Month: February 2016

The Finance Minister of India presented the union budget for the financial year 2016-17 (April 16 – Mar 17) earlier today. As predicted by us earlier this month, there is no substantial change in central government outlay for the sector (refer). The most significant announcement is about an investment of INR 91 billion, an increase of INR 37 billion over the previous year (refer) in the Indian Renewable Energy Development Agency (IREDA), the government owned renewables dedicated lender.

Focus on improving availability of debt finance is a step in the right direction

A cess levied on domestic coal production has been increased from INR 200/tonne to INR 400/tonne making coal fired power more expensive and improving price competitiveness of solar power

But overall, the solar sector has got lost amongst various priorities of the government – changes in depreciation, corporate tax and service tax will have marginal impact on the sector

A larger balance sheet will allow IREDA to provide more lending to the private sector. According to BRIDGE TO INDIA estimates, the country is expected to add 5 GW of solar projects in 2016 and 9 GW in 2017, up from just 2 GW in 2015. Enhancing IREDA’s ability to provide greater debt is a step in the right direction as other traditional lenders are likely to struggle to ramp up.

Other relevant announcements from the budget include:

Doubling of cess levied on coal production from INR 200/tonne to INR 400/tonne on coal – this cess, estimated at INR 280 billion for FY 2017, was originally dedicated to funding clean energy initiatives but its scope is now widened to cover all environmental projects. The main impact for the sector is that it will help in making solar power commercially more attractive in comparison to coal-fired power by about INR 0.12-0.15/kWh.

Reduction in accelerated depreciation rate to 40% from the existing 80% from April 2017 – the impact of this change will be felt in the short-term mainly in rooftop market, where bulk of end customers make use of this benefit. As a result, rooftop sector is likely to see a big boost in FY16-17 before this benefit is halved. Longer-term, this move will provide a more level playing field to professional capital and should help in bringing more investments in the sector.

Increase in effective service tax rate through an additional 0.5% cess – this announcement is likely to have a marginal negative impact on EPC and O&M services.

Overall, the budget is lacklustre for the sector. In particular, lack of any initiatives to support domestic solar manufacturing is disappointing especially in the light of the recent WTO action and ‘Make in India’ campaign. The government is walking a tight fiscal and political path. The sector has got lost amongst a myriad conflicting priorities.  The industry’s wish list of tax waivers and other sops has been unsurprisingly ignored.

The Chandigarh Renewable Energy Science and Technology Promotion Society (CREST) is likely to issue a notification making rooftop solar mandatory in the union territory.  If that happens, Chandigarh would follow the neighboring state Haryana and become the second region in the country to make rooftop solar compulsory.

 The mandate targets commercial, government and residential buildings with a plot size larger than 100 square yards (83 m2);

Given the low grid tariff in Chandigarh, getting building owners to adopt rooftop solar will be challenging;

A robust information and support mechanism from the government is crucial for successful implementation of this policy

The Ministry of New and Renewable Energy (MNRE) has fixed Chandigarh’s solar target capacity of 2,171 MW by 2022 to meet its Renewable Purchase Obligation (RPO). So far, Chandigarh has a total installed solar capacity of 5 MW, most of which are rooftop solar projects installed on government buildings.

The table given below shows the proposed minimum project sizes to be installed according to the plot size of the building:

Plot Size (in sq yards)Rooftop solar system size0-1000100 to 5001 kWp or 100 litre solar heating system500 to 1,0001kWp1,000-3,0002 kWpMore than 3,0003 kWp

In September 2014, Haryana introduced a similar mandate requiring buildings to install rooftop solar by September 2015. As an industrial/commercial building owner in Haryana, rooftop solar makes sense economically because grid tariffs are between INR 8.50-10.00/ kWh. However, the state has a total of 17 MW of installed rooftop solar capacity. This is nowhere close to the target the policy had initially envisaged. The reasons for this could be unavailability of net metering connections and/or lack of information available to consumers about how to comply with the regulation.

