Month: January 2016

Last week, India’s Cabinet Committee on Economic Affairs (CCEA) approved amendments to the National Tariff Policy 2005 (refer). While the policy document has not yet been released, the draft version issued by the Ministry of Power in April 2015 is available (refer). This policy is meant to guide central and state regulators for determining tariffs and other regulations.

The policy proposes several reforms for overall health of the power sector but as usual, implementation will be the challenge

Promotion of renewable power has been added as a key objective of the policy

Implementation of Renewable Energy Generation (RGO) on a cost-plus basis will have serious ramifications for renewable IPPs

Key proposed elements for the power sector include: i) existing power generation plants have been allowed to conditionally increase their capacity by up to 100% (the mechanics are not clear); ii) a provision has been made for “periodic (monthly/ quarterly)” revision of tariffs by distribution companies; iii) an amendment has been made such that the state regulatory commissions shall “necessarily” be guided by the principles and methodologies specified by the central regulatory commission for determination of tariff, and; iv) a provision has also been made for timely transition to smart meters to allow time-of-day metering.

Another major highlight of the policy is the strong impetus on renewable sources. Promotion of renewable generation sources has, in fact, now been added as a key objective of the policy. Other existing objectives include: ensuring availability of power, ensuring financial viability of the sector, promoting transparency and promoting competition.

Under the amendments, Renewable Purchase Obligation (RPO) targets have been enhanced and its trajectory would be announced by the Ministry of Power and the MNRE, pass through of RPO’s financial impact to customers has been allowed through regular revision in tariffs, the concept of RGO for thermal power generators has been introduced on a cost plus basis and inter-state transmission charges for solar and wind power have been waived off.

There is some ambiguity in solar specific RPO target, which as per the press release (refer) has been revised to 8% by 2022 but as per the Ministry of Power draft, the 8% target is for 2019 and not 2022 (refer). As per MNRE, solar RPO target should be 10.5% to get to 100 GW by March 2022.

Implementation of RGOs on a cost plus basis will result in serious ramifications on the solar sector and especially renewable specific independent power producers. BRIDGE TO INDIA’s analysis on the topic can be read in our earlier blog on the subject (refer).

The amendments are now expected to be tabled in the Parliament next month. But with political impasse in the last two sessions and with several other important bills pending, the timeframe for passing this bill remains uncertain. Effective implementation will be another challenge.

Other news

Foundation stone laying ceremony for the interim secretariat of the International Solar Alliance

French President Francois Hollande and Indian Prime Minister Narendra Modi will lay foundation stone for the interim secretariat of the International Solar Alliance (ISA) today. ISA is conceived as a coalition of solar resource rich countries to address their special energy needs and will provide a platform to collaborate on addressing challenges through a common, agreed approach. BRIDGE TO INDIA’s view on the alliance can be read in our earlier blog (refer).

450 MW projects allocated to eight companies by SECI in Maharashtra

SECI announced the results of this tender where developers were asked to offer a discount on tariff of INR 4.43/kWh or seek Viability Gap Funding (VGF) of up to INR 10/MW. The lowest bidder, Bhageria Industries, offered a tariff of INR 4.41/kWh and other winners asked for VGF in the range of INR 4.6-5.4 million/MW.  Welspun, Suzlon and Solar Arise are some of the prominent companies that won capacities in the tender.

Earlier this month, bids were submitted to Solar Energy Corporation of India (SECI) for 500 MW of solar PV projects in Maharashtra under Viability Gap Funding (VGF) mechanism. Out of the total capacity under this tender, 50 MW of projects are reserved for modules meeting domestic content requirement (DCR). Key highlights of this tender are – minimum project size of 10 MW, no maximum limit, land to be procured by developers, fixed tariff of INR 4.43/kWh and VGF of up to INR 10 million/MW (INR 13.1 million/MW for DCR category) payable in 6 instalments (50% on project COD, followed by 5 annual instalments of 10% each). Bidders will be allocated projects on the basis of most competitive VGF quotes.

The tender has received bids from 14 developers for total capacity of less than 1.8 GW in contrast to NTPC’s recent 500 MW tender in Andhra Pradesh which received bids aggregating 5.5 GW from 30 bidders.

MNRE reduced the fixed tariff drastically from INR 5.43/kWh (plus an annual escalation of INR 0.05/kWh for 20 years) in earlier VGF rounds taking note of recent bids of INR 4.63/kWh in Andhra Pradesh just 10 days before bid submission;

Bid response is highly subdued as compared to recent allocations by NTPC and some states;

We expect similar muted response for SECI’s three upcoming tenders in Uttar Pradesh, Gujarat and Andhra Pradesh.

