Month: December 2015

Last week, Central Electricity Regulatory Commission (CERC) passed an order for determination of benchmark capital cost for solar PV projects for the financial year 2016-17 (refer). The order estimates capital cost including cost of equipment, construction, land, transmission and pre-operative expenses of solar PV projects for the upcoming financial year at INR 50.1 million/MW (USD 0.76 million). Based on inputs from the industry due by 10th January 2016, final benchmark capital cost and solar tariff is expected to be notified on 31st March 2016.

CERC order shows a capital cost reduction of 17% over the benchmark number for FY 2015-16 (last year decline was 12%)

The industry may ask for an upward revision and a separate benchmark for projects with domestic content requirement

Rapid decline in capital cost shows how difficult it is for the Indian government to move away from bidding and towards fixed feed-in-tariffs

For current year (FY 2015-16), CERC had pegged the benchmark capital cost at INR 58.7 million/MW (USD 0.87 million), subsequently revised to INR 60.6 million (USD 0.92 million) after industry feedback. We believe that an increase based on industry inputs is likely this year as well. Further, the industry is also likely to seek a separate benchmark capital cost for projects using domestic cells and modules because of the substantial cost difference between imported modules and domestically manufactured modules.

Combined with cost reduction of 12% for the current year, the new benchmark amounts to a total reduction of 28% over 2 years.  This may seem a bit drastic but is consistent with the trend observed in bid tariffs over this period. During FY 2014-15, the average tariffs discovered through bids in Andhra Pradesh (500 MW), Telangana (500 MW) and Karnataka (500 MW) were in the range of INR 6.50 – 7.00/kWh. About one and a half years later, new bids are now expected in the range of INR 4.75 – 5.00/kWh.

The drastic cost reduction comes on the back of significant PV capacity addition in China and sharp fall in polysilicon prices. While most experts have been predicting gradual price reduction of 5-7% per annum over the next few years, some industry observers feel that we will continue to see double digit decline in capital cost in the coming year. A decline of this magnitude in capital cost raises two important implications for the sector. First, it is commercially not viable for the Indian government or any other power offtakers to offer fixed feed-in-tariffs. Second, what is the significance of CERC benchmarks? Based on benchmark capital cost for the current year, CERC has defined the solar power tariff at INR 7.01/kWh. But average bid tariffs during the year have come in sharply lower at rates significantly below INR 6/kWh for all allocations since May 2015.

Last week, three e-auctions of solar projects were completed by National Thermal Power Corporation (NTPC). Our summary observations are as below:

Competition continues to be intense with Softbank-Bharti group JV winning 350 MW in Andhra Pradesh at a price of INR 4.63/kWh. Interestingly, despite winning the previous allocation of 500 MW at INR 4.63/kWh, SunEdison didn’t qualify for the second round in this project.

BRIDGE TO INDIA expects tariffs to go down further for upcoming auctions in Rajasthan (420 MW) and Karnataka (600 MW) with some possible upward adjustment in the market thereafter.

Projects with domestic module stipulation see price premium of 11%.

The three auctions completed last week were for the following projects:

A 350 MW solar project in government solar park at Gani-Sakunala, Andhra Pradesh was won by a Softbank-Bharti group JV on PPA basis at a price of INR 4.63/kWh;

3 x 50 MW projects in government solar park at Gani-Sakunala, Andhra Pradesh were won by Azure Power (100 MW) at INR 5.12/kWh and Adani Group (50 MW) at INR 5.13/kWh respectively on PPA basis – these projects had the stipulation of using domestically manufactured cells and modules;

4 x 65 MW projects were won by Vikram Solar (130 MW at INR 56.28 million/MW), Jakson (65 MW at INR 56.34 million/MW) and Tata Power (65 MW at INR 56.40 million/MW) on EPC basis in Bhadla solar park, Rajasthan again using domestically manufactured cells and modules – these projects will be developed and financed by NTPC.

After announcing the 100 GW target, Indian government is walking the talk. Auction process has already been completed for over 10 GW of solar projects and a further 6.5 GW of solar projects are expected to be allocated in the next three months. This frenetic pace of activity is a big step-up in contrast to historic solar capacity addition of approximately 1 GW per annum over last three years.

Despite the huge pipeline, the auctions continue to see intense competition with tariffs coming down sharply. Several developers including Indiabulls, FRV, ReNew, Reliance, Azure Power, Orange Renewables and Acme have shown appetite to win projects at tariffs of less than INR 5/kWh.

