plants alone, over their lifetime, will be 61 gt of CO2e. This is 145% of what India’s carbon budget would be under the “justice first” approach or 240% of India’s carbon budget under the “survival first” approach.

In a “solar-heavy” scenario, wherein India would need to build only 94 GW of new coal-fired power plants, extra emissions would be 11 gt of CO2, in line with the carbon budget. So the answer to the question is: Under a “coal-heavy” scenario, India would indeed bring the global climate to the brink.

Tobias Engelemeier is the Founder & Director of BRIDGE TO INDIA

On Thursday last week (19th March 2015), the Ministry for New and Renewable Energy (MNRE) called for a meeting to discuss how to best scale up rooftop installations in India to 40 GW (cumulative) by 2022 (refer). It was chaired by Upendra Tripathi, Secretary MNRE, and Tarun Kapoor, Joint Secretary MNRE, and was attended by approx. 300 representatives from the industry. The discussion began on the somber note that despite some existing government policies and the improving economic fundamentals for rooftop solar, the market has not yet gained momentum.

Stakeholders proposed abolition of subsidies for urban grid-connected solar installations

Most stakeholders proposed for standardization guidelines for components, installations and grid-interconnectivity to be followed by all installers

Availability of finance and cost of finance was the third topic discussed

Most installers pointed out (and ministry officials conceded) that the lack of funds and sanction delays associated with the subsidy process has been the primary bottleneck for the market segment. The ministry officials informed that, for 358 MW of subsidy applications received till date only 42 MW actually received it. BRIDGE TO INDIA had previously raised the issue in our analysis with the conclusion that the subsidy mechanism does more harm than good for the market (refer link 1, link 2 and link 3). To close the gap between demand for subsidy and available funds, the government had recently proposed to reduce the subsidy amount to 15% of the capital cost so that more solar can be supported with available funds. Most stakeholders in the meeting, however, preferred that the subsidy mechanism be scrapped altogether for urban grid-connected solar installations. The ministry officials did not spell out their conclusion.

Another topic of discussion was ensuring the quality of new installations and the role of channel partners. Most stakeholders were of the opinion that the process for becoming a channel partner was costly and time consuming, especially in the context of unavailability of subsidy funds. While some stakeholders thought that the channel partner route helped ensure quality, most others proposed that instead of the channel partner mechanism, there should just be standardization guidelines for components, installations and grid-interconnectivity that should be followed by all installers. The ministry officials noted the stakeholder suggestions but again did not spell out their conclusions on the subject.

Availability of finance and cost of finance was the third topic discussed. The ministry officials presented the steps taken by the ministry to bring Indian banks on board to provide more finance (refer) and how international multilateral financing institutions can help reduce the cost of finance (refer).

On the whole, no out-of-the-box suggestions came up from either the industry or the ministry. This is what makes realizing the 40 GW target for rooftop solar such a daunting task. BRIDGE TO INDIA believes that direct government incentives can only go so far, especially in light of the limited availability of funds to the sector. The primary objective of the government should be to create a functioning market place, get states and utilities on board and provide a level playing field to the industry. Net-metering/banking of power with fair compensation to utilities, non-discriminatory quality standards, active collaboration with states and education of end-customers on standards and benefits of solar installations are some of the larger non-incentive ideas that the MNRE could focus on. An opening up of the REC market to more buyers and sellers, as Mr. Abraham of Arise Solar has suggested in an email to us could also help. On the fiscal incentive side, based on BRIDGE TO INDIA’s analysis, interest rate subvention seems to hold the most promise from both the perspective of cost to government and ease of implementation (refer).

What is the projected growth of India’s electricity requirements in the next 20 years, i.e. until 2035? In 2012, the country generated 1,050 TWh of grid power. The government now wants to set in motion a process of accelerated industrialization to provide much-needed jobs, sustain growth and drive development. This will raise energy demand. To date, there are few reliable projections on future demand. So here are our own calculations.

In a high-growth scenario, BRIDGE TO INDIA foresees 7.3% annual growth rate in power generation over the next 20 years in India

It is more than five-fold increase to almost 5,000 TWh of electricity – just above what China or the US generate today

In a business as usual scenario (coal-heavy) India would need to add 869 GW in the next 20 years

In 2012, India’s power consumption made up around 5% of global consumption and India had just overtaken Japan to become the world’s fourth largest electricity consumer. However, on a per capita basis, India was still far below the global average with only 875 kWh per head (at a population of 1.2 billion). Compare that to the 11,900 kWh for the average US citizen, the 6,600 of the average German citizen or even the global average of around 3,000. Since both India’s population and the per capita electricity consumption will increase, there will be significant growth in the country’s energy needs – but by how much?