Figure 1: Bid response in recently concluded tenders

We believe that the SECI tender has two key differences in comparison to other recent tenders, which are likely to result in higher tariff (or VGF) expectations for developers. As these projects will be implemented outside government solar parks, land acquisition will be a challenge for developers particularly for large project sizes. As contiguous land is unlikely to be available in large sizes, developers will not benefit from economies of scale. Secondly, the market’s higher risk perception of SECI as an off-taker in comparison to NTPC is also likely to have an upward impact on the bids. Finally, we believe that the recent hardening of module prices and INR depreciation against the USD may also have a similar upward impact on the bids.

SECI has issued 3 other tenders for projects in Gujarat (250 MW), Uttar Pradesh (440 MW) and Andhra Pradesh (500 MW) respectively under VGF route. Bids are expected to be received for these tenders over the next two months. We expect similar muted response for all three tenders for various reasons including smaller project sizes, low radiation (Uttar Pradesh), high solar park charges (Gujarat).

BRIDGE TO INDIA research shows that utility scale solar projects totaling up to 4.8 GW of capacity will be commissioned in the calendar year 2016, a growth of 140% over capacity commissioned in 2015. Contrary to popular perception, new capacity addition in 2016 will be driven largely by state level allocations. Delays in new allocations by NTPC and SECI mean that most of the recently allocated or under allocation capacity under National Solar Mission (NSM) will get commissioned only by about H1 2017. This may still allow the government to reach closer to the official target of 7,800 MW for utility scale projects for the upcoming financial year (April 2016 to March 2017) (refer).

The market is expected to grow significantly in 2016; capacity addition in the first quarter of 2016 is expected to be equivalent to the entire capacity added in 2015

Southern states of Tamil Nadu, Andhra Pradesh, Telangana and Karnataka are expected to add 80% of all new capacity in 2016

There is little doubt that capacity additions in 2017 will surpass capacity additions in 2016, catapulting India to become one of the key global markets for at least the next two years

In 2015, India’s utility scale solar capacity grew by 2 GW, double the rate of capacity addition in years between 2012 and 2014 but substantially below our estimate of 2.45 GW (India Solar Handbook 2015, refer) because of delays in projects in Andhra Pradesh, Telangana, Tamil Nadu, Karnataka and Punjab. Out of the 2 GW commissioned in 2015, 700 MW of capacity was completed under central government allocations, 850 MW under state allocations and the remaining 450 MW under other heads, including private initiatives. The Indian government’s utility scale solar target of 1,800 MW for the current financial year (ending 31 March 2016) will be easily met.

In calendar year 2016, southern states of Tamil Nadu, Andhra Pradesh, Telangana and Karnataka would contribute to almost 80% of all new capacity addition. With a strong pipeline of state level projects to be commissioned through 2016 and a significant capacity addition expected through central government allocations in the first quarter of 2017, the utility scale solar market also seems to be on track to meet the targets for the next financial year.

The government’s ambitious plan to ramp up capacity addition for utility scale projects from 1 GW per year until last year to 7.2 GW planned in the next financial year, now seems plausible. This is further expected to be ramped up to 10,000 MW in 2017-18. However, it is not going to be easy to sustain this momentum as states are expected to assume the responsibility for further growth once the central government led allocations begin to dry up. We foresee evacuation of power and grid stability becoming big bottlenecks for future growth as several gigawatts of capacity comes up in the southern states itself. The speed of implementation of the inter-state evacuation corridors will be key to the success of these initiatives and sustainable growth of the market.

At the “Energy for Tomorrow” conference in Paris, last week, one of the core discussions in the energy industry was: is a low-carbon world a challenge of deployment or one of innovation?

In other words: do we already have the technologies we need (e.g. solar, wind, grid management) and now just need to focus on deploying them? This could be called the evolutionary approach. There will, of course, be innovation and cost reduction through ongoing deployment and scale. However, we would essentially work with what we already have. This approach would recognise the fundamentally conservative nature of energy and infrastructure markets that rely on upfront financing of long-term cashflows.

Take solar as an example: despite innovations such as thin film and, more recently, perovskites solar cells (organic cells), 85% of the solar power installed this year is crystalline PV — a technology that is over 60 years old and has been brought to competitiveness through thousands of little improvements. If you think about new energy (e.g. solar) and new markets (e.g. India), you might expect an entrepreneurial, disruptive boom market. Instead, what you find is very conservative infrastructure business, with an eye on minimising risks.