The challenge with Chandigarh with regard to rapid adoption of rooftop solar will be even more acute as local grid tariffs are significantly lower at INR 6.00-6.50 for commercial and industrial consumers. CREST/government would need to take several steps in order to make this a successful campaign:

The government needs to enable operational net metering guidelines. Timelines and processes should be defined for the implementation of net metering connection

The local utility needs to build a sufficient capacity (systems and trained staff) for new interconnections

 A strong public education and communication campaign would be needed to educate rooftop owners and provide them with information on benefits of rooftop solar and the options for implementation.

A strict mechanism for enforcement would be needed to ensure that adoption is in line with the policy

The MNRE has asked all states to revise their solar policy targets (refer) to make them consistent with the revised Renewable Purchase Obligation (RPO) target of 8% by 2022, as notified under the revised Tariff Policy published in the Gazette of India on 28th January 2016. States have been asked to submit a ‘State Action Plan 2022’ by second week of March. This plan is expected to include year-wise RPO trajectory and targets for different technologies in each state.

Several states have already announced state-level targets that are in line with India’s 100 GW target

Legislative sanction is still missing for National Renewable Energy Act and amendments to Electricity Act but the government is already implementing plans as per the objectives laid out in these policy changes

By and large, most states seem to be on board with the changes proposed specifically for promotion of solar power

Some states have already revised their targets more or less in line with the country’s 100 GW solar target. This includes states such as Maharashtra, Jharkhand, Andhra Pradesh, Telangana, Gujarat and Delhi. Some states including Karnataka and Jharkhand have already announced plans that go beyond the scope of their original policy.

Uttar Pradesh, Tamil Nadu, Haryana, Bihar, Chhattisgarh, West Bengal, Punjab and Odisha are some of the larger states that are all expected to revise their solar targets. Based on RPO targets, Uttar Pradesh and Maharashtra, two of India’s largest power consuming states are expected to add 26% of all solar power in the country by 2022. As they currently account for less than 10% of installed capacity as well as pipeline, both these states are expected to increase the quantum of new allocations significantly in future.

By inviting all states to discuss their individual action plans, the central government hopes to formulate a “National Renewable Energy Plan”, a framework that would seek to create a national, uniform and mandatory renewable purchase obligation (RPO) trajectory for all obligated entities. This was envisaged under the draft National Renewable Energy Act (refer) released in July 2015. As with the proposed amendments to the Electricity Act 2003, the National Renewable Energy Act itself has not yet seen the light of the day but the government is moving in that direction.

By and large, most states seem to be on board with the changes proposed specifically for promotion of solar power.  Legislative sanction for these plans is awaited keenly but the current stand-off in the Parliament remains a source of uncertainty.

The Ministry of New and Renewable Energy (MNRE) has been keen to introduce Dollar denominated bidding for solar projects. The rationale is to eliminate currency risk for international developers and manage this on aggregate basis thereby reducing the solar tariffs. When the concept was first mooted in the second quarter of 2015, the solar tariffs in India were in the range of INR 6.00 – 6.50/kWh and the objective was to lower tariffs down to INR 4.50 – 5.00/kWh so that distribution companies (DISCOM) are comfortable procuring this power.

Recent tenders organized by NTPC and Solar Energy Corporation of India (SECI) have seen tariff of less than INR 5/kWh, putting the need to carry out Dollar denominated bid into question

Volatile currency market increases the risk considerably for Dollar denominated bidding

Recent bid result indicate that Indian solar sector may not require incentives such as bundling and Viability Gap Funding (VGF) going forward. The same is true for Dollar based bidding as well

Most DISCOMs in India are financially stressed and had been hesitant to buy solar power at over INR 6.00/kWh when marginal thermal power is available at around INR 4.50-5.50/kWh (refer). To bring the DISCOMs onboard, the government had been targeting a solar tariff below INR 5.50/kWh. To this effect, central government has been using incentives in the form of VGF and bundling of solar power to sell solar power at an acceptable tariff to the DISCOMs.