There are different approaches to making such a projection. One way, favored by the now defunct Planning Commission of India, was to look at an expected (or desired) economic growth rate and then look at the electricity elasticity of GDP (refer). The idea behind this approach was that the composition of the Indian economy is unusual in that it is led by a fast-growing service sector (e.g. IT), which needs far less electricity per unit of output than industry. As a result, India could grow more with less power.

However, there is now a wide consensus that India’s growth path will need to be more aligned with traditional paths, such as that of China, i.e. driven by a power hungry industrial sectors. The service sector in India has never been able to create nearly enough jobs for India. There are, in total, around 3 million people employed in India’s IT and BPO industries today (refer), while 13 million new young Indians enter the labor force every year.

A second approach is to look at historical trends. According to the EIA, between 2008 and 2012, total electricity generation in India grew by 7.2% per annum (EIA, refer) from around 796 TWh to around 1,050 TWh. Data from A.T. Kearney (and CEA) shows historical growth rates of between 6.8% and 8.1% (refer).

The question is: how relevant is the past data for the future? It was roughly in line with India’s GDP growth trend of around 7% for the past 20 years. In the future this relationship can change: there will be efficiency gains in electricity use (e.g. in factories or households), electricity generation (e.g. through super critical thermal power plants) and energy transmission (down from average national losses of 25%). At the same time, if industrial growth picks up, we might see more power intensive manufacturing, pulling people from agriculture into factories. Also, there might be deeper electrification and fuel replacement from petrol to electricity, if electric vehicles take off in the next 20 years.

And let’s not forget that there is a latent, unmet power demand. On the grid, many consumers face power cuts, often lasting several hours a day. The demand-supply gap is at least 10%. Off the grid, there are up to 400 million Indians in 20,000 villages – a third of the population – who don’t have access to grid power. Therefore, improving the quality of power and providing power access, will in itself require power supply to jump by at least 20%.

A third, very rough, approach would be to indeed look at China and compare. In 2012, China generated 4,768 TWh of power (#1 in the world) for its 1.35 billion people. That is more than 3,500 kWh per capita. To get to this level, its annual power generation has grown by over 10% per year for the last 20 years. India, under the Modi government, with its central “Make in India” campaign, seems set to replicate the Chinese model of growth. If India were to provide its citizens (by then 1.5 billion) with the same amount of power by 2035 that China generates today, it would need to increase its energy generation to 5,250 TWh per year. That would require an annual growth rate of 7.3%.

A lot, of course, will depend on India’s actual growth rates and infrastructure development. There can be two scenarios: one, in which India grows as it needs to and one, in which it does not.

Scenario 1 (“Sluggish Growth”): growth is disappointing at around 5% p.a., no “industrial revolution”, problems of energy access and quality of power remain unresolved. In that case, growth in power generation could be around 4% p.a. These were the expectations of some observers in the early 2000’s (refer). Total electricity generation in 2035 would then still more than double to 2,600 TWh.

Scenario 2 (“Dynamic Growth”): High growth of 8%+ p.a. with industrialization, better quality of power (closing demand to supply gap), better energy access. In such a scenario, we expect power generation to have to grow by around 7% every year. By 2035, India would then need to generate almost 5,000 kWh of power per year – more than China generates today and five times India’s current power generation. At that amount, India would in 2035 be near to the current global, per capita average of around 3,000 kWh.

Let’s be optimistic about India’s future and go with a 7% growth projection.

Tobias Engelmeier is the Founder and Director of BRIDGE TO INDIA

There has been much talk and an equal amount of confusion about the future of India’s solar market. It is not easy to predict the growth rates or future market character, because the market is neither fully in nor fully outside of the government’s hands. It comes down to what one believes in. I am here proposing three perspectives to take into consideration: The “Vision”, the “Reality” and the “Need” perspective.

India’s government has announced a 100 GW solar target. The only policy that is in line with it the planned revision of RPO targets to 10%

In reality, the Indian market is already a steady 1 GW growing to 3 GW in the next year

The real question is, however, how will India satisfy it’s long term energy needs?

Let us first consider the “Vision” perspective: Prime Minister Modi has, on several occasions, stated his commitment to make India a 100 GW solar market in five years’ time (with 40 GW of that coming from distributed generation).  Compare that to the German market, which is only 38 GW to date. Overall, if one adds the supporting grid infrastructure and auxiliary services, this would translate into a $ 100+ billion market opportunity. This was enough to make every investor and bank around the world listen up, which is already a success of sorts.