While several market participants have expressed concerns at such low tariffs, BRIDGE TO INDIA believes that competition has been particularly intense for these projects as they offered the best risk profile for international developers in India – no land acquisition or transmission connectivity risk combined with possibly the best India off-take risk in the form of NTPC. It is also worth noting that: i) these projects were the first to be auctioned under National Solar Mission after a gap of about two years; and ii) projects have been auctioned in such large sizes for the first time in India providing developers with significant scope to optimize operating costs. Earlier auctions typically had a cap of 50 or 100 MW per developer. Both these factors added further to the intense competition.

BRIDGE TO INDIA expects strong competition to persist for solar park based bidding in Rajasthan (420 MW) and Karnataka (500 MW open and 100 MW DCR) organized by NTPC. These auctions are due in next two months. Indeed, tariffs could go down even below INR 4.63/kWh as solar park charges for these states are lower than that in Andhra Pradesh. Going beyond that, we expect competition to ease slightly for projects tendered by Solar Energy Corporation of India (SECI).

The Paris Agreement on reducing global warming got everyone very excited. The leaders of the world came together and agreed on a deal that arguably helps and has some teeth. That is really good news. However, it’s not enough. And it is a topic too important to leave to politics.

This is where we are: We need to stop global warming to save the planet (cheesy, but true), and we have about 30 years to do it. Given the size of the task at hand, that is a very short amount of time. The good news is: we can do it. “We” meaning each one of us, individually.

Global warming is the struggle of our generation. Its effects are happening as you read: droughts, threatened harvests, rising sea levels, vanishing ecosystems, more extreme weather. There is more than enough scientific evidence that global warming is a man-made problem, linked to the rise in carbon emissions witnessed since the beginnings of the industrial era in the 19th century.

Sometimes, the vastness and complexity of the issue, the lack of progress, and the repeated apocalyptic messages can dull our senses or scare us into looking the other way. Let’s not let that happen. We don’t need to wait for others to sort this out. We can do our part – here and now.

You might be surprised at how much power we, as individuals, have to fight global warming, if we really care and make it a part of our everyday decisions. You can make a difference as a consumer, as a voter, as an investor, and as a professional. Here is my “Everyday Climate Warrior Guide:”

Part 1: Care as a Consumer

Part 2: Care as a Voter

Part 3: Care as an Investor

Part 4: Care as a Professional

On 20th November 2015, Karnataka Renewable Energy Development Agency issued a request for selection (RFS) for allocating 1,200 MW of solar PV projects. Karnataka has already allocated 690 MW of solar projects previously in phases (130 MW in 2012, 60 MW in 2013 and 500 MW in 2014). According to BRIDGE TO INDIA research total capacity commissioned in Karnataka is 126 MW under state policy. With 564 MW in pipeline and another 1800 MW under allocation process (including 600 MW by NTPC), we expect Karnataka to become the second leading state in terms of capacity (MW) allocated by states, next only to Telangana (refer).

Salient features of the tender:

Projects will be allocated through a reverse bidding process and allocation would be done Taluk-wise.

The size of each project is specified as between 3-20 MW and there is no upper limit specified for bids by individual developers.

Up to 100 MW capacity has been reserved for module manufacturers in Karnataka.

Benchmark tariff, the highest that a developer can bid, is INR 6.51/kWh (10 US cents).

Time allowed for commissioning is 18 months.

Developers are required to identify and acquire land on their own.

A list of 60 Taluks has been identified (out of a total of 177 Taluks in Karnataka) and each such Taluk can have a maximum capacity of only 20 MW. The Taluk based bidding process is unique with the rationale seemingly being that the state wants to disperse solar capacity across different regions rather than creating large concentrated capacity. This is desirable from the point of view of reducing stress on transmission infrastructure but will create many complications in bidding and lead to inconsistent competition as some Taluks may be more lucrative than others (differences in radiation, transmission infrastructure and land prices). It is also not clear what will happen if some Taluks get multiple bids at a very competitive price, say INR 5/kWh and another Taluk gets the lowest bid at INR 5.50/kWh.  Will the state be willing to pay a price premium?

Reserving capacity of up to 100 MW capacity for local module manufacturers  is also highly unusual. No other state or central policy has ever imposed such a condition previously. Major module manufacturers in Karnataka are Emmvee and HHV.

Last allocation of 500 MW in Karnataka in 2014 was oversubscribed by 3 times with successful bids falling in the price range of INR 6.71-7.12/kWh. Ongoing projects under state and central schemes are receiving aggressive bids in the range of INR 4.63-5.98/kWh. However, with restrictions on capacity developed under each Taluk it would be difficult for developers to scale up projects and we might actually see higher tariff bids for this tender.

