Month: March 2016

Solar Energy Corporation of India (SECI) recently conducted reverse auctions for 125 MW of the aggregate 440 MW capacity (390 MW capacity under open and 50 MW capacity under Domestic content requirement category) tendered under government solar park projects in Uttar Pradesh as part of its viability gap funding (VGF) scheme. In this scheme, developers sell power at a fixed tariff of INR 4.43/kWh (USD 0.06) and bid for VGF support of up to INR 10 million per MW (USD 151,515) for open category projects and 13.1million per MW (USD 198,000) for DCR category projects.

Key highlights:

 Bids were received from only 3 developers; Azure Power, Indiabulls and SolaireDirect

Indiabulls won the 50 MW Allahabad project at a VGF of INR 7.49 million per MW

SolaireDirect was allocated the 75 MW project at Vijaypur at a VGF of INR 7.42 million per MW

Projects totaling 315 MW did not receive enough bids to carry out a reverse auction

The poor response is a sober pointer for the government and especially with new tenders coming at break neck speeds, the industry needs to get a little bit more selective. There are various reasons as to why this tender has been so poorly under-subscribed:

 Developers seem unhappy with the quality of solar park infrastructure (land and evacuation)

Despite SECI being the official purchaser of power, off take is a significant source of concern in Uttar Pradesh as local DISCOMS have poor credit ratings (C+ rating by CARE)

High upfront solar park charges of INR 3.9 million/MW (USD 60,000) combined with a low fixed tariff/ VGF cap is not seen as sufficiently attractive by the developers

We expect the next three upcoming auctions totaling 1,250 MW by NTPC (400 MW in Telangana, 600 MW in Karnataka and 250 MW in Andhra Pradesh) to be extremely competitive because of strong offtake. Beyond that, the developers will condition their bid responses for various SECI and state tenders based on their comfort with offtake risk and local operating environment.

Central Electricity Regulatory Commission (CERC) passed a final order for determination of benchmark capital cost for solar PV projects for FY 2016-17 last week (refer). It has established the capital cost of solar PV projects including equipment, construction, land, transmission and pre-operative costs at INR 53 million/MW (USD 0.79 million). It is worth noting that the Commission had proposed a benchmark capital cost of INR 50.1 million/MW (USD 0.76 million) in December last year. At that time, BRIDGE TO INDIA had predicted that the benchmark cost would be revised upwards based on industry inputs (refer).

Reduction in benchmark capital cost in the past two years has been 12.5% and 12% respectively

With just two more years of similar cost reduction, solar tariffs in India could be in the range of INR 3.5/kWh – INR 4/kWh

Any industry plea to fix Feed in Tariffs (FiTs) based on regulated benchmarks is likely to fall on deaf ears in a falling cost regime

Based on the industry comments received, the private developers suggested capital cost estimates ranging between INR 58–85 million/MW (USD 0.87 million/MW – 1.2 million/MW). It is standard practice for the industry to provide fairly conservative capital cost estimates.

For FY 2015-16, CERC had pegged the benchmark capital cost at INR 60.6 million (USD 0.92 million). Based on this, the benchmark tariff was fixed at INR 7.04/kWh (INR 6.35/kWh with accelerated depreciation). However, the role of these benchmarks is limited to providing guidance and they do not necessarily reflect the real capital cost or tariffs in the market. The benchmarks merely set an upper cap on tariffs or subsidies offered to a project. Projects allocated by the central government use the CERC benchmarks, whereas projects allocated by the state governments use respective state regulatory benchmarks.

Benchmark capital cost in the past two years has fallen by 12.5% and 12% respectively.  But bid tariffs have declined much more sharply in this period. For example, all successful bid tariffs in FY15-16 have come substantially below the benchmark tariff of INR 7.04/kWh. Madhya Pradesh and Telangana allocated solar projects at tariffs between INR 5.05–5.72/kWh in the earlier part of this financial year, whereas recent successful bids have come in the range of INR 4.34 – 5.00/kWh.

The industry has been vociferous in asking for a fixed Feed in Tariff (FiT) regime based on benchmarks fixed by CERC and/or state regulators particularly as the wind sector has been following this structure already. The industry argument is that FiTs will provide more predictability to the developers and accelerate the growth of the sector (refer). However, this demand is likely to fall on deaf ears particularly in a falling cost regime. The government seems firm that bidding is the best way to procure solar power. Also, with other countries such as Germany and France that have traditionally offered FiTs now moving to bidding based tariff discovery, there is little chance of India changing course now.

As we come to the end of the financial year, a rush to meet allocation and announcement targets has made the Indian solar market fairly frantic. Just last week, bid results were announced for a cumulative capacity of 1,425 MW including a 1,200 MW state allocation in Jharkhand, a 125 MW allocation in Uttar Pradesh by Solar Energy Corporation of India (SECI) and a 100 MW allocation in Rajasthan by National Thermal Power Corporation (NTPC). Apart from that, new tenders were announced for a 750 MW state allocation in Madhya Pradesh and a 100 MW SECI allocation in Chhattisgarh. India’s overall solar project pipeline now stands at a staggering 23 GW.

