Month: June 2015

Last week, the Cabinet Committee on Economic Affairs, chaired by the Prime Minister formally gave its approval for stepping up India’s solar power capacity target to 100 GW by 2022 (refer). The press release included some bold policy ideas to achieve the goal. They include: making 10% rooftop solar mandatory under a scheme to be formulated and announced by the Ministry of Urban Development (this is still an idea that may or may not become a policy) and setting up industrial parks for manufacturing solar PV components. Apart for the new policy targets, the cabinet also gave its approval for implementing 2 GW of utility scale projects under a viability gap funding mechanism (refer). This is a part of the 7 GW to be allocated by SECI.

India’s cabinet approves the 100 GW solar plan

A provision for mandatory renewables for buildings is planned

There will also be industrial parks for manufacturing solar components

The most noteworthy point in the press release is the proposal for amendment in building bye-laws for mandatory provision of roof top solar for new construction and 10% renewable energy provision for end-customers under the new scheme of Ministry of Urban Planning. It is an interesting proposal and, in this post, we discuss some of its pros and cons.

Mandatory rooftop solar is not new to India. Similar policies have earlier been formulated by the states of Haryana and Tamil Nadu. In 2012, Tamil Nadu unveiled a solar policy, under which large power consumers (with a connected load of above 11 kVA) were asked to meet a share of their power consumption from solar. However, a year later, this obligation was challenged by the Tamil Nadu Electricity Consumers Association in court on the grounds that there was already a general renewable energy obligation upon commercial consumers, as per a Tamil Nadu Energy Regulatory Commission (TNERC) order of 2010. The rooftop obligation was dismissed by the courts and the plan as aborted.

Subsequently, Haryana has made it mandatory for all buildings with an area of 500 sq. yards or more to install solar rooftop systems of a minimum size of 1 kW or 5% of their power requirements, whichever is higher. The deadline for meeting the requirements is September 2015. In all likelihood, there will be large scale non-compliance to this mandate. The primary reasons for non-compliance is that the other aspects of the policy are not being effectively implemented. A central and state government subsidy has been announced but it is not available. Net-metering exists on paper but the process for providing interconnection has not yet been streamlined. In fact, hardly any permissions have been provided for net-metering. Over and above these challenges, the short timelines provided for publicizing and enforcing the mandates has created a situation where the public has not taken them seriously.

The past financial year has seen a marked uptake in solar activities in India with new capacity installations and many new allocations and policy announcements. Rajasthan has emerged as a preferred investment choice and will likely remain so in the coming years. Please download our free India Solar Handbook 2015 for more information (LINK).

From Jan 2015 till date, nearly 1.1 GW of utility scale solar capacity has been added in India and another 75 MW capacity was added through rooftop installations

Out of this 1.1 GW, 555 MW was added under NSM Phase II Batch I; the remaining under different state policies

The top three states in terms of capacity addition in the last year were Rajasthan (295 MW), Madhya Pradesh (220 MW) and Punjab (167 MW)

The cumulative solar capacity in India as of May 31, 2015 stood at 4.4 GW (including 350 MW of rooftop solar). While in Rajasthan and Madhya Pradesh maximum capacity was added under NSM projects, in Punjab the state solar policy was the key driver. New allocations which will start converting in the next 1-2 years include Punjab phase II (250 MW allocations), Karnataka Phase II (500 MW allocations), Andhra Pradesh (500 MW allocations), Telangana (500 MW allocations), Uttar Pradesh (115 MW), and Bihar (130 MW). Hence, in total about 2 GW of new capacity from state allocations is expected in the next 1-2 years.

In the rooftop segment, as of May 31, 2015 only 350 MW was installed. Maharashtra and Tamil Nadu are the leading states. Maharashtra has India’s highest industrial and commercial tariffs. Tamil Nadu has been facing power supply shortages and has a high consumer awareness with respect to renewables and private power purchase agreements.