Climate talks in Paris over the past week have been hailed largely as successful by most analysts. After much anticipation, an agreement was adopted by 195 countries. Piyush Goyal, India’s minister for coal and power, has said that India lived up to expectations and that the country’s interests have been safeguarded in the final agreement (refer). India’s environment minister, Prakash Javadekar, called the agreement as balanced and an important achievement for the country (refer).

India in its INDC has not made a commitment on reducing its emissions like the developed countries have, but has pledged to reduce its carbon intensity

USD 100 billion finance from developed countries is unlikely to become a key factor for the Indian solar sector as it only comes into play from 2020

A key benefit of these climate negotiations has been that it prodded India and other countries to define their ambitious targets

Intended Nationally Determined Contributions (INDCs) are a core element of the COP21 process, and are meant to ensure that each country has identified its own contextually-appropriate targets and actions. India has not made an INDC commitment on reducing emissions unlike most of the developed countries, but it has pledged to reduce its carbon intensity by 33 percent by 2030 (over 2005 level), which means that the emissions would come down in relation to total energy consumption. As part of this target, India has declared that it wants to achieve 100 GW of solar capacity addition by 2022 (refer).

The final agreement also includes a commitment from developed countries to provide USD 100 billion a year to developing countries for mitigation and adaptation from 2020 onwards. Investments into solar power should benefit from these funds but only from 2020 onwards.

BRIDGE TO INDIA believes that the main benefit of these climate negotiations has been to provide a short-term catalyst effect to the solar sector. But actual progress towards achieving the 100 GW target will depend more on improvements in solar technology (improving efficiency, falling cost) and domestic factors such as growing power demand and increasing public pressure for pollution abatement rather than execution of the COP21 agreement. India needs political will at both the central and state government level to overcome operational challenges like land procurement, transmission and financing to achieve its solar potential.

Last week, Jharkhand, one of India’s largest coal producing states and governed by BJP, announced a new tender for 1,200 MW of solar capacity allocation under its state policy (refer). This is the first such tender for the state. Projects under this tender are expected to be allocated under two categories: 200 MW for projects smaller than 25 MW (minimum size is 1 MW) and 1,000 MW for projects ranging between 26 MW and 500 MW. The projects in the first category will get 13 months for commissioning and those in the second category will get 18 months.

• If all projects under this tender are successfully commissioned, the state will be able to meet over 90% of its peak consumption and over 20% of its overall power requirement through solar in the year 2018-19• In view of Jharkhand’s higher risk profile and availability of several other project development opportunities in the market, we believe that bids under this tender may not be as competitive• The state’s recent approval to join the central government’s debt recast scheme is likely to improve the off-take risk in the state

Jharkhand’s solar tender follows on the heels of another 1,200 MW tender from Karnataka just two weeks ago under its state policy (refer). These tenders come at a time when the Indian market is flush with new allocations. Current pipeline of utility scale projects in India, excluding this tender, stands at around 15 GW, split between 10 GW where tender process has already been completed and another 5 GW where tender process is underway. While it is great to see many Indian states come out with ambitious tenders for solar projects, some important issues arise. Firstly, are these tenders well thought out in terms of overall state policy and regional power sector situation? Jharkhand, for example, already has more generation capacity than its power consumption. If the new solar projects are commissioned, the state will be able to meet over 90% of its peak consumption and over 20% of its overall power requirement through solar in the year 2018-19. As we pointed in our last weekly update, 40% of capacity allocated under state policies in the past two years is either significantly delayed or cancelled for various reasons (refer). Secondly, such rapid ramp up in capacity allocation means that the equipment suppliers and contractors may actually struggle to deliver all these projects. There is an urgent need for the state and central governments to co-ordinate time-table for solar tenders to ensure that pace of project development is consistent with the financial and operational capacity of the private sector.

Land cost and irradiation in Jharkhand are expected to be more favorable than some of the north Indian states such as Punjab and Uttar Pradesh. However, risks arising out of local insurgency in the state could cause problems for project developers. Moreover, due to high technical and commercial losses, Jharkhand State Electricity Board has a very poor credit risk profile. Its credit rating is C+, ahead of only four other distribution utilities out of a total of 39 rated (refer). However, the state has recently given an in-principle approval to join the central government’s debt recast scheme, UDAY (refer). In view of Jharkhand’s higher risk profile and availability of several other project development opportunities in the market, we believe that bids under this tender may not be as competitive.