In line with this goal, the government is currently pushing through parliament an amendment to the Electricity Act (2003) to increase the solar renewable purchase obligations (RPOs) of the discoms and other obligated entities to 10% in five years – roughly in line with the 100 GW target. However, the implementation of the RPO targets will have to be done at the state level. And this shows one of the key limitations to the government’s vision: it needs the states to cooperate. Predictably, there is a sharply divided response from states based on whether they are BJP/NDA ruled or not. Overall, there is currently no credible roadmap to reach the 100 GW target in five years through government incentives.

The second perspective is that of “Reality”. Currently, India has around 3 GW of solar installed, supplying less than 1% of the required power. Over the last two years, India has been a 1 GW per year solar market. This seems to now be ready to rise to 3 GW. This is still far less than what would be required for the 100 GW, but it is a highly respectable growth rate nevertheless.

Altogether, there are around 10 GW of solar projects under development: some through central schemes, some through state schemes, some driven by government-owned enterprises and some by private investors. Margins in the market are still fairly low (EIRR of 15%) and debt costs are still very high (12.5%). The government wanted to reduce the cost of financing and increase the amount of available financing through various channels, but on that front the market was disappointed. The distributed market continues to underperform at no more than 10% of new capacity, its share actually falling. This is a far cry from the 40% share that the government has in mind. The good news is: India has built an excellent ecosystem of market players: especially EPCs and developers/investors. Banks and regulators are catching up.

The third perspective is that of the “Need”. India needs enormous amounts of power in the future. In 2012, it’s total electricity generation was 1,050 TWh. Let us assume that India will experience high economic growth, will industrialize more, will electrify the hundreds of millions still without grid power and will close its grid power deficit. Then, despite efficiency improvements in generation, transmission and consumption of power, India will, according to BRIDGE TO INDIA modeling, need around 7% more power every year for the next 20 years, bringing the total generation to almost 5,000 TWh. That would be slightly more than what China and the US generate today. On a per capita basis, it would take Indians from the tiny 800 kWh per capita of today to around 3,000 kWh in 2035 – which is the current global average.

And what options does India have to meet these requirements? My guess is, it will come down to a “coal-heavy” and a “solar-heavy” scenario. Both have their challenges. Building 100’s of GW of new coal would be immensely polluting, require huge investments into rail and port infrastructure, pollute very large amounts of India’s fresh water, weigh heavily on India’s import bill, drive up global coal prices and presumably bring the global climate to the brink.

If you think about the solar-heavy scenario, consider this: if India were to supply 60% of its 2035 electricity from solar, it would need to build 1,600 GW of solar plants. From today’s base, that would require a 35% growth rate every year. At today’s cell efficiencies, this would require around 1% of India’s total landmass. There would have to be a lot of investment into the grid (balancing, spinning, storage, smart supply and demand management).  Of course, if India were to build anywhere near that much in solar (around 4 times the total global installed capacity), then you can expect the cost of solar and of storage to fall by 50-80%. It could well be the much cheaper option.

Both options sounds staggering – but that is the task before India. And if you put your faith in the solar scenario, you realize that the 100 GW target is not what this game is really about. The question is: which energy system will India – by 2035 the most populous country on the planet – chose to develop.

Over the past weeks, we have provided plenty of analyses of the different solar policies in India in this newsletter. Overall, we are not terribly impressed with them. This is partially because of the weight of expectations the government has put upon itself with its 100 GW target. In fact, growth in the sector is picking up significantly. It is just that this growth is not driven by sustainable policies, but by one-off measures, and that it is not enough to get near to the very ambitious target.

The focus should be on the fundamental needs in a power deficit country like India

Energy growth needs to enable economic growth that creates employment, allows for a significant increase in standards of living without destroying the country’s living environment

We might be talking about more than 1,000 GW before 2035

Policies are not sustainable, because they do not yet provide a credible, overall framework. Solar parks to deal with land and power evacuation bottlenecks are delayed. There is no “big bang” financing solution to bring down the cost of debt and thus of solar (refer). Power tariffs are rising, but there is still no underlying reform to stabilize the sector. The government is working on implementing more ambitious RPO targets, but there are questions around the value and punch of such targets. The budget did not deliver (refer). All this might come as a bit of a disappointment to those (including ourselves) who were hoping for a Modi “solar rocket” (refer). Our suggestion, today, is to refocus. Let’s forget the target – which would require an annual industry growth rate of more than 90% – and focus on the real driver behind solar in India: the country’s enormous power demand and the dearth of supply options. Let’s focus on India’s fundamental needs (refer).

