Month: October 2015

Ahead of the COP-21 meeting of the United Nations Framework Convention on Climate Change (UNFCC) in Paris, India is expected to float a grouping of countries called the International Agency for Solar Policy and Application (InSPA), possibly at the ongoing India-Africa Forum Summit (refer).  This solar alliance is known to have a backing of countries such as Australia, New Zealand, China, Brazil and African nations. Being an Indian initiative, the alliance’s secretariat is expected to be set up within India.

India wants to position itself as a key global solar market as against been seen as just another emerging solar market

Renewable energy makes so much sense for India that the country needs to start taking a leadership role

The government needs to start taking more responsibility to support the growth of the sector as there are still substantial challenges to be resolved

Amongst its several objectives, the InSPA alliance is pegged as a platform for developing countries to share technologies with each other rather than depending on costly transfer of solar technologies from Europe and the US. However, at least at this stage, the messaging seems more important than the substance of this initiative. India now wants to start positioning itself as a key global solar market and not just another name in the list of emerging solar markets. Over the past months, both Prime Minister Modi and the Minister for Power, Piyush Goyal, have used the phrase ‘renewable energy capital of the world’ to describe India’s future role (refer) in the sector. While one may dismiss that as empty grandiloquence, there is definitely a sense that India has got the most to gain from renewable energy amongst major economies in the world.  The country, therefore, needs to take a leadership role to support the sector growth and address critical challenges in its technological and operational implementation.

But what is India’s credibility as a founding member of the alliance? It is generally seen as a laggard in the sector, way behind the leading markets of Europe, China, US and Japan. It does not have access to any special technology, nor any solar manufacturing capacity of note. On the other hand, it has amongst the highest solar market potential and has a pipeline of 15 GW of solar capacity that is expected to catapult it to the third largest global solar market over the next two years. Moreover, as the country is fiscally constrained, solar sector growth is driven by sustainable factors like commercial parity and growing demand for power. Through various policy measures such as reverse auctions and government owned solar parks, India has been able to bring down the cost of solar power and address some daunting operational challenges. These policy measures mean that India can showcase solar, in particular, to emerging markets and lead the way in sector development.

Going forward, India needs to build expertise in low cost manufacturing, grid-integration of renewables and smart grid management. Coordinating R&D efforts and coming up with a credible technology sharing process can bring measurable benefits for all stakeholders.

Last week, the National Thermal Power Corporation (NTPC) issued two tenders totaling 400 MW (40 projects of 10 MW each) in Telangana under batch two, phase two of National Solar Mission (NSM). 50 MW of this is earmarked for projects using domestically manufactured modules under Domestic Content Requirement (DCR) guidelines. This tender comes on the back of 2,500 MW already allocated by the state government (116 MW commissioned so far) and puts Telangana at the forefront of states in India for solar penetration by 2017. 

With this tender, Telangana’s total solar capacity should touch 2,900 MW

As a result, Telangana could meet 8% of its power requirements from solar by 2017, much ahead of India’s average

This will put regional grid stability to the test and offers a good case for learning

Since their establishment as new states in June 2014, Telangana as well as the new Andhra Pradesh have been very aggressively supporting solar. In September 2014, Telangana started by allocating 500 MW of solar projects. This was followed by a recent bidding for 2,000 MW. Now, these new tenders of 400 MW in the state will take the project pipeline in the state to around 2,900 MW. Andhra Pradesh has an almost equally impressive solar pipeline of 2,720 MW. 

Solar is an attractive option for Telangana because of its high peak power deficit. The peak power requirement and deficit in FY 2015-16 is expected to be 8,223 MW and 1,650 MW respectively. Solar power could help in meeting a part of the deficit, but it will pose a challenge for grid management. With the current project pipeline, by 2017, solar power could contribute over 8% of the state’s total power requirements and over 40% of its power during peak solar power generation. This would take the state way beyond the newly proposed RPO targets under the draft National Tariff Policy amendments (refer). It would be much ahead of India’s average and even higher than what is currently seen in Europe, US and China. With their limited integration with the northern grid, the southern states, including Telangana and Andhra Pradesh, will become a test bed for grid balancing and management. As a pioneer, the region can provide useful lessons for India’s overall solar ramp-up (the target being 10.5% by 2022).

While the state has wisely opted to distribute projects rather than concentrating them in a few solar parks, we expect to see bottlenecks in acquiring land near suitable evacuation points.

As we move closer towards the Paris climate talks, something interesting is happening. Ever more stakeholders seem to be ready to be part of the solution. Negotiations that were earlier bogged-down in zero-sum confrontations suddenly have a new fluidity and a ring of can-do optimism about them. Why? …Actually, the new question seems to be: “Why not?” Creating a low carbon world is seen less as a burden and more as an opportunity.

