Month: November 2015

Telangana successfully completed auction for 2,000 MW of grid connected, ground mounted solar projects in India in August 2015 and PPAs were expected to be signed by October 2015 (refer). However, there has been a considerable delay in signing these PPAs. The process appears to be stuck at senior levels in the state government purportedly because the subsequent auction processes completed by Punjab and NTPC (500 MW under National Solar Mission) received record low tariffs of INR 5.09 and 4.63/kWh respectively.

Out of 1 GW of projects allocated under state policies in the past two years, nearly 40% of capacity is either significantly delayed or cancelled for various reasons

Policy certainty and delays in state government solar initiatives are a major concern for the Indian solar industry

Such delays and uncertainties are a huge setback to private sector confidence, especially affecting the plans of foreign investors and suppliers

Telangana’s 2000 MW bid was the single largest allocation in the country till date. Bids were received for almost 5,000 MW from 101 developers with successful bids falling in the range of INR 5.17 – 5.88/kWh. It is relevant to note that since then, auctions have been completed by Punjab (lowest tariff of INR 5.09 kWh) and NTPC (INR 4.63/kWh) at lower tariffs (refer1, refer 2).

We have seen similar instances in past when the state governments either refused to sign PPAs after the bid results were announced or they retrospectively changed allocation criteria to suit their requirements. In March 2014, Chhattisgarh asked developers to match the L1 bid retrospectively leading Welspun to withdraw from a 28 MW project that it had won fairly under the state’s 100 MW tender. In Tamil Nadu, the state power generation company TANGEDCO signed PPAs for 708 MW in 2014 (refer) but the state electricity regulator (TNERC) cancelled all projects on the grounds that the bid tariffs were not pre-approved by it.

While private developers face the brunt of such policy flip-flops, some developers exploit these uncertainties by bidding aggressively and deliberately delaying project implementation to benefit from falling equipment prices. This, of course, does not augur well for the industry particularly as international investors expect a transparent and level playing field. Some of the international equipment suppliers and those planning manufacturing facilities for the Indian market may also be forced to reconsider their plans because of such uncertainties.

As per BRIDGE TO INDIA analysis, out of 1 GW of projects allocated under state policies in the past two years, nearly 40% of the capacity is either significantly delayed or cancelled for various reasons. As of today, solar projects pipeline under state policies in India stands at about 10 GW (refer). But if past track record is any indicator, it is highly likely that only about 60% of this capacity will be completed on time.

Given that state policy projects are expected to contribute the bulk of 60 GW utility scale solar capacity target for 2022, it is increasingly imperative to improve and enforce the policy framework at state level.

Around this time last year, India announced its ambitious target to install 100 GW of solar by 2022 (refer). This target was then officially adopted by the Indian cabinet in June 2015 (refer). It is a good time to take stock and assess progress towards this target.

Investment appetite, particularly from international investors, in the sector has increased substantially

There has been considerable activity on operational front including policy formulation, project tenders and solar park development combined with rapid fall in the cost of solar power. But intense competition raises doubts on sustainability of new found price points

Distributed solar still lagging as there is relatively lower policy support and market momentum behind it

Following the announcement of 100 GW target, the government received (non-binding) investment commitments of over 171 GW for solar project development from over 50 developers (refer). International developers such as ENEL Green Power, ENGIE, FRV and Sembcorp have also announced their entry into India with significant acquisitions or project development plans. In October 2015, we saw Sany Group, China, announcing plans to invest USD 3 billion in Indian by 2020, Chint Group, China, announcing plans to invest USD 2 billion by 2020 and SoftBank/Foxconn/Bharti joint venture signing its first USD 2 billion memorandum of understanding in Andhra Pradesh for 3 GW of solar as a part of its overall plan to invest into 20 GW of solar projects (refer). During Prime Minister Modi’s recent visit to the UK, a large European project developer, Lightsource, signed a memorandum to develop 3 GW of solar capacity in the country. Last week, China’s Trina Solar signed an agreement with the government of Andhra Pradesh to invest INR 28 billion (USD 420 million). Moreover, there are several manufacturing capacities being planned by Adani Group, JA Solar, Hanwha and Q CELLS amongst others.