BRIDGE TO INDIA expects the market to grow at a CAGR of 63% to reach 28.4 GW (including 4 GW rooftop market) by 2019.

Jyoti Gulia is Senior Manager – Market Intelligence at BRIDGE TO INDIA

Last week, BRIDGE TO INDIA released the yearly India Solar Handbook (2015 edition) at InterSolar, Munich (download the report here). While the report examines various aspects of the Indian solar market, one of the most commonly asked questions that it tries to answer is: How much solar will India really install?

BRIDGE TO INDIA expects the solar market in India might fall short of the government’s ambitions but the good news is that the market will still grow at an impressive pace

We expect India to realistically have around 31 GW of installed solar capacity by 2019

Of this 31 GW, we expect 27 GW to come from utility scale projects and 4 GW from rooftop projects

There is good news and bad news. The bad news is that BRIDGE TO INDIA expects the solar market in India might fall short of the government’s ambitions but the good news is that the market will still grow at an impressive pace and provide immense opportunity for businesses to flourish.

According to the proposed amendments to the National Tariff Policy 2005, the government wants India to generate 8% of its electricity from solar by 2019. That would require around 69 GW of installed capacity (refer). However, based on an analysis of the market fundamentals as well as announced and anticipated central and state government policies, BRIDGE TO INDIA expects India to realistically have around 31 GW of solar capacity by 2019.

Of this 31 GW, we expect 27 GW to come from utility scale projects. While the central government has put its foot on the accelerator and wants to allocate 10 GW of new capacity this year, BRIDGE TO INDIA believes that it will be a number of leading Indian states that will be the main market driver over the next four years. We estimate that until the end of 2019, 7.6 GW will be installed through central government and 11 GW through state government allocations. A third category that will contribute to utility scale solar growth is that of renewable generation obligation (RGO) and non-policy projects.

The distributed solar market will grow even faster, but from a small base. We project 4 GW of rooftop solar capacity addition until 2019. This is way short of where the government wants it to be (40 GW by 2022). Currently, the policy framework in support of distributed is still weak and projects will be driven by the commercial case for complementing expensive grid power for some tariff groups in some states with competitive solar power.

Of this 4 GW, we expect 50% to come from industrial consumers, 30% from residential consumers and 20% from commercial consumers. In the initial years, commercial and industrial consumers will dominate. Later on, the share of commercial installations will reduce, while the residential market will pick up. Commercial consumers account for 15% of the power consumption in the country vis-à-vis a much larger share of industrial and residential consumers.

Of course, the policy environment for solar is very dynamic right now and things can change very quickly. Thus, making accurate projections is difficult. We see the main risk for a smaller than estimated solar market, in possible delays in allocation processes (mostly linked to states’ willingness to buy solar power and availability of land and transmission infrastructure). On the other hand, the market might be significantly larger, if the government in the center and states puts policy meat behind the distributed solar targets. Other important factors that will determine the growth of India’s solar market are the pace at which vital overall electricity sector reforms are pushed through, whether consumer power prices are further rationalised (increased) and the speed at which transmission and distribution infrastructure will be improved and expanded.

Overall, our message is that the Indian solar market is going to be one of the most exciting ones globally, offering many opportunities across the value chain and in different end-markets for new and established companies.

Since taking over office, the central government, under the aegis of Mr Piyush Goyal, Minister for Power, Coal and New and Renewable Energy, has repeatedly stated its goal of providing 24-hour power supply across the country. Mr Goyal has laid out a detailed plan to accomplish this critical and difficult goal, the effects of which we are seeing today. A careful inspection reveals though, that these plans (detailed below) and subsequent actions are mostly focused on energy generation. However, 24-hour power supply requires not just ample generation but also a robust bottleneck-free transmission infrastructure and a reliable distribution network that is unobstructed by populist measures and influence.