Dollar denominated bidding was envisaged as yet another form of solar power procurement under which National Thermal Power Corporation (NTPC) would take the risk of currency fluctuation and manage any volatility through the use of a hedge reserve fund. The key advantage of Dollar denominated bid is that it would attract currency risk averse international investors to the sector. Through the auction process, it was envisaged that the solar tariff would reach about US$ 0.06/kWh (INR 3.60/kWh) and NTPC would then sell to DISCOMs at about INR 5.00/kWh after factoring in the cost of managing the hedge reserve fund. However, the very steep fall in bid tariffs in the last six months to INR 4.34 – 4.80/kWh has mitigated the need for Dollar denominated tariff procurement or any models such as VGF or bundling. There is little sense for India to pursue Dollar based bidding.

Indian government is expected to table the budget for 2016-17 on 29th February 2016. Due to severe constraints on the government’s fiscal position, room for new expenditure including spending on solar sector seems limited. Intelligent use of the available fiscal resources should be the focus for the sector.

The budget is likely to approve funding for already announced schemes and higher tax free bond issuance

Clarity on future of tax holiday and accelerated depreciation benefit will be welcome but is unlikely

We also expect some measures to promote domestic manufacturing sector, which would benefit from removal of distortions in taxation framework

The Cabinet has already passed the plans for higher capital subsidy of INR 50 b (USD 750 m) to rooftop solar and Viability Gap Funding of INR 50 b (USD 750 m) for utility scale projects. We expect the budget to provision for a part of this requirement to be met in the next financial year but expect no additional support. Although, a long-term investment plan for upgradation of grid infrastructure would be welcome.

Other likely issues of interest in the budget would be – i) efforts to reduce cost and/or improve availability of finance; and ii) getting clarity on future taxation policies. The Ministry of New and Renewable Energy (MNRE) has already sought approval for issuing tax-free green bonds of up to INR 100 b (USD 1.5 b), an increase of 100% over the current year. We believe that the budget would most likely sanction this. On taxation front, the government’s attempts to rationalize corporate tax may result in axing of 10 year tax holiday for the sector particularly as the Minister of Power, Mr Piyush Goyal, has been categorical recently that the power sector does not need any financial incentives any more. BRIDGE TO INDIA is of the opinion that removal of tax holiday will not be a big dampener since the benefit is partly eroded by applicability of Minimum Alternate Tax. Nonetheless, we hope that the industry is given sufficient advance notice of any changes. We also hope that the government provides long-term visibility on availability of accelerated depreciation benefit, which is currently due to expire in March 2017.

Given the Indian government’s strong focus on promotion of domestic manufacturing and its Make in India campaign, it would be reasonable to expect some measures to improve competitiveness of domestic module manufacturing sector. In particular, there are various tax inequities at present which disadvantage domestic manufacturers and they should be removed at the earliest.

Overall, the solar industry should not expect any significant funding support from the budget. If the government can rationalize overall taxation structure and provide long-term visibility and certainty, that will be a major positive.

Bids were submitted last month for a 500 MW tender under the Viability Gap Funding (VGF) scheme to Solar Energy Corporation of India (SECI). In this tender, 50 MW was reserved for Domestic Content Requirement (DCR) category and remaining 450 MW was for open category. However, the bidder interest in this tender was highly subdued as compared to other recent tenders (refer). The most surprising outcome was that only one participant bid for the 50 MW under DCR category. This tender for DCR category will now be re-opened for bidding.