In developed economies, we are ready to revamp existing industrial and resource infrastructures. In developing economies, we are realising the incredible opportunity of directly building a low carbon infrastructure. What is clear now is that we have achieved technological as well economic convergence: building a low carbon world is both technologically feasible and economically attractive. In addition, now we finally seem to reach cognitive convergence: recognising that changing now is a smart choice.

We have all the technologies we need to combat climate change: resource efficiency, renewable energies and carbon sequestration. There are, of course, challenges. For example, maintaining grid stability when using large amounts of fluctuating renewable energy sources is tricky. However, these challenges are procedural, not fundamental. They can be addressed and solved as we move along. It is worth remembering, that such a piecemeal approach is the very essence of what we know as progress. We expand the Internet, we conquer space, we improve agriculture, and we speed up communication and movement. Transitioning to a low carbon future is just one more area of progress that is already happening.

Economically, the story is more complicated. On a macro scale, a transition to a low carbon economy is a good choice. The IEA estimates that switching from the current fossil fuel energy system to a low carbon system by 2050 would cost $44 trillion (refer). That sounds like a lot of money. But consider this: it would be less than 1% of global GDP until then and associated efficiency gains would actually make this a positive investment choice. This is without taking into consideration the economic benefits of not having climate change – which are certainly very, very large but difficult to reliably predict (refer). What is clearly lacking is a global political solution such as the Montreal Protocol provided for Ozone Layer depleting gases in 1987.

Without a political framework that offers a long-term approach and puts a price on externalities, the economic case for low carbon solutions was too weak in the past. The returns were not attractive enough for consumers and investors to accelerate the required transition. Governments stepped in with technology-targeted subsidies (e.g. for renewables). They also tried to price carbon (through cap-and-trade systems or taxation). The results seemed disappointing: these efforts did not alter the global emissions trajectory. However, at a second glance, the results were actually very good: governments created sufficiently large (albeit niche) low carbon markets to help reduce the cost of technologies rapidly.

As a result, politics now matters far less. We are reaching economic convergence at the micro-level. Falling low carbon technology costs (they are falling much faster and, more importantly, more predictably than those of fossil fuels), now make investing into an energy transition an attractive choice for investors, companies, consumers and countries alike – just based on the economics and strategy of energy and resource use, leaving aside climate or even local pollution externalities.

That is very big news. It is the opportunity of a lifetime. Now the question is: how to make this known and understood as rapidly as possible? This is the last required convergence – the cognitive convergence: an understanding that low carbon solutions are not only needed from a global survival point of view, but offer immediate, tangible and specifically attributable benefits to those deploying them. This sets in motion a cultural shift. To accelerate it we need to unlearn old “truths” and open up to new possibilities. Our path dependencies are mental more than structural. Companies (and countries) that are heavily invested into the high carbon economy might not be able to change fast enough. New players will emerge.

Here are three examples of how this cognitive convergence is already happening, from the point of view of a country, a company and investors/consumers:

India has long held the view that it needs an unrestricted right to emit in order to develop, and that it has a moral right to do so because of its low per capita and historical emissions. Any attempt to reduce emissions was seen as a cost that would delay the economic advancement of its overwhelmingly poor population.

This position is now changing: India is turning into a constructive partner at global climate negotiations with ambitious Intended Nationally Determined Contributions (INDCs) for greenhouse gas reduction (refer). The country commits itself to reducing the carbon intensity of its GDP by 33-35% by 2030 (against the 2005 levels). A key lever to achieving this is to shift towards 40% clean energy sources, including as much as 250 GW of solar power and improved energy efficiency.

India’s main goal is not to stop climate change (despite the fact that it is one of the most vulnerable countries to the effects of climate change). It is shifting to a low carbon economy because it makes economic sense. With rising energy demand and few viable supply options, energy efficiency and competitive solar power are very sensible choices. The fact that such a strategy also reduces local pollution and global emissions is welcome and can be used on the international stage, but it is not the driver behind it. The same can be said of the recent shift in Chinese and US climate positions.

Now, look at a company: the German industrial conglomerate Siemens. Its CEO Joe Kaeser has recently announced that “taking [climate] action is not just prudent – it’s profitable” (refer). The company declared that it will become carbon neutral by 2030 (relating to emissions directly linked to own economic activities, equivalent to 2.2 million metric tons of carbon in 2014). It will start by investing $110 million into energy efficiency – with many own technologies. It expects a 5-year payback time, with savings of $20 per annum. In addition, Siemens will invest into distributed energy and buy clean power from the market. Kaeser writes that “the opportunity is clear: We have the technologies, we have the business incentive, and we have the responsibility. Now all we need is the commitment.”