While the central government’s focus has been on generation, power disruption is mainly a distribution problem

There is only one major policy initiative to fix the distribution issues, and it’s not very effective

The proposed amendment to India’s Electricity Act might be a vital part of solution, but it faces stiff political opposition in parliament

Context

Sixty-seven years after independence more than 30% Indians still live without reliable access to grid electricity. And a majority of those who do have grid access suffer, on average, 5-6 hours of daily power disruption, making costly inverter-battery power backup systems commonplace. In an effort to meet our energy needs Mr Goyal has aggressively pushed to secure fuel (coal and gas) for the thermal plants, restructured the bureaucratic process making it open and efficient, and, most visibly, set ambitious solar and other renewable targets — however, more needs to be done.

There is no doubt about the size and complexity of the situation. Just to exemplify – on the bureaucratic side, it requires the newly collated Ministry of Power, Coal and New & Renewable Energy to coordinate with the Ministries of Environment and Forests, Railways, Finance, Commerce and Industry, External Affairs, Steel, Mines, Petroleum and Natural Gas, Law, Science and Technology, Development of North Eastern Region, Labour and Employment, Rural Development, and Urban Development, amongst others, for major decisions and initiatives. Complicating it further is the fact that electricity is a concurrent subject, i.e. it is the shared responsibility of both the central and state governments (see demarcation below), and as such the central government has limited implementation control or guidance at the distribution level, where the toughest problems await.

Challenges

In September 2014, Mr Goyal outlined a number of tasks and initiatives through which he wants to achieve 24-hour power (highlights in table below). While none of these can function in isolation, it is interesting that only one initiative—the Integrated Power Development Scheme (IPDS)—targets India’s distribution network. Its purpose is to help reduce grid losses, strengthen sub-transmission and distribution networks, and fix administrative losses in accounting, billing and collections through IT integration. It also replaces the largely ineffective R-APDRP scheme.

However, IPDS faces considerable challenges. Its basic premise (as was also the case with earlier, unsuccessful initiatives) is to relieve the financial stress on India’s hugely loss-making DISCOMs mostly through tariff escalations, thereby allowing them to avoid load shedding and provide uninterrupted power. Unfortunately, this is a political minefield in a country where low power tariffs are a favourite populist weapon wielded successfully during elections. Moreover, the centre depends on state governments and state DISCOMs to implement the tariff escalations and the requisite infrastructure upgrades—and they may not want to play ball. And herein lies Mr Goyal’s biggest challenge. To accomplish his goals he will have to convince all 22 non-BJP state governments to join hands with the central government and fix the distribution issues.

A way out?

In December 2014, a crucial amendment bill to India’s foundational Electricity Act was introduced in parliament. The bill seeks to unbundle the distribution network and electricity sale and supply. It will not only allow customers to choose their power supplier, but also allow market based price discovery. Additionally, it will drastically reduce the overreaching political meddling in the DISCOMs, thus allowing DISCOMs to provide more reliable power to their customers through cost recovery.

Unfortunately, the bill has already garnered stiff resistance from opposition parties and might continue to do so until it is modified to leave loop holes to allow political influence on consumer segment electricity pricing. While Mr Goyal is going to fight hard, unless the proposed amendments in the Electricity Act are approved and enacted, India will continue to grapple with power cuts, and Narendra Modi’s promise of, and India’s desire for, 24×7 power supply shall remain a distant dream.

Thankfully, there is some ray of hope. Non-BJP states are also power hungry and are therefore ready for dialogue with the central government. And, although the proposed amendment to the Electricity Act cannot alone bring relief to the sector – which needs major structural and tariff reforms at the central and state level, and fully independent regulators – it is a step in the right direction and will lay the groundwork for subsequent reforms.

Gayrajan Kohli is Senior Manager – Consulting at BRIDGE TO INDIA

With the formation of the new BJP-led government at the state level 3 months ago, solar power is finally gaining momentum in Maharashtra. Last week, the state government cabinet approved a renewable energy policy with a target of 14,400 MW by 2020. Out of this, 7,500 MW has been earmarked for solar power. The policy document has not yet been released in the public domain but the ambitious targets follow recent bold policy announcements in Telangana, Andhra Pradesh and Jharkhand – all in line with India’s proposed 10.5% solar RPO target by 2022. We expect several other states will follow suit and align their solar policies accordingly.