Key highlights:

Bid results in Jharkhand show that there is enough appetite in the market to sustain aggressive bidding for every available opportunity

Bidder interest in NSM tenders in Uttar Pradesh and Rajasthan was muted for specific reasons but the end results are still very aggressive

BRIDGE TO INDIA expects capacity addition of 4.8 GW in 2016 and over 9 GW in 2017 utility scale projects, making India one of the top global markets

Jharkhand’s 1,200 MW tender was split in two parts – 200 MW was reserved for smaller project sizes between 1-25 MW and 1,000 MW was reserved for larger projects sizes between 26-500 MW. For the smaller projects, winning bids were received in a wide range of INR 5.29 – 7.79/kWh providing attractive returns to developers. For the larger projects, however, winning bids were much more aggressive at INR 5.08 – 5.48/kWh considering that this was an exceptionally large tender for a small state meeting over 90% of its peak consumption and over 20% of its overall power requirement. Further, Jharkhand State Electricity Board has a poor credit risk profile and its credit rating of C+ is ahead of only four other distribution utilities out of a total of 39 rated in the country. The rationale for the state to bring out such a large tender or for the developers to bid so aggressively is unclear to us. But it is clear that there remains strong interest in the market for bidding for every available opportunity.

For the 100 MW NTPC tender in Rajasthan, the three winning bids were in a very close range of INR 5.06 –  5.07/kWh. Given that these projects are under the DCR category, these bids are extremely aggressive, adjusted for higher module cost and risk associated with their availability.

The SECI tender for 125 MW in Uttar Pradesh saw a limited participation from just three companies. IndiaBulls and SolaireDirect won 50 MW and 75 MW at a tariff of INR 4.43 with Viability Gap Funding (VGF) of INR 7.5 million and INR 7.43 million respectively. The limited participation in Uttar Pradesh was primarily due to high solar park costs and concerns about implementation of solar parks (refer).

India’s current solar PV pipeline of 23 GW is divided into 15 GW of tenders where bids have been submitted already and 8 GW of tenders pending bid submission. The Ministry of New and Renewable Energy (MNRE) believes that India would add 12 GW of solar capacity in 2016-17 (refer). However, past experience has shown that there are significant timeline slippages in project implementation particularly in state tenders. BRIDGE TO INDIA’s analysis shows that in the past nearly 40% of projects in state tenders are either significantly delayed or scrapped altogether. Reasons include delays in signing of PPAs, failure in arranging land, transmission and/or financing for projects (refer).  BRIDGE TO INDIA estimates capacity addition of 4.8 GW in 2016 and over 9 GW in 2017 excluding additions in the rooftop solar and open access solar markets. That would make India the fourth largest solar market in the world after China, US and Japan in 2016, with a chance of India overtaking Japan in 2017.

Kerala State Electricity Board (KSEB) issued a Request for Selection (RFS) for allocating 200 MW of ground-mounted, grid connected solar PV power on 17th February 2016. This is the first large scale RFS issued by KSEB for consumer use. So far, Kerala has only 13 MW of installed solar capacity, most of which (12 MW) is deployed onsite at the Kochi International Airport.

Salient features of the tender:

Projects will be allocated through a tariff based competitive bidding process

Size of each project is specified as between 10-200 MW (no upper limit)

Benchmark tariff, the highest that a developer can bid, is INR 7.04/kWh

Time allowed for commissioning is 24 months from the date of signing of the PPA

Developers are required to identify and acquire land on their own

Financial qualifications for the developers is specified as net worth greater than or equal to INR 35 million per MW. This will be very restrictive for small developers in particular. Most tenders have a net worth criterion of typically between INR 10 – 15 million/MW. Other financial conditions in the tender are also relatively onerous:

 Bid bond of INR 2 million per MW (INR 1 million/MW in Telangana and Andhra Pradesh)

Performance guarantee of INR 7.5 million per MW (INR 2 – 2.5 million per MW)

These conditions will result in higher bid costs for developers. Similarly, Kerala being a relatively small and fertile state, land acquisition will be more challenging and costly in comparison to other states.

However, the tender does provide some benefit in terms of timelines. While most tenders offer 13-18 months for commissioning, this tender offers 24 months, which makes it easier for the developers.

Overall, this tender shows that the smaller states are beginning to move towards greater adoption of solar power. We expect good response from the developer community but tariffs are expected to be higher in comparison to recent tenders because of more onerous bidding conditions.