A third example are the choices made by investors and consumers around the world in unsubsidized energy markets: Chinese manufacturers are investing into energy efficiency, Indian businesses are buying into renewable energy plants, German power consumers are spending on solar batteries. These unsibsidised markets are propelled by a global investment community that is beginning to understand the opportunities of low carbon business and the risks around high carbon businesses. Elon Musk, seeking to discupt entire industries with electric cars, solar business models and cheap battery storage, European utilities investing into renewable energy projects around the world, the $900 billion Norwegian Sovereign Wealth Fund divesting from high carbon businesses, Japan’s Softbank investing $20bn into the Indian solar market are just some examples.

As governments, companies, consumers and investors around the world make that cognitove shift and understand the specific benefits of low carbon technologies, there is now a good chance of an urgently needed, accelerated, global energy transition. And the best news is: it will accelerate all by itself.

Mr. Piyush Goyal, Minister for New and Renewable Energy, announced last week that the government plans to waive interstate transmission charges for electricity generated by renewable sources (refer). This waiver was earlier included in the proposed amendments to the country’s existing tariff policy of 2005 (refer), but the amendments are yet to be approved. However, for speedy promotion of renewable energy projects, the central government is actively moving to implement amendments such as the waiver of interstate transmission charges that are under its control.

To meet the 60 GW of utility scale solar target, interstate power transmission is essential and needs to be encouraged.

Waiver of interstate transmission charges will allow developers to install solar projects in states with cheaper land (wasteland) and higher irradiation.

The grid infrastructure will need to be strengthened to evacuate power. Waiver of transmission charges is a positive short term support for the sector but it is more important to make the necessary investment commercially viable for sustainable growth of the sector.

At present, solar projects are usually developed close to consumption centres within the same state. If the interstate transmission charges are waived, greater number of solar projects will be installed in states which are providing better economics to project developers, leading to higher concentration of solar projects in those select states, for example, Rajasthan, Gujarat, Madhya Pradesh, Andhra Pradesh and Telangana. However, these states cannot necessarily absorb the higher capacity of intermittent power in local load centres. The role of interstate transmission of power will thus become crucial as the penetration increases. The incentive in the form of free transmission of power will therefore provide a major boost to the solar sector.

Figure 1: Target of 60 GW utility scale segment by 2022

A good example of the benefit of this waiver will be solar power procurement for the state of Delhi. Land in Delhi is expensive and scarcely available. The power distribution companies of Delhi plan to buy solar power from projects set up in states such as Madhya Pradesh and Rajasthan. Waiver of transmission charges could result in lowering of solar power tariff by up to 10%.

Obviously, free transmission is a positive move for the sector but this policy should be seen only as a short term incentive. The inter-state transmission corridors need massive investment, estimated at INR 430 bn covering the states of Tamil Nadu, Karnataka, Andhra Pradesh, Gujarat, Maharashtra, Rajasthan, Himachal Pradesh and Jammu & Kashmir (refer). This investment needs to be commercially viable to make the long-term prospects of solar energy sustainable.

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While the large solar policy allocations take all the limelight, there are very interesting niche markets developing in India. These markets are typically driven by favourable end-user economics and require less government support. Depending on the quality of the local grid, on the policy support and availability of on-site space, end consumer could go for open access or rooftop solar solution. Rooftop solar is slightly more expensive but it has no grid risk exposure and sizes are constrained by rooftop availability, where as open access is more scalable and cheaper option but comes with the risk of unpredictable grid usage costs.

While open access market is still in an early stage, buying solar from such projects is an increasingly attractive option for India’s power consumers.

India’s first open access solar projects have broken the regulatory ice

These projects can thrive where power tariffs are high, the grid is robust and regulations are favourable

Open access project returns will likely remain at risk from unpredictable grid usage costs

Open access projects are typically set up for power supply to industrial consumers, who pay relatively high tariffs for often erratic power supply from the grid. The concept of open access is enshrined in the Electricity Act 2003, which allows a buyer with a connected load of more than 1 MW to procure power directly from the market through the grid. For using the grid, the power producer (and ultimately, the power consumer) typically has to bear the costs of transmission and distribution losses, as well as wheeling and banking charges.

The rationale behind open access power transactions is to encourage competition in the power market and allow customers to choose among a number of power suppliers rather than just from the local utility.

A variation of the open access model is the captive or group captive model, wherein the power consumer takes a significant share of the ownership of an off-site power generation asset.

Most current open access solar projects are based in Rajasthan, Madhya Pradesh and Andhra Pradesh as these states provide the most favourable regulatory environment. They offer waivers in transmission and wheeling charges as well as exemption from cross subsidy surcharges. States where open access projects does not make sense due to high grid losses and grid instability are Uttar Pradesh, Bihar, Tamil Nadu, Odisha and West Bengal.