Let us be optimistic and assume that India will develop. If for no other reason than because anything else would be a terrible tragedy. Development would mean: growth that brings employment to the 13 million new, annual entrants into the labor force (more industrialisation and growth rates of 8% or more), would allow for a significant increase in standards of living for the average Indian (including using more energy consuming devices), and would do so without destroying the country’s living environment (water, air, soil). It would mean that India is able to provide more electricity to more of its people. Despite likely and significant efficiency gains in power generation, transmission and consumption, that would likely mean raising the per capita consumption of power from the current 800 kWh per annum to around 3,000 kWh per annum (the current global average). Over the next 20 years, we are looking at an increase in electricity generation from 1,050 TWh in 2012 to around 5,000 TWh in 2035 (refer), a 7% p.a. growth rate.

Where could such an enormous, additional amount of energy come from? Whatever energy source one looks to, there are challenges: Nuclear power has been consistently under-performing since the 1950s, providing only around 1% of India’s power. Gas is not available in nearly large enough a quantity. Large hydro power plants are difficult to execute due to political/social resistance and evacuation bottlenecks. Biomass can add, but is limited in amount. Wind can add, but the sites are geographically concentrated and the volatility of wind creates challenges. The default choice is coal, which currently provides around 60% of India’s power and there are large reserves of coal in India. But consider the implications of building e.g. 500 GW of new coal-fired power plants on the environment (water pollution, air pollution and soil destruction), on India’s stretched railway and port infrastructure, on the current account deficit, on energy security (a lot of it will be imported) and – not least – on the global climate. India can try and go down that route as China has done, but China struggles hugely with the environmental consequences of this choice. When China made it around 20 years ago, there might not have been a real alternative. That is different today: the cost of solar (and of storage) has come down enormously since then, making it a mainstream energy choice.

Could India’s future be solar? We believe it can be. Yes, there will be challenges of building hundreds and hundreds of GW of solar. That is naturally so, given the size of the task at hand. These challenges relate to the use of land (given today’s efficiencies, 1,000 GW of solar would require around 0.5% of India’s land mass), to the cost of solar (still higher than some alternatives, but will fall very rapidly with large scale deployment) and to the volatility of solar (we will need a lot of storage, much better demand management and forecasting and some grid balancing/spinning). These challenges can be overcome. Solar might well turn out to be a default market (reacting to consumer needs) rather than a design market (driven by specific policies) (refer). In any case, it will be a very large one. Growth rates might not be 90% p.a. as the government anticipates over the next 5 years, but they might be at 30-50% p.a. over the next 20 years, topping 1,000 GW before 2035. That is real prize.

In view of the BJP government’s strong commitment to the solar sector and the much trumpeted 100 GW target, there was mighty anticipation about what the budget would bring by way of cheaper financing, tax incentives and other promotional measures to grow the sector. But the budget turned out to be bit of a damp squib and it is not clear how the government hopes to realise its solar vision with the current, incremental approach. Here is our proposal for a big-bang financing solution to achieve India’s goals.

Debt cost in India are too high and there is far too little of it available to meet the ambitious solar targets

The government should provide low cost and long tenure debt through new, dedicated renewables financial institutions

This initiative would cost less than USD 2 bn per year – a bargain, given the various political, social and environmental benefits of solar

There are many challenges ahead for the solar sector – offtake risk, land acquisition, transmission, grid stability and storage to name a few. But there seems to be a mistaken perception that financing will automatically fall in place, with leading Indian and international companies making “commitments” to develop 266 GW of renewable capacity.

There is ample liquidity in the global financial markets. With global macro-economic growth rates slowing down in many parts of the world (Europe, Russia, China, Japan) and interest rates coming down to all-time lows, fund managers are desperately chasing attractive avenues for investment and are increasingly willing to take more risk. So why not finance the Indian solar sector?

But of course it is not so simple. We need to break financing into two parts – equity and debt – and look at these separately. For the reasons discussed above, it seems fair to expect that international utilities, power sector companies and developers will be keen to come to India and invest in solar projects. We can see hard evidence of this on the ground.