The critical question now is – how many of these commitments will actually fructify? India is a very competitive market and aggressiveness of the ongoing bids will determine whether or not many of these commitments materialise. The new competitive bidding process that led to tariffs falling to INR 4.63/kWh will probably mean that many of these new players will continue to look at the market from the sidelines and hope for the competition to ease before they put down their money. While India offers a very large attractive market to solar developers and manufacturers, intense competition is driving pricing down and making the risk-reward unfavourable for them.

The government on its part has taken up several policy measures over the last one year to support the sector.  Amendment to the Electricity Act proposes to increase the RPO target to 10.5%, amendment to the National Tariff Policy is expected to make it easier for states to reflect the RPO cost in consumer tariffs, interstate transmission charges are being waived off and states have been advised to lower intra-state open access charges, REC pricing regime has been re-worked to make it more realistic, solar parks policy is in place and a similar solar zones policy is in the works, most states have been convinced to announce net-metering policies and subsidy for rooftop solar expected to be re-instated. Central and state government led project allocations have now gathered pace. The total pipeline of yet to be commissioned projects that have been allocated or are in the process of being allocated now exceeds 14 GW. The government expects these projects to be commissioned over the next two years. More allocations are on the horizon.

Overall, at least for the utility scale target of 60 GW, the market perception has been evolving. Although still very ambitious, in just one year, the targets seem more reasonable that they did when they were originally announced. However, relatively little movement in the rooftop solar market still casts serious aspersions on that part of the target.

Earlier this month, India’s minister for new and renewable energy, Piyush Goyal, announced that the country’s rooftop solar policy is now ready to be placed before the union cabinet (refer). This policy is expected to lay out yearly targets to reach 40 GW of rooftop solar capacity and provide comprehensive details of operational and fiscal support for the rooftop solar market.

The Indian rooftop solar market grew 66% in the last 12 months despite the lack of any specific rooftop solar policy initiatives

The new rooftop policy is likely to consolidate and detail out already known aspects such as yearly targets, changes in capital subsidy scheme and schemes for low cost financing

If the new policy does not introduce mandatory rooftop solar installations for buildings, the policy release will likely be a non-event

There is no draft policy document in the public domain but we believe that the new policy will consolidate and bring all disparate fiscal and operational support measures for the market under one comprehensive framework including for example, steep expansion in yearly targets (refer), 15% capital subsidy for residential consumers and public buildings (refer) and low cost financing using funds from international developmental banks (refer). Other concessional benefits such as zero import duties on equipment and accelerated depreciation benefits (available until March, 2017) are likely to continue.

In the last one year (November 2014 – October 2015), India added 240 MW of rooftop solar capacity against 145 MW in the same period before this – a growth of 66% despite a largely non-functional rooftop specific policy framework.

It is not possible to underpin the 40 GW rooftop target on fiscal support measures such as subsidies, feed-in-tariffs or generation based incentives. The role of rooftop policy in our view should be to accelerate adoption rates by enabling various technical and operational measures as the market has extremely strong fundamentals with increasing commercial attractiveness vs. grid power.

When the cabinet passed the 100 GW target in June 2015, the Cabinet note mentioned several possible initiatives such as implementing mandatory rooftop installations for private power consumers. The note also mentioned making net-metering compulsory by incorporating measures in the Integrated Power Development Scheme (IPDS) (refer).

Further action on compulsory net-metering by power distribution companies and mandates on building owners to install rooftop solar can provide a significant fillip to the market. Given that most of the other initiatives have already been announced, if the rooftop solar policy fails to elaborate on such new measures, its release will largely be a non-event.

Last week, the government unveiled its Ujwal DISCOM Assurance Yojana (UDAY), a scheme intended to find a permanent solution to the financial mess facing the power distribution companies (DISCOMs) in the country. The key planks of the scheme are getting state governments to assume 75% of total debt obligations of their respective DISCOMs and getting banks to reduce interest rates on the remaining DISCOM debt.

A successful revival of the power distribution sector is vital for the success of Indian power sector and it is important to learn lessons from the failure of many similar restructuring packages announced in the past, most recent being central government’s financial restructuring package (FRP) in 2013.