Open access projects have so far been mainly developed primarily by mid-size players. Most of these developers are focused geographically only on states where they have easier access to land and have favourable open access policies. For example, Ujaas is developing solar parks exclusively in Madhya Pradesh with more than 100 MW in total capacity. Similarly, Emmvee is focusing on Andhra Pradesh (20 MW capacity), while Rays Power Experts, has projects at multiple locations in Rajasthan such as Baap (10 MW), Kolayat (25 MW) and Gajner (60 MW).

Though the open access market has started to grow, it still faces challenges. The most important is the uncertainty about the future charges for using the grid such as future open access charges and grid losses. These charges are subject to revision every year by the State Electricity Regulatory Commission (SERC). This makes assessing the financial viability of a long term open access solar project difficult and affects the bankability of such projects. In most states, utilities lobby hard with the SERCs to increase open access charges, in order to cut out competition for their most high value consumers who pay the high industrial and commercial tariffs. Another most important risk for open access projects, apart from policy uncertainty, is the PPA default by private customers. A private customer’s inability to consume power and/ or pay for it over a long-term period, of say 15 years, is a substantial risk.

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India has made tremendous strides in the development of its solar sector in last 18 months. As of today, the country has a solar project pipeline of 13 GW. These are projects, for which either PPAs have already been signed or tenders are issued. Most of these projects should be commissioned by the end of 2016 or early 2017.

Southern states are most ambitious and drive solar under their own state solar policies. Telangana, Tamil Nadu, Andhra Pradesh and Karnataka jointly aim for more than 8.8 GW.

Under central allocations (National Solar Mission, Phase II), 3,600 MW are in the pipeline.

2016 will be the market’s transition year: annual solar installations could triple and India could become a top global solar market.

Figure 1: State wise new capacity additions expected, MW, as on September 30, 2015

Seeing the current pace of development, almost 50% of the cumulative solar capacity expected to be installed by 2017 will be in four southern states including, Telangana, Andhra Pradesh, Tamil Nadu and Karnataka, leaving behind Rajasthan and Gujarat.

Southern states are more aggressive because they still have the highest power deficits (in 2014-15, 6-7 per cent of peak deficit and expected to be 19.8% for 2015-16). The crisis is primarily the result of the ongoing slump in fresh thermal capacity addition, a historic dip in hydro reservoir levels feeding southern stations and decline in gas supply. Therefore these states see solar as a viable and attractive option as solar can be built up very rapidly and is driven mostly by private investment.

Other key reason is that the southern grid is connected to the eastern and western regions through asynchronous links, severely limiting the power transfer capacity. The transfer capacity between the western and the southern regions stands at 1,520 MW against 4,220 MW between the western and northern regions and 4,390 MW between the western and eastern regions. Because of this solar has increasingly started playing an important role in these regions and is expected to remain so in next 2-3 years also.

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The recent National Solar Mission (NSM) tenders have been delayed multiple times before and are again delayed now. This pattern of delays is not new.

Only one of the 30 odd bids in India has gone through without significant extensions or delays

Main culprits are process delays by implementation agencies and requests for time extension from developers – these delays affect sector development as many players, particularly the new entrants are not conditioned to respond to the way business is carried out in India

MNRE should play a key role in streamlining the somewhat disorganized tender process so as to improve the ‘ease of doing business’

Out of the approximately 30 solar tenders so far in India, only one has been submitted on the original date mentioned in the bid document – this was the 500 MW tender in Karnataka in June 2014. Other than this, most bids have been delayed by a few months. A bid for a 50 MW tender in Haryana was delayed by as much as five months.

Another cause for concern for the new NSM tenders is the decreasing accessibility under the online tendering process. Earlier, all new tenders were announced in the newspapers, on Ministry of New and Renewable Energy’s (MNRE) website and on the website of the tendering authority like NTPC Vidyut Vyapar Nigam Limited (NVVN) or Solar Energy Corporation of India (SECI). The openly available tenders allowed the media and the market to scrutinize and publicize them for the global audience. Under the new NSM bids released by National Thermal Power Corporation (NTPC), the announcements and the bid documents are only available on a paid portal. This paid portal and its somewhat complicated access procedures are an unnecessary hassle for developers.

With the floodgates on solar capacity allocations now open in India, there is an urgent need to streamline processes. By improving their internal planning and providing advance notice of (more realistic) bidding timelines, the tendering authorities can provide better transparency to the market and minimize delays. MNRE should also focus on improving the ‘ease of doing business’ by for example, developing a special online portal for launching all central and state solar project tenders in one place and possibly, spreading the tenders evenly over time.

We expect such measures to boost confidence in the sector and improve participation particularly from the international developers.