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Is India aiming for 250 GW of solar by 2030?

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The process to substantially alter India’s future energy mix seems to have begun. This is very good news for renewables. Prime Minister Narendra Modi re-iterated India’s current target of installing 175 GW of renewables by 2022 at the United Nations General Assembly last week. This would then be equivalent to almost 20% of India’s power generation. Over and above this, and in the context of India’s Intended Nationally Determined Contributions (INDCs) for the climate negotiations in Paris, the target could be raised to a stunning 250 GW of solar and 100 GW of wind power capacity by 2030, which when added to other renewables would be equivalent to nearly 40% of power from renewables by 2030 (refer).

Successfully implementing such targets would mean decades of growth for the solar sector

The underlying premise of these ambitions is the belief that storage and smart grid technology will become economical and ready for implementation over the next five years

India needs to start thinking about storage technology for large scale integration of renewables and possibly even using storage to leapfrog grid investments for rural electrification

Key countries and blocks such as the US, EU and China have already published their INDCs and the world is now waiting for India to declare its position. A target of 40% renewables by 2030, and the corresponding de-carbonisation of India’s growth, would give the negotiations momentum and India a very strong position in them. An even bolder step could be to follow the advice of the country’s Chief Economic Advisor, Arvind Subramanian, and drop demands for climate equity in favour of concentrating on a climate solution (refer). This, however, seems unlikely.

These announcements further strengthen the Indian solar story, which is already driven by strong growth in new installations (see our recent India Solar Map for details, refer). Successfully implementing such targets would mean decades of growth for the sector. However, the underlying premise of these ambitions is the belief that storage and smart grid technology will become economical and ready for implementation over the next five years. During his ongoing visit to the US, the Prime Minister visited Tesla and met with corporations such AES to understand the possibility of India using storage technology for large scale integration of renewables and possibly even using storage to leapfrog grid investments for rural electrification.

In a town hall meeting yesterday hosted by Facebook, the Prime Minister used an analogy that the country is not like a scooter than can turn around swiftly but like a train that will turn slowly. This is also true for India’s power sector. Changing the energy mix is a herculean task and the transition will surely be slow. The economic fundamentals for an increased share of renewables are already falling into place and legally binding climate commitments can only help.

Other announcements

Last week, Solar Energy Corporation of India (SECI) announced new allocations for 440 MW in Uttar Pradesh under the Viability Gap Funding (VGF) route. Earlier, two tenders for 500 MW and 100 MW were announced by NTPC in Karnataka. Out of this, the 100 MW tender has a domestic content requirement. The total capacity of open state and central tenders in India now stands at 5,320 MW in addition to total capacity under execution of 8,707 MW.

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High cost of solar parks diluting policy objectives

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On paper, the solar parks policy is excellent. It tackles the two major issues of land acquisition and evacuation, reducing developer risk. In theory, this should bring down the cost of solar power. However, after seeing the costs released for the recently announced solar parks in Andhra Pradesh, Rajasthan, Gujarat and Karnataka, most developers are of the opinion that they could have quoted lower tariffs had they been allowed to bid for projects outside the park. Now, this is despite the fact the states are receiving a substantial central grant of 50% (or up to INR 2 million per MW) for developing this park infrastructure.

High charges for solar parks can make solar power more expensive by between INR 0.16/kWh – INR 0.36/kWh

Cost of leasing land inside the park is turning out to be more expensive that buying the land outright and creating own evacuation infrastructure

The policy itself is useful but the key reason behind this failure is inefficiencies in implementation and the Solar Park Implementation Agencies (SPIA) structure

The concept is that a Solar Park Implementation Agency (SPIA) in each state is responsible for land acquisition and infrastructure development, including evacuation. Developers are then expected to invest into and develop individual solar projects on top of the solar parks infrastructure.

BRIDGE TO INDIA analysis shows that the recently announced solar park charges by the various SPIAs will end up being counterproductive to the objective of reducing costs.