The debt part, however, is a completely different story. Debt financing options in India are severely limited. By far the biggest source of debt in India for long-term project financing is Indian banks (floating rate, high cost of debt with an interest rate of typically 12.5 – 13% and debt tenor of < 15 years). But the banks are saturated with power sector debt and many of them are burdened with “non-performing” (i.e. distressed) loans to distribution companies and IPPs. To expect Indian banks to provide the bulk of the financing for 100 GW is not only overly optimistic but also sub-optimal for their own balance sheets and for the solar sector.

The other plausible options for debt financing today are also severely limited by their potential capacity and/or appetite – Indian institutions such as IREDA and PTC Financial (relatively small size but competitive cost), finance companies such as L&T Infra Finance and Tata Capital (low capacity, high cost), international institutions and export credit agencies such as IFC, KFW, DEG and US-Exim (very low appetite, low cost). International banks are not keen to commit long-tenor debt and the capital market route simply does not exist. There have been multiple suggestions on how to finance solar at more competitive terms – priority sector lending, hedging cost benefit, investment tax credits etc. In our view, these measures are either not practical in the Indian context or suffer other operational shortcomings.

So how can 100 GW of solar be debt financed in the next years? We need a radical approach, aiming to bring down the cost and extend the tenor of debt financing. The government needs to create dedicated renewables financing institutions funded with gilts, coal cess monies and tax free bonds. And given all the social, environmental and macro-economic (improved energy security, low currency risk, improved growth prospects, significant job creation) benefits of renewable energy, there is a rather strong case for the government to not only do this but also provide a flat 4% financing cost benefit to the sector. We believe that this could bring down the cost of solar by 18% to Rs 5.35 per kWh and go a very long way in making the 100 GW target achievable.

The cost of doing so is actually quite modest – it peaks at about USD 2 bn per annum (0.1% of GDP) and is estimated in aggregate at only about USD 26 bn. The beauty of this structure is that it is very easy to administer and if the government does go ahead with this, it can remove all other incentives such as accelerated depreciation, capital subsidies/ VGF etc and remove operating and financial distortions in the sector. That in turn means that the total cost of following this approach will be more like USD 15-20 bn, which in view of all the benefits is probably one of the best ways for government to spend the money.

Vinay Rustagi is the Managing Director at BRIDGE TO INDIA.

Over the past several months, we had the impression that central government-led allocations would be the preference of the new government and that the role of the states would be limited to setting up the infrastructure of solar parks and procuring solar power. The central government would make that power cheaper for the state utilities either through bundling it with coal power or through Viability Gap Funding (VGF). This perception is now changing as the central government-led allocations lose steam due to delays in setting up the solar parks and a lack of funds for VGF.

The document for implementation of 15 GW by 2019 has been released on March 9, 2015

 As nothing concrete has been proposed so far, BRIDGE TO INDIA does not expect new allocations based on such a mechanism any time soon

Several states namely Telegana, Karnataka, Tamil Nadu, Maharashtra and Gujarat has announced their plans with respect to implementation

A revised document for the implementation of 15 GW by 2019 (refer) has been released today (9th March 2015). Initially 3 GW planned were to be allocated by March 2015 under the bundling mechanism. Now only 1 GW will be auctioned in Andhra Pradesh in time. The remaining 2 GW is delayed as the solar parks have not been finalized. The document also states that for the remaining 12 GW, the MNRE will devise a suitable mechanism with “minimum support from the government” and “after getting some experience while implementing Tranche I”. The document goes on to explain that this minimum government support could be “in the form of low cost, long tenure loans or other means”.

From the language of the document, we think that the full 3 GW of capacity could be allocated only by the end of 2015 as against the previous timeline of March 2015. With respect to the recently published guidelines for an allocation of 2 GW (from the remaining 12 GW) under the VGF scheme (refer), the process is only expected to move forward once some form of interest rate subvention mechanism has been devised. As nothing concrete has been proposed so far, BRIDGE TO INDIA does not expect new allocations based on such a mechanism any time soon.

The good news is that while the center stalls, several states are moving forward with their own plans. And rightly so: states should not hold their breath for central solar policies that provide only “minimum support”. Here are some recent announcements: Telangana is calling for bids to allocate 1 GW of solar (refer), Tamil Nadu wants to allocate 3 GW (refer), Karnataka will likely allocate 500 MW this year under its existing policy and Maharashtra and Gujarat are expected to launch new policies. While these state announcements will have their own set of issues with respects to implementation, we note that the targets at the state level will likely match, if not exceed, the 15 GW target of the central government until 2019.