In the past, Maharashtra was not very supportive of solar. This might change now, with a new policy

The state has the highest power requirements and costs in India. It is ideal for solar

It remains to be seen, if regulators will allow solar to compete freely with the established utilities

A really encouraging feature of the policy is the deemed open access status for renewable projects. This will come as a big relief for developers who are building business models around private sale of renewable power. However, there is still a need to rationalise open access charges. Maharashtra and other states should take a cue from Karnataka, which has waived off almost all open access charges for solar for at least 10 years. A similar policy in Maharashtra can bring in a lot of new investments into solar and help reduce power costs for industries in the state.

On paper, India’s most industrialised state, Maharashtra, has enormous potential for solar: it requires more power than any other Indian state, tariffs for industrial and commercial consumers are the highest in India (exceeding the cost of solar power), and there is plenty of land and sunshine. It’s power distribution companies are also relatively better off than those of most other Indian states.

So far, however, it has been a dark spot on India’s solar map. Regulators have been dragging their feet on renewable purchase obligation (RPO) targets. Capacity addition has largely been limited to state utilities (one 150 MW project stands out), with little private sector participation. There have been restrictions on granting open-access permissions in the past, power customers’ ability to buy power from private suppliers has been curtailed and conditions for banking of power, which is essential for renewable sources, have been very discouraging for IPPs. The previous government let the local distribution company protect its vested interests and block growth of renewables. This might now change.

BRIDGE TO INDIA supports the principle of fair compensation to utilities for using their infrastructure. However, using the pretext of losing customers, state utilities and regulators like those in Maharashtra and even Gujarat have blocked open access and prevented their power customers from procuring solar power using the grid. Policy makers have not yet intervened to stop this practice. It is not the job of regulators to protect utility monopolies.

From 2010 to 2013, solar costs have come down dramatically. For the past two years, experts had been saying that solar prices would remain stable. However, at least in India, cost reduction, while slowing, has not halted. Project implementation costs have fallen by almost 10% in 2013 and another 12% in 2014. While module costs have fallen by roughly 10%, a similar, if not higher, cost reduction has come from inverters, mounting structures and other BOS.

There are murmurs that Chinese suppliers may have asked for renegotiations with Indian developers because of the increased demand from within China

Supply capability of prominent mounting structure manufacturers and inverter assembly companies is limited and a spike in demand may lead to increase in costs

With increased demand, input costs may rise in the domestic market in the short term

Globally, solar installations have been growing at an impressive pace. A large share of growth has come from China, which is also the world’s largest solar modules supplier. On the modules side, global factors contribute more to the final cost of solar modules in India than what happens in the country itself. On one hand, there are murmurs that Chinese suppliers may have asked for renegotiations with Indian developers because of the increased demand from within China. On the other hand, polysilicon costs have fallen dramatically this year. The module costs can go anywhere from here. Most analysts have given a flat outlook for module costs.

Inverter costs in India are amongst the lowest globally. This has primarily been driven by local assembly and by intense competition. However, the local assembly capacity is limited. If the Indian market suddenly starts growing at 4-5 GW a year, up from the 1 GW in 2014, the existing capacity might not be able to ramp up that quickly. This would necessitate fully assembled imports that are more expensive, leading to an increase in inverter costs.

Falling cost for module mounting structures has been one of the biggest contributor to the fall in project cost. They have fallen by almost 60% in the past 4-5 years. The manufacturing of structures is a fairly consolidated market with the top five companies in India controlling 80% of the market share. These players have a cumulative capacity of 2,300 MW per year. This might seem like a solid base for future growth. However, the demand in India is cyclical and driven by policies. Timely deliveries for the entire 2,300 MW will already be an issue, leave alone catering to a 4,000-5,000 MW market. The costs for mounting structures can also go up if there is a spike in capacity addition. However, this increase will be short lived as companies can start buying parts of the structure from other steel fabricators.