The charges announced for solar parks are high as compared to the stand-alone cost for developers to acquiring land and arrange evacuation infrastructure themselves within the same state. Ideally, the solar park lease should be cheaper but it is not.

Fig. 1: Increase in cost of solar power for projects installed inside the park vis-à-vis outside (INR/kWh)

Based on BRIDGE TO INDIA calculations based on applicable costs in the state. Project cost and return expectation has been assumed same for project being executed inside and outside the solar park

The purpose of creating solar parks is being defeated with such high charges. It does not make sense that the cost of leased land and common evacuation infrastructure with central government subsidy is turning out to be higher than the cost for private land acquisition and individual evacuation infrastructure. There is clearly huge inefficiencies that are getting built into the process. One possible solution to this could be perhaps to bid out execution of solar parks to private entities.

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Table 1: Applicable solar park charges (as on 21st September 2015)

Various state IPAs

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First NSM bid under the new government oversubscribed by over 10x

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Bids were submitted last week for 10×50 MW of solar PV projects under the new phase of National Solar Mission (NSM) in Andhra Pradesh. This is the first round of NSM bids since the new government took office in May 2014. This is also the first time that bids have been called for projects to be set up in solar parks being developed under the new Solar Parks Policy. A total of 30 developers have submitted valid bids totaling 5.5 GW.

Six developers including SunEdison, Adani, Rattan India, Reliance, SoftBank and Energon have bid for the entire 500 MW capacity;

Prominent new entrants include SoftBank, Trina Solar, Enel, Energon, Solar Arise, Suzlon and Greenko;

Industry murmurs suggest very aggressive tariffs that can even fall below INR 5/kWh but we remain skeptical in view of high solar park infrastructure costs;

Existing prominent developers that have participated include Acme, Azure, SunEdison, Adani, Reliance, Tata Power, Renew, Welspun, SkyPower and SolaireDirect.  Renew, Tata Power, Shapoorji Pallonji, Azure and Orange Renewables have all bid for capacities of 200 MW or more. A bid by a Scottish developer, Dundee Power, has been disqualified due to incomplete documentation.

At this stage of the tender, initial bids have been submitted independently by each developer. Based on the conditions set out in the tender, 28 developers are now expected to move on to the second round of open online bids. At that stage, developers will be able to see their relative position and bid successively until no further bid revisions are received from any of the developers. No date has been fixed yet for online bidding but it is expected to take place a month from now. This is the first time an online open bidding will take place in the Indian solar market. If similar bids in India for telecom spectrum and coal mine allocation are any indicator, this mechanism will lead to a further intensification of competition.

Going by the interest in this allocation process, there seems to be no let-up in competition. In fact, our discussions with market participants suggest that the next round of NSM projects in Rajasthan for 420 MW will get considerably higher interest. At last count known to BRIDGE TO INDIA, over 80 developers had shown interest in participating in the Rajasthan allocation. The relatively lower interest in Andhra Pradesh has been attributed to high cost of lease for the solar park and the lack of clarity on the park’s progress.

It is clear that the appetite per developer has also increased considerably. Analysis by BRIDGE TO INDIA shows that the capacity of projects under execution for top 15 developers in the country is almost four times the capacity of already executed projects by these developers. Developers such as Acme, Adani, Renew and SunEdison already have a pipelines exceeding 500 MW each and they have all bid for significant capacities under this round. It is likely that they will continue to bid for significant capacities under several upcoming allocations.

With the recent state policy bids in Madhya Pradesh, Telangana and even Punjab, tariffs have already come down considerably. In the past, we have noted that bids under NSM are typically more aggressive in terms of return expectations than those at the state level primarily due to better bankability of the off-taker, NTPC in this case. There have been industry murmurs suggesting that the current batch of NSM projects may see tariffs fall below INR 5/kWh. While we believe that would be very aggressive, recent bidding in Punjab, a state with relatively lower irradiation and higher cost of land, was an eye-opener with tariffs in the range of INR 5.09/kWh –INR 5.98/kWh.