Recent reports suggest that the changing numbers in India’s upper house of Parliament may mean that the Goods and Services Tax (GST) Bill could be passed by July 2016 (refer). India’s finance minister also claimed yesterday that he is hopeful for the bill passage by mid-May (refer). If the bill is indeed passed as anticipated, it is expected to be implemented almost immediately.

GST is a key taxation reform as it seeks to simplify a complex maze of state and central taxes by subsuming these into a single tax levied at the point of consumption. Renewable sector, currently a beneficiary of several indirect tax exemptions, may be a big loser as a result of GST since the bill proposes to revoke most of the exemptions.

Key highlights:

The resulting input cost/ tariff increase of between 12-20% would wipe out the pricing gains of the past two years

The cost increase of this magnitude would also put viability of several projects in jeopardy

The Ministry of New and Renewable Energy (MNRE) is in dialogue with the Department of Revenue to ensure that renewable power equipment is exempted from GST

A recently concluded study by MNRE suggests that solar project costs and tariffs could go up by 12-20% on account of the new indirect taxation proposal (refer). Such a material increase would erode most of price gains made in the past two years and also put viability of several ongoing projects in jeopardy.

The cost increase would arise because of two reasons: i) currently, no import duty or indirect tax is applicable on solar modules but under the new regime, GST of between 17-20% would be payable; ii) local value added tax (VAT) and other levies such as excise, entry tax and Octroi on solar modules and the complete system, together at around 5% in most states because of many exemptions, would again be replaced by a combined GST of 17-20%. The MNRE report estimates that the cost for all equipment used in a solar project i.e., solar modules, inverters, cables, batteries, structures etc. will go up adding up to a differential of 12-20% from current levels.

Successful passage of the GST bill, although highly beneficial to the wider economy, would severely impact both ongoing and new projects in the sector. MNRE is believed to be pushing for a waiver from GST arguing that a sudden increase in cost would lead to disruption in the sector and delay implementation of policy targets. BRIDGE TO INDIA is of the opinion that the solar sector has a strong case for an exemption. The government has put strong focus on the sector to achieve a very diversified set of policy goals including energy access, energy security and climate change mitigation. Moreover, as the sector is still relatively small, an exemption would not lead to significant loss of revenue in the short-term.

Karnataka announced results for its 1,200 MW solar project tender last week. This tender was very unique as it sought bids for up to 20 MW capacity on a taluk-by-taluk basis in 60 taluks (refer) in an effort to distribute solar capacity evenly across the state. 100 MW of capacity was reserved for solar cell and module manufacturers located in Karnataka.

The results are very interesting and provide a test case for policy making in the sector – about 800 MW of capacity has been won by bidders in the open category (no module sourcing restrictions) with tariffs of between INR 4.69 – 5.85/kWh. Winning tariffs for domestic module category are INR 5.94 – 6.50/kWh, a tariff premium of INR 1.50 over the open category. 12 taluks did not get any interest from developers presumably because of land acquisition challenges in these taluks. Projects in these taluks will be retendered. Hero Future Energies was the most aggressive bidder and won 180 MW at INR 4.69-4.86/kWh. Other big winners include Renew Power and Aditya Birla Nuvo, winning 180 MW at INR 4.76-5.05/kWh and 60 MW at INR 4.86-4.97/kWh respectively.

Bidding intensity in the sector remains very high despite huge volumes of projects coming for tender in the last six months with Karnataka being the first state tender to receive bids of less than INR 5.00/kWh

Distributing solar projects across the state to reduce transmission grid burden will cost about INR 0.70/kWh

The state is paying an unusually high tariff premium of around INR 1.50/kWh for using locally manufactured modules

Traditionally, projects tendered by central government entities are the most competitive and attract the lowest tariffs. However, Karnataka has seen very intensive bidding with 49 developers bidding for 2,500 MW of projects despite a challenging land acquisition process and small project sizes.

Because of the unique taluk based bidding, some bidders have won projects at very attractive tariffs in excess of INR 5.25/ kWh when many bidders with more aggressive bids lost out because they offered slightly higher tariffs than the most aggressive bidder in their respective Taluk. Example – Aditya Birla offered a tariff of INR 4.76/kWh in Gangavati taluk but did not win because of intense competition in this taluk but Jindal Aluminum was the only bidder in Mayakonda taluk and won a 10 MW project at INR 5.85/kWh.  Effectively, this process has resulted in less transparency for the bidders and a relatively higher cost of procurement for the state distribution companies. Many developers who did not win projects despite aggressive bids will feel that they have unfairly lost out.

Similarly, the domestic manufacturers have made most of the preferential status. Only 4 bidders (Emmvee, Tata Power, Swelect and Microsun) qualified under this category and won 100 MW at a tariff premium of about INR 1.50/kWh over the open category.

Karnataka has followed an innovative tender model and raised some important questions. The issues of preference given to domestic manufacturers and tender design are likely to result in an intense debate.