All this has to be viewed in isolation of the larger 100 GW target until 2022. There still isn’t any official framework for achieving that. Going by the lower than expected budgetary allocations to the MNRE, BRIDGE TO INDIA does not expect big leaps in this next financial year.

Around 70% of India’s power comes from coal, less than 1% from solar. Will that change in the next 20 years? Can solar become the new backbone of the Indian electricity system? There is a good possibility that it will. Let’s look at some key drivers.

India is just beginning to build the energy infrastructure it needs

Solar is practically unlimited and cost trends are strongly in its favor

As the energy market will become more flexible, investor preferences will shift away from coal and towards solar

Photo credit: Sierra Club

It is important to clarify that a transition from a coal backbone to a solar backbone requires no shutdown of existing coal plants. India will need to grow its power generation capacity manifold over the next 20 years. The question is: what new plants will be built? On a global level, investments into renewables already outpace investments into fossil-fuel plants. This trend will accelerate and in India it will give the shining solar knight the opportunity to topple “King Coal”. This is good news for India and great news for the global climate, which cannot be controlled unless this shift happens across all rapidly developing countries like India.

Infrastructure

Since India has not yet built its future electricity system, it can more easily leapfrog towards a renewables-heavy, more distributed structure than countries with stable, functioning centralized power systems, such as Europe, the US or even China. That sounds like a good plan.

In reality, however, I think a key driver will be the inability of the government and government-backed or private infrastructure providers to build big infra. A look at the current, insufficient, leaky power grids suggest that this is not something India is cut out to do. Thus, a distributed system will emerge by default. This is how India’s vast, private power backup power market (mostly diesel gen-sets) has come into existence.

Of course, building a solar backbone will require infrastructure, too. Here, storage will play a key role. But storage will also more likely be distributed (e.g. batteries) than centralized (e.g. pump hydro plants). In all likelihood, India’s future power system will continue to be driven by the unsatisfied power needs of its citizens and businesses, not by the governments Five Year Plans.

Privatization

In the process of privatization (think consumer solutions, not infrastructure) the power market will become increasingly more fluid and flexible. New, innovative players will enter, providing all kinds of customized solutions to customers. This process favors renewables and especially solar, because they are more flexible (faster to build, modular, smaller unit sizes, shorter lifecycle) than fossil power plants. In addition, there is a trend of households and businesses going for their own solar solutions – on site (on rooftops) as well as off site (e.g. in solar parks).

In the US, innovative industries, such as Apple or Google, already buy into large solar farms. They have at least three reasons to do so: firstly they want to lock in long-term power prices to re-risk their business. Solar and wind, which have negligible operating expenses, are ideally suited for that. Grid power prices, on the other hand, are expected to only go up. Secondly, grid buying solar can already be cheaper than buying grid power in many places (including in many Indian states). A third reason is going green. This is a smart business decision as the fossil fuel divestment movement gains pace and ever more investors and consumers look towards a company’s green credentials.

Energy pricing

Underlying this shift from solar to coal is, of course, energy pricing. In the UAE a large solar plant has recently offered a tariff of less than USD 0.06 per kWh. In India, tariffs for large plants have come down to around USD 0.10 per kWh. This is already competitive with the cost of new, imported coal. The great thing about renewables as opposed to all fossil fuels is that the more we use, the cheaper they get. The cost of solar has come down enormously since the 1980s, and it has done so consistently every year. There is no reason to presume this trend will stop. Once the cost of storage (today adding around 30-80% on top of the cost of solar) will come down, too – which all industry observers expect – then solar will become a direct replacement for fossil-fuel power.

Today, the cost of coal and other fossil fuels is determined only by supply and demand. Environmental externalities are not accounted for. This might well change in the future. There might be an additional levy on coal, oil and gas usage that takes into consideration the air pollution these fuels cause (Indian cities have the most polluted air in the world) and the emissions and climate damage they cause (think of the debate over “unburnable carbon”).

Investment

This brings me to the last point. The future energy system that India needs to build will depend to a large extent in private investment. The government has made that clear on many occasions. From the point of view of investors, the energy landscape is changing rapidly. In the past, an investment into a coal-fired power plant was considered a fairly safe bet. It is a well-known technology, coal supply is ample in India (at least in theory) and there was no real competition.

A coal-fired plant has a lifetime of around 50 years. It was the perfect annuity investment, easily earned money. However, anyone looking 50 years into the future today will wonder whether that still holds true.

While the power market has been largely the same for the past 100 years, it will transform entirely in the next 10 years due to the growth of new, renewable energy technologies (especially solar) and due to the environmental and climate debates.