A counter-example is electric cars. For a long time, global car manufacturers focused their efforts on increasing the efficiency of the combustion engine, following the existing technology path. Electric mobility was sidelined. Now we seem to see a sea change. Electric mobility has become central to the research and product development strategies of almost all big car companies. In part, this is thanks to the pioneering efforts in technology and marketing of Tesla (and Toyota’s Prius before that). Another aspect is that the combustion engine might have reached the end of the road. The Volkswagen emissions scandal also came about because the car manufacturer could not improve diesel engines fast enough to keep track with much needed, ever stricter regulations. In mobility, we need a new innovation path. In electricity, we have perhaps already shifted to the right one.

At the conference in Paris, the “deployment” approach was propagated by some of the largest energy companies. For instance, Ulrich Spiesshofer, CEO of the Swiss energy technology giant ABB, told me that, “we need to now focus all our efforts on deploying the technologies we already have.”

On the other side stand the disruptors and technologists, such as Bill Gates and many Silicon Valley representatives. They argue for a revolutionary strategy: we need innovation in technologies and business models to bring about radical change. These new technologies could be (just examples): new storage technologies, nuclear fusion, better carbon capture and storage, carbon sequestration from the atmosphere and oceans, space solar power, or geo-engineering. Their point is that, given current technology trends, and even the much feted Paris Agreement, we are still far off from a 1.5 degree climate change goal we need to reach.

Of course, one could argue: it will be a bit of both — innovation and deployment. One will feed into the other, as always in life and business and technology. However, such an answer would dodge the issue. We have limited budgets and limited time, so it matters whether companies, entrepreneurs, investors, and regulators focus their efforts on enabling, for instance, distributed solar business models or on researching a space solar program. The question is: where do we put our focus?

India’s Cabinet Committee on Economic Affairs (CCEA) sanctioned INR 50 billion (USD 750 million) funding for 30% capital subsidy for rooftop solar installations (refer). The subsidy will be restricted to residential, government, social and institutional segments only and the government expects this subsidy to support total rooftop capacity of 4,200 MW until this budget is exhausted.

The fund unavailability issues with previous subsidy schemes are likely to get resolved;

Significant changes to allocation process mean that the funds will be better directed to needier customers and potential for abuse will be much lesser than before; and

We expect significant growth in the rooftop market particularly in the government and institutional segments but the entire rooftop market will benefit from growth through overall industry learning and skills enhancement.

Based on past experience in India with rooftop capital subsidy, the two key issues here are: i) how will the new subsidy scheme work; and ii) and will the subsidy be effective in kick starting the growth in rooftop solar in India?

An approval by CCEA is a strong assurance of availability of funds. However, we will need to see an appropriate increase in the budget for Ministry of New and Renewable Energy (MNRE) for FY 2016-17 (to be presented in March 2016). Earlier experience in this relation is mixed as in March 2015, when INR 6 billion was sanctioned for a similar subsidy scheme (refer), funding availability proved to be a problem. The difference this time is that the government is targeting a huge jump in rooftop solar capacity addition from 200 MW in FY 2015-16 to 4,800 MW in FY 2016-17 (refer).  And there is a palpably stronger commitment from the government to support the sector.

Moreover, the capital subsidy is being allocated to specific parts of the economy where funding availability is a big impediment to growth of rooftop solar.  Subsidy is not being made available for commercial and industrial customers because these consumers pay higher tariff and can also avail the accelerated depreciation benefit.

The biggest change in the subsidy scheme is that funds will no longer be disbursed through MNRE ‘channel partners’. There will now be three key modes of subsidy disbursement – Solar Energy Corporation of India (SECI), schemes run by state governments and subsidy disbursements through financial institutions. SECI is already believed to be in the process of allocating subsidy for 750 MW of rooftop capacity to systems aggregators and EPC contractors. The states are also likely to follow a similar aggregated capacity allocation route. Another important mode for subsidy disbursement is going to be through financial institutions. MNRE is likely to provide an in-principle approval to the State Bank of India to disburse subsidies. These disbursements will be clubbed with the rooftop solar loan schemes of the bank.

As the new scheme is not applicable on the industrial and commercial segments, these segments are expected to continue to grow at a decent pace. We expect a significant growth in the government and institutional segments as soon as the subsidy disbursement mechanisms get going. In its first leg, SECI may lead the charge on this. This growth is expected to start playing out over the next 6-12 months. As the subsidy disbursement mechanisms for the residential market would primarily be taken up by states and financial institutions, it may take up to a year for the mechanisms to become operational.

Overall, there are many improvements to the subsidy allocation process and together with the bigger allocation of funds, this is a very positive development for the sector. BRIDGE TO INDIA believes that this subsidy scheme will result in substantial growth of the rooftop sector in the short-term. In the long-term, this market needs a very strong concerted effort from the government on policy and regulatory front to achieve its growth potential in a sustainable manner.