Only one company, Adani, submitted bid for participation in 50 MW DCR category

Downward revision of tariff to INR 4.43/kWh is the likely reason for such lower interest

We expect low interest for DCR projects in the upcoming tenders in Gujarat, Uttar Pradesh and Andhra Pradesh

The primary reason for such subdued interest in the tender is the downward revision in tariff for VGF based projects to a fixed INR 4.43/kWh from the earlier INR 5.43/kWh for the first year with an escalation of INR 0.05/kWh for next 20 years (equivalent to a levelized tariff of INR 5.79/kWh). The upper cap of VGF remained unchanged at INR 13.1 million/MW for the DCR category. As per our calculations, taking the VGF benefit into account, effective revised levelized tariff works out to an upper cap of INR 5.46/kWh.

For the 50 MW DCR category allocation, only one company – Adani, participated in the bid. As a result, the allocation has been cancelled and the bids will be invited once again. Even for 450 MW allocation for open category, the median winning bid was higher in terms of levelized tariff by about INR 0.27/kWh as compared to the auction results for NTPC projects in Andhra Pradesh (refer).

BRIDGE TO INDIA believes that there are two primary reasons for such poor interest in the DCR category. First, the international bidders are usually not interested in such tenders as seen in the past. Second, the higher cost for DCR modules means that tariff expectation for such bids are significantly higher. For example, in the 500 MW tender by NTPC in Andhra Pradesh in December 2015, the difference in winning tariff in open category and DCR category was about INR 0.50/kWh, equivalent to additional VGF of about INR 6.5 million/MW. Hence, a combination of fixed tariff of INR 4.43/kWh and VGF of INR 13.1 million/MW is not very attractive for projects under DCR category.

Re-opening of the DCR tender does not augur well for similar DCR projects in the upcoming tenders in Gujarat (total 250 MW, DCR quota of 25 MW), Uttar Pradesh (total 440 MW, DCR quota of 50 MW) and Andhra Pradesh (total 500 MW, DCR quota of 100 MW).

In August 2015, World Trade Organization (WTO) declared that it was illegal for India to impose ‘Domestic Content Requirement’ (DCR) obligation for solar cells and modules. India had appealed against this ruling and continues to allocate projects under the DCR category. However, India has now offered a compromise to the US by removing DCR requirements for private sector projects only (the requirement is proposed to continue for projects developed by public sector entities). Indian government believes that this formula complies with WTO guidelines.

DCR accounts for less than 5% of total module demand in the Indian solar market

DCR has failed to provide long-lasting support to the domestic manufacturing sector

A settlement or withdrawal of the WTO case will not substantially affect any US manufacturer, or any manufacturer from any other country for that matter

For projects under development and allocation, DCR requirement is applicable on – 430 MW of projects allocated by NTPC to private developers, 760 MW of projects developed by NTPC and 125 MW of projects allocated by SECI. This adds up to 1,315 MW or a little less than 10% of total capacity allocations announced by central government entities. Apart from this, capital subsidy scheme for rooftop projects also requires made in India solar modules for some projects.

Taking state schemes and private initiatives into account, DCR accounts for less than 5% of overall demand in the Indian solar market. When the new BJP government dropped the proposal to enforce anti-dumping duties on solar cells and modules in August 2014, the Minister for New and Renewable Energy, Piyush Goyal, had assured domestic manufacturers that enough demand will be created to absorb all of their production. Imposition of DCR requirements may have helped the existing manufacturers but it has failed to bring any sustainable improvement or investment in the domestic manufacturing sector.

The Indian government understands that for the sector to grow at about 10 GW a year, imports continue to be the dominant source of modules. Indian cell manufacturers may face some impact if an equivalent capacity for DCR is not taken up by the public sector. The only other impact this case may have had is to ensure that India does not opt for a more protectionist policy to promote manufacturing. BRIDGE TO INDIA believes that any outcome from the WTO case will not materially alter the module supply scenario in India.

If the Indian government wants to promote domestic manufacturing, the focus should be to provide policy certainty, grow the market and improve competitiveness of the sector. Progressive industrial policies at the state level, level playing field on taxation and other larger reforms required for a manufacturing sector growth in the country will have a much larger impact than having protectionist policies such as the DCR.