DISCOMs can only return to profitability if serious tariff reforms are taken up along with the measures suggested in the package

In an encouraging move, the central government has linked availability of various central government funds such as Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY) and Integrated Power Development Scheme (IPDS) to the successful implementation of UDAY

A significant part of the 270 GW of power generation capacity in India lies unutilized because DISCOMs refuse to procure power that they are forced to sell at a loss.  IPPs are crippled by reduced offtake and payment delays of as long as 12 months. In turn, the national banks are staring at huge potential debt write-downs affecting the health of the national banking sector.  DISCOM financial health is critical not only for the proper functioning of the power sector but for wider health of the economy including success of the ‘Make in India’ campaign.

Asking states to assume bulk of DISCOM debt will reduce the DISCOM financial burden. More importantly, it will force states to directly bear the cost of DISCOMs operating inefficiencies and tariff subsidies.  The scheme will therefore hopefully significantly alter the behavior of state governments going forward and improve political will for DISCOM reforms.

However, serious discussion on tariff reforms seems to be largely missing from the package due to political considerations. Tariff reforms should allow DISCOMs to charge prices that reflect cost of delivery, including a return on capital. If this is not done, DISCOMs will always stay in a poor financial state. If the states are unwilling to swallow this bitter pill, this scheme will fail like the previous restructuring package announced in 2013. It is therefore encouraging to see that the central government has linked availability of various central government funding programs to successful implementation of UDAY. Also, participating states will be provided with additional coal supplies and low cost power from NTPC and other central public sector generators. It remains to be seen where these measures will have sufficient ‘pull factor’ for the states.

Poor DISCOM financial health has serious ramifications for continued growth of the solar sector. The economic case for solar power is becoming stronger by the day but offtake concerns can imperil the solar sector in much the same way as they have for the thermal power sector. A successful revival of the power distribution sector and tariff reforms will immensely benefit both utility scale and rooftop solar.

First round bid results have been released today for the 500 MW National Solar Mission (NSM) tender in Andhra Pradesh. Bids were submitted for over 5.5 GW by 30 developers with tariffs ranging between INR 5.21/kWh and INR 6.45/kWh. 28 developers have been selected to move to the second round of electronic bidding and the highest qualifying bid to move into the second round stands at INR 6.01/kWh.

The winning bids in the online bidding tomorrow will be INR 5.37/kWh or lower

If there was no requirement for these projects to be inside a solar park, the cost-adjusted maximum tariff could have been INR 5.11/kWh

BRIDGE TO INDIA believes that in view of around 5 GW of projects due for auction in the next 3 months, such aggressive bidding is unlikely to continue

Trina Solar is believed to have quoted the lowest tariff of INR 5.21/kWh, followed by developers such as First Solar at INR 5.35/kWh, SunEdison at INR 5.37/kWh, Energon at INR 5.39/kWh, Renew Power at INR 5.39/kWh, Aditya Birla at INR 5.45/kWh, Essel Green at INR 5.49/kWh and Tata Power at INR 5.49/kWh, all quoting tariffs below INR 5.50/kWh. SoftBank, whose bid has been anticipated for some time now, played relatively safely with a tariff of INR 5.65/kWh. Some of the other prominent bidders who have moved to the second round include Reliance at INR 5.52/kWh, JSW Power at INR 5.71/kWh, Azure at INR 5.73/kWh, Fortum at INR 5.75/kWh, Acme at INR 5.89/kWh, Welspun at INR 5.90/kWh, SkyPower at INR 5.94/kWh and Hero Future Energies at INR 6.01/kWh. Suzlon is one of the two bidders who will not move into the second round of the bid.

With the entire 500 MW getting subscribed by just three bids at and under INR 5.37/kWh, the winning bids tomorrow will definitely close below INR 5.37/kWh. In this second round of bidding tomorrow, bids are likely to go down even further. However, BRIDGE TO INDIA is of the opinion that tariffs below INR 5.25/kWh will move into the realm of being unattractive investments.

There are two schools of thought on how to interpret these tariffs for future guidance. The first is that because Andhra Pradesh solar park has relatively very high solar park charges (refer) and most of the bidders will end up being unsuccessful, future bids in Rajasthan and Karnataka will be even more aggressive, probably breaching the INR 5.00/kWh level. The second school of thought is that the tariffs have already reached unsustainable levels and competition in this tender is higher because this is the first NSM tender after a long time. But as several new tenders are on the anvil, we will see some rationalization of tariffs in the next few months.

We will find out which school of thought is correct in the days to come.