Irrespective of the returns a coal investment might promise, the risk side has changed fundamentally and for the worse. Solar, on the other hand, offers the investor speed and flexibility. It is the safe – and smart – bet. Once the majority of investors will be clear on that, solar will rapidly outgrow coal and become the backbone of India’s energy economy.

Most sections of the overall Indian industry have labeled the budget presented on Saturday (28th February 2015) as an incremental progress in the right direction and not a ‘big-bang’ or reformist budget (the yardstick being the 1991 budget). While infrastructure has received its due attention, unfortunately, for the solar industry, incremental progress just doesn’t add up to the new and ambitious targets promised for the sector (100 GW by 2022).

Planned budgetary allocation has marginally increased to INR 62 billion, not in line with the new plans

There is a risk of underfunded new programs being started with negative consequences

Some benefits in the form of custom duty exemptions have been provided for inverter assembly and PV cell manufacturing

The most positive budget announcement for renewables has been the doubling of the clean energy cess on coal for a second year in a row. At INR 200 per tonne, the government is expected to collect around INR 120 billion (USD 1.9 billion) during the upcoming financial year. This trend, coupled with the continuation of higher taxes on petroleum products, effectively changes India’s status from a carbon subsidizing economy to a carbon taxing economy. This is good news.

However, all said and done, the Ministry for New and Renewable Energy (MNRE) has been provided only a slightly enhanced planned budgetary allocation of INR 62 billion (USD 1 billion), up from approx. INR 50 billion (USD 800 million) in the last budget. With this budgetary allocation, the ministry is expected to provide the following: “central financial assistance for grid-interactive power capacity addition from wind, small hydro, biomass power/cogeneration, urban and industrial waste to energy, and solar power. In addition, it should promote the deployment of off-grid/distributed renewable power systems. On top of the on-going schemes/programs, it is also expected to help fund (i) a scheme for mega renewable power generation of 100 GW, (ii) a 20 GW scheme for unemployed graduates, village Panchayat and small scale industries (refer), (iii) rooftop grid-connected projects as well as provide interest an subsidy scheme for such projects, (iv) creation of an international agency for solar policy and applications and (v) a scheme for establishment of solar zones and (vi) provide an outlay of INR 100 million (USD 1.6 million) for a scheme to train 50,000 youths under the ‘Surya Mitras’ program (refer).

Looking at this list, it is evident that there is a huge disconnect between the government’s ambition and the MNRE’s to-do list on one hand and the budgetary allocation on the other. From the solar industry’s experience with the rooftop solar capital subsidy, we already know what happens, when programs are started without sufficient budgetary allocations: they not only stall, but even prevent the un-subsidized market from picking up.

On the manufacturing side, there is some support in the form of a reduction of the basic customs duty on the Active Energy Controller (AEC) to 5%. AEC is a microprocessor based electronic component that is mostly imported and used for manufacturing renewables inverters. This will increase the competitive advantage of domestically assembled inverters by companies such as ABB, Schneider, Refusol, Bonfiglioli and TMEIC. An excise duty exemption has also been provided for the copper wire and tin alloys used in making solar cells. In the past, there has been a duty on importing raw materials for solar PV cells and modules but no duty on the finished products. This has been hampering the competitiveness of the domestic manufacturers. This exemption is in line with the government’s plan to remove inverted duty structures on import of raw material.

On the services side, an increase in the service tax to 14% is likely to add to the EPC and O&M costs for solar projects. On financing, there are now tax-free bonds for rail and roads, but against industry expectations, renewables are not included in this list.

The government re-affirmed that it wants to provide power to India’s un-electrified villages (it counts 20,000 of them) with a special mention of solar energy. This is good, but there is no detail on whether any allocation for such a program would be provided to the MNRE or would it be limited to the rural electrification programs under the Ministry of Power.

Overall, the budget shows some, incremental progress from the last time, but it falls well short of meeting the raised expectations of the solar industry. The hope is that the larger projects will get supplementary budget allocations through the course of the year. However, the prospects for any accelerated growth in rooftop and rural solar look slim.

Jasmeet Khurana, is Senior Manager – Market Intelligence at BRIDGE TO INDIA

On the 28th of February, India’s finance minister has presented the widely anticipated first full budget of the new Modi government. After all the fanfare around growing the Indian solar market including at the recent RE-INVEST, the industry was expecting if not real boost to the sector, at least a clear directional step towards creating a sustainable and fast growing solar market. This expectation was not met.