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Energiewende “Made in India”

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India currently consumes over 1,000 TWh of electricity a year, making it just about the world’s third largest power consumer. More than 60% of this electricity is produced from coal-fired power plants.

On a per capita basis, however, India’s power consumption is still very low, at less than 800 kWh per year (compared to China’s 3,500 kWh or the USA’s 13,000). As India’s population continues to grow and is set to overtake China’s in the mid 2020s, and as the country is planning for rapid growth and development through industrialisation, electricity consumption will rise fast. Predictions vary and detailed scenarios are not available, but growing the overall power supply by a factor of 3-5 in the next 20 years is probably required. Doing that with coal power plants would almost certainly push the world beyond the 2 degree climate target.

But what kind of electricity system will India build? Will it be an extension of the current system, dominated by coal? Or can the backbone of India’s future electricity mix be solar (the most likely alternative)? Can India transition its electricity system?

Currently, the government in India follows an “all of the above” strategy: there is significant investment into renewables (especially solar). At the same time, the need to increase coal-fired power generation has been repeatedly stressed.

And indeed, it is difficult to see how renewables could replace coal in India anytime soon, given the energy demand. Take solar as an example: Today, solar still makes up less than 1% of the country’s power supply (4.5 GW of capacity). Even if the government’s ambitious target of 100 GW is achieved, this percentage will rise to only around 10% by 2022.

For solar to contribute more than 50% to India’s power mix in 15 years time, the required solar capacity would have to be more than 1,000 GW. That is five times the total global installed capacity today. Germany and China, the world’s leading markets are below 40 GW.

Most projections (by e.g. IEA, BP, the Indian government), therefore, assume that coal will continue to provide more than 50% of India’s future electricity mix – despite the rapid growth of renewables.

However, working in India over the last years has made me believe that a change in India’s electricity mix could be much more transformative and that a 50% plus solar mix is feasible. There are a number of reasons, why I think this is the case:

If the current growth rate of solar in India (more than 40% on average over the last 5 years) can be sustained for more than ten years, a rapid energy transition is likely. It could be more difficult to achieve the 100 GW target in 2022 than reaching 1,000 GW in 15 years.

New solar and new wind is cost competitive with new coal for utilities already today. Distributed solar is cost competitive with grid tariffs for many industrial and commercial customers. It seems reasonable to assume that the cost of solar will fall further as it is deployed more, making it more and more attractive in the future.

There are persistent and deep-rooted infrastructural and political challenges around ramping up coal power generation (the same is true for hydro, gas and nuclear). Solar, on the other hand, can be built quickly, at different sizes, in a modular manner and in many locations. Solar irradiation is high throughout the entire country.

In India, investment into renewables (especially solar) is already outpacing investment into thermal power. Investors are concerned about stranded assets in thermal power. International investment is flowing into renewables at unprecedented rates (e.g. Softbank at $20 bn). There is hardly any international investment interest in thermal power generation in India.

Given that the Indian government has so far failed to provide reliable power to large sections of its industry and people, a significant part of the country’s energy transition might be driven by consumers rather than policies and infrastructure investment. (Currently India already has more than 60 GW of installed diesel gen-set capacity.)

Externalities of coal-fired power generation are coming into focus: Urban and regional air pollution levels in India are among the world’s highest (for PM 2.5). The social damage associated with coal mining is causing unrest. The high water usage of coal-plants is a growing concern. It is unclear how long India can avoid accepting limitations on its carbon emissions. This threatens the pubic and, therefore, political acceptance of coal (licence to operate) and could increase the cost of coal power.

There are some key challenges, however, that need to be addressed to enable a transition of the electricity system in India. These include:

The infirm nature of wind and solar: Above a certain percentage (at substation level; perhaps between 10-20% penetration) infirm renewable power will significantly drive up infrastructure cost and affect wholesale power prices. The main solution for this challenge is electricity storage. This might be applied at the grid level, at the project level or at the consumer level. While the cost of electrical storage is falling fast, at present deployment of e.g. Lithium-Ion batteries is still negligible. Demand side management, time of day charges, etc. would also help.

