Month: April 2016

BRIDGE TO INDIA has just released results from its first ever survey of the most influential private sector decision makers in the industry as part of the Indian Solar Handbook 2016 report (download your free copy here). Most of the 27 participating CEOs said that they expect their businesses to grow by an average of 3-5x by 2020 with 37% of them believing that their business will grow by more than 10x by 2020. This optimism is based on the expectation that the market will also grow at an impressive compounded annual growth rate (CAGR) of 45% per annum until 2022.

The industry is most concerned about transmission connectivity/ grid failure, debt financing and INR depreciation risk

The industry has also rated central government’s policies for the sector as ‘Good/ Very Good’

Most CEOs are positive about the prospects of domestic manufacturing

Even though the market is expected to grow at a very impressive pace, the capacity addition numbers may seem lacklustre in comparison to India’s very ambitious targets. A majority of the participants expect India to add 40-60 GW of solar capacity until 2022, against the government target of 100 GW. Most of this capacity is expected to be set up for policy based utility scale projects. The rooftop solar target of 40 GW until 2022 seems most unrealistic under the current policy environment as almost half of the CEOs don’t expect the market to cross the 10 GW mark for cumulative capacity addition until 2022. Prospects for growth of the open access market also seem limited as 85% of the respondents don’t think that the market will cross the 10 GW mark by 2022.

The anonymised survey reveals that the industry is most concerned about transmission connectivity, grid failures, debt financing and INR depreciation risk in that order.

Most survey questions related to challenges indicated that grid and transmission related issues have become a key concern for the industry. BRIDGE TO INDIA also believes that the future risk of curtailment of power due to grid congestion and grid’s ability to absorb intermittent sources of power, especially in high renewable penetration areas, can upset project cash flows and already squeezed return expectations.

On the macro front, the industry is largely optimistic about the UDAY reform for DISCOM finances and think that it will help improve the DISCOM bankability issues. However, there is still some scepticism, which is not surprising given the failure of previous moves to restructure DISCOM finances.

Lauding the efforts of the current government, 74% of the survey participants give the central government a rating of ‘Good/Very Good’ on overall policy framework. The industry is also generally positive about the prospects of domestic manufacturing and believe that India is expected to have an annual cell-module manufacturing capacity of 5 GW by 2022.

To download the India Solar Handbook 2016, please visit our website: http://www.wordpress-117315-688799.cloudwaysapps.com/reports/india-solar-handbook-2016/

As part of the memorandum of understanding signed under the UDAY scheme, the Ministry of Power has allowed a roll forward of the Renewable Purchase Obligation (RPO) for Uttar Pradesh by seven years (refer). Meanwhile, state power distribution companies in Odisha have got a stay on enforcement of RPO from the state High Court. These incidents set bad precedents for the country’s solar targets, which are conceptually based on compliance with the RPO mechanism. On the other hand, states such as Telangana, Andhra Pradesh, Karnataka and Jharkhand are rapidly scaling up their solar programs and going way beyond their RPO targets. In fact, there is more solar power capacity planned in Telangana and Jharkhand in the next two years than their respective 2022 targets set by the Ministry of New and Renewable Energy (MNRE).

The RPO mechanism has by and large failed because of poor regulatory framework and non-compliance on the pretext of poor financial health of distribution companies

Some states are increasingly adopting solar power because of its economic advantages combined with environmental and political credentials

Going forward, we expect the RPO mechanism to become more of a measuring stick than an underlying driver for new capacity addition in the country

India’s 100 GW target for 2022 is based on 8% of total power consumption being met through solar power. However, RPO enforcement has been a challenge across the country because several states remain non-compliance on the pretext of poor financial health of distribution companies. This is despite the Supreme Court of India recently passing a judgement reaffirming the legal sanctity of RPOs (refer) and the central government proposing penalties for non-compliance under the Electricity Act 2003 amendments (refer). The purchase volumes of solar specific Renewable Energy Certificates (RECs) remain abysmally low at between 3