A couple of measures will help solar manufacturers and solar developers

Many new laws were promised – but we need to move to implementation

The bigger picture of building a healthy economy (driving power demand), building a healthy power sector (pricing) and enabling solar to take a large share of that (grid access) were not satisfactorily addressed

Photo credit: AP

Just to clarify: we were not expecting industry handouts, such as feed-in-tariffs, subsidies or tax breaks. They don’t work. Instead, we were looking for measures that would create a sustainable solar market, one that allows professional and household investors an attractive rate of return on solar projects. Such a market can be created by: ensuring sustainable (implying: higher) power tariffs; by drafting reliable and transparent grid access rules; by investing into expanding the power grid and making it “smarter”, i.e. future ready; by improving contractual security (clearing up the legal backlogs); by making acquisition of land easier; and by fully opening up India’s financial system.

That cannot, of course, be achieved in entirety in just one year’s budget. Thus, we would have already considered clear steps in the right direction a 10 out of 10 budget. However, they are missing. At the same time, there are no specific measures for renewables. For instance, there are now tax-free bonds for rail and roads, but not for renewables. In light of the government’s earlier emphasis on providing financing solutions to achieve the ambitious renewables targets, this is surprising. Also, there was an expectation that the Minimum Alternate Tax (MAT, at 18%) was to be dropped for renewables projects. This did not happen. An interesting point made by the finance minister was that the government sees a cleaner development as part being pro-poor as environmental degradation hurts the poor most.

Overall, there is little in this budget to suggest how India is to grow to a 10 GW a year solar market, in line with the government’s goals, from the current 1 GW per year. This budget, for us, is just a 3 out of 10 – a disappointment, really, especially when measured against the large expectations this government has fuelled over the past months. This is why:

What helps

– Overall economic policy seems to be sound and could bring India back to stable, higher growth rates (and hence rising power demand) and improve the business environment. There were no big handouts (subsidies) and the government seems determined to keep the budget (and inflation) under control.

– 5% reduction on corporate tax (30% to 25% over a period of 4 years)

– This was not directly part of the budget, but to give the government its due: Instead of subsidizing petroleum products, there is now a duty, an effective “carbon tax” on them. This is hugely helpful. It might incentivize India’s 60-90 GW of diesel backup operators to consider solar hybridization or replacement.

What seems to help but does not (really)

– The coal cess is to be raised from INR 100 to INR 200 per ton of coal used. This will increase the funds in the National Clean Energy Fund and should lead to an increase in tariff of INR 0.04-0.06. The coal cess sounds like a good idea from the point of view of renewables, but it is worth keeping in mind that (a) domestic coal is given away to power plants at cost (rather than market prices) and that (b) the funds have so far not been spent on green investments. The underlying issues around power pricing remain unresolved.

– More public investments à growth driver, but not really sustainable/relevant to solar

– Less tax exemptions à makes the Indian market more transparent, accessible for professional investors

– The government affirmed that it wants to provide power to India’s un-electrified villages (it counts 20,000 of them). This is good, but there is no clarity on how it intends to do so. Previous governments have said the same and not delivered. What is different this time?

– Reduction on import duties of materials for solar cells (copper wiring, tin alloy). While this makes sense, it will have a small impact on cell manufacturing costs.

What slows down the sector

– Nothing, really. So that is good news. The only (minor) concern is an increase in service tax from 12.36% to 14%. That will affect all engineering and maintenance services which are crucial to upholding execution quality of solar.

What is missing

– No plan! The government wants to see 100 GW of solar and 60 GW of wind built in the next seven years. These are very ambitious goals and there is absolutely nothing in the budget to suggest how this might be achieved.

– No clear financing plan for renewables – there was much talk before the budget of initiatives such as currency hedging support, interest rate subvention and classification of renewables as priority sector.  But none of these measures have been accepted.

– No reform of the power markets. There is nothing to suggest how power prices might be rationalized and how.

– No grid investment plans. Evacuation of 100 GW of solar and 60 W of wind would require dedicated transmission infrastructure. Given that transmission lines take 3 years to build, the government would need to start now. There is nothing in the budget relating to that.

An afterthought: The stock market was not thrilled either. It closed a couple of point down, still near its all time high, at 29,361. Expectations, one could argue, were largely met. However, stocks of companies linked to the infrastructure and power sector, such as Tata Power, Coal India, NTPC and BHEL were amongst the day’s biggest losers.

Tobias Engelmeier is the Founder and Director of BRIDGE TO INDIA