Land usage: Building 1,000 GW of solar would require approximately 0.3% of India’s land. There are significant legal, procedural bottlenecks around acquiring land and there are potential conflicts with other land usage.

Financing: 1,000 GW of solar would cost around $ 500 bn, around a quarter of India’s nominal annual GDP.

Utilities have little incentive to support an energy transition that threatens their current assets and market position. In many Indian states, they resist the spread of renewables and new market entrants.

New skills, new data, new regulations and laws are needed for a new type of electricity system. This is primarily a question of institutional willingness and capacity. Currently, India is far from having an institutional ecosystem that is able to actively support or manage a more complex electricity system.

Can India transition to a solar-based electricity system by 2030? Yes, I think so. And doing so will be the opportunity of a lifetime for India’s economy, India’s power consumers, energy companies in India and abroad and for the global climate.

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India’s burgeoning solar pipeline defies sceptics

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India’s utility scale solar project pipeline is growing rapidly, bringing the government’s ambitious solar goals closer. The installed capacity stands at 4.4 GW and projects under development and allocation stand at an additional 10.9 GW. The pipeline number is expected to swell further as new tenders are released. Accounting for policy uncertainties and delays, these developments can place India solidly in the 4-6 GW a year capacity additions range between 2016 and 2019, while leaving room for a potential upside. While the market might still fall short of the 60 GW target for utility scale projects, this market growth would make India a key global market over the next few years. Depending on the performance of the Japanese market, India could become the third or the fourth largest solar market in the world.

The Government has recently issued a notification removing the power generated by more than 25 year old NTPC plants from the existing PPAs, opening an important source of unbundled power

Tenders for project development and EPC issued by SECI and NTPC add up to 3.9 GW, and several new tenders are expected

Projects adding up to 7 GW are either under development, have been allocated or are under allocation at state level; several new allocations are being planned.

Based on recent announcements, it seems that the public sector company National Thermal Power Corporation (NTPC) is going to play an increasingly important role in helping India achieve its targets. In its last earnings conference call towards the end of August, NTPC announced that it wants to develop 15 GW of solar by 2019 (refer). The Government has recently issued a notification removing the power generated by more than 25-year-old NTPC plants from the existing PPAs. This power can now be bundled with the solar power generated by the NTPC and will be sold at a bundled rate. This is an important development from the solar market perspective. The company has already started work on a 250 MW project and has published EPC tenders for an additional 1,260 MW. Based on the availability of solar parks, more tenders can be expected soon.

In parallel, NTPC is also allocating projects to private developers under the National Solar Mission (NSM). Initially, it plans to help allocate 3 GW. Of this, tenders for 1,750 MW have already been announced. Additional tenders are expected over the next few months. A tender for 1,000 MW from this bucket is expected to be for a dollar denominated bid.

At the same time, the Solar Energy Corporation of India (SECI) has been tasked with allocating another 2 GW to private developers. Of this, tenders for 750 MW have been announced (refer) and more tenders across different states are expected soon. SECI has also been given the mandate to develop its own projects and support other PSUs with their developments. It is already developing a 750 MW project in Madhya Pradesh.

Projects under development, recently concluded allocations and ongoing allocations at the state level add up to 7 GW. The new allocations from this are spread across states such as Punjab (500 MW), Haryana (150 MW), Bihar (150 MW), Tamil Nadu (1,240 MW), Telangana (2,000 MW) and Madhya Pradesh (300 MW). More state level tenders are coming up in Maharashtra, Karnataka, Gujarat and Uttar Pradesh.

With the closing gap between tariffs for power from green field thermal, wind and solar projects, the demand for new solar projects in India is here to stay. The government backed procurement of power is already augmented by captive consumption or business-to-business sale of power. According to BRIDGE TO INDIA research, a capacity of 300 MW of solar has already been commissioned for private consumption through open access.

With the growth of utility scale solar more or less secured for the next few years, the active interest from global suppliers, developers and investors seems justified. However, the Indian market remains complex and we need to be mindful of remaining challenges, especially the low project margins.

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