Until now, tariff based bids have been very competitive. Far fewer projects have been allocated as compared to the development appetite of the private sector. This year, the central government wants to allocate 10 GW of capacity. Over and above that, Uttar Pradesh, Tamil Nadu, Karnataka, Maharashtra and other states have or might bring their own capacities. Tamil Nadu is signing PPAs at an attractive tariff of INR 7.01/kWh. With so much capacity up for grabs, the bids might not be as competitive as they have been in the past, where developers had to make do with sub-optimal returns. Margins along the value chain might recover. This, coupled with any increase in input costs might push the solar tariffs up, at least in the short term. In the medium to long term, the cost trend continues to be downward.

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

Last week, India’s Ministry of New and Renewable Energy (MNRE) released a new policy designed to encourage unemployed youths and farmers to install renewable energy plants (refer). The idea is to increase employment as well as power generation. The government has set a very ambitious target of installing 20 GW of solar capacity through this scheme. 40 GW more is supposed to come from utility scale plants and another 40 GW from rooftop plants. To put these numbers in perspective, India’s current solar capacity stands at 4 GW.

BRIDGE TO INDIA feels that the policy will be difficult to implement

It seems improbable that many unemployed youths or farmers will be able to raise capital for this

Commercial banks will also be wary of providing any financing to applicants with little or no solar experience on a non-recourse basis

The core driver of the policy is a grant from the central government of INR 5 million per MW, initially for a total capacity of 9,500 MW. It is not clear how MNRE will fund this aggregate grant of INR 47.5 billion. Each project is to be 0.5-5.0 MW in size. These projects will be split between states based on their Renewable Purchase Obligations (RPOs) (see table below). The scheme is proposed to run for seven years to achieve the overall target of 20 GW. Apart from solar, this policy is open for other renewable sources such as wind, small hydro and biomass.

The Proposed state-wise allocation is as follows:

The MNRE has written to the states for formal acceptance of the allotted capacity. If any state government does not wish to participate in the scheme, its capacity will be distributed between other states.

The state governments will be responsible for identifying the beneficiaries, setting up tariff structure for power purchase agreements (PPAs) and providing basic training to the beneficiaries (the cost will be borne by the central government) for running the solar projects.

The beneficiaries are required to hold a majority stake in the projects and will be allowed to bring in partners for up to 49% of the equity. Apart from the central assistance, state governments are free to provide additional financial incentives in the form of capital subsidy or interest rate subvention. This might well be needed.

Can the policy fly? We have serious concerns. Firstly: how will an unemployed youth or farmer find money to invest – equity requirement in the projects is expected to be around INR 20 m/MW (assuming a debt to equity ratio of 30:70). After adjusting for the central incentive of INR 5 m/MW and possible infusion from partners, beneficiaries will still have to arrange for roughly INR 5 m/MW. It seems improbable that many unemployed youths or farmers will be able to raise that kind of capital. Additionally, commercial banks will also be wary of providing any financing to applicants with little or no solar experience on a non-recourse basis.

The second key question revolves around off-take. The cost of generation and finance for small -scale plants will be substantially higher than that for larger developers. To make such projects viable, DISCOMs will have to offer tariffs of around INR 6.50-7.00/kWh. Given that many of the DISCOMs are in very bad financial health, their enthusiasm will likely be limited.

BRIDGE TO INDIA is of the opinion that this scheme is fundamentally flawed and will be difficult to implement. The government is trying to mix two very different policy goals – more employment and more power – in a very unimaginative manner and it will fall short on both accounts. It would be better to invest more into building the technical skills India’s young need to make the overall solar story a success. If India’s solar market will continue to grow as fast as it currently does, it will provide plenty of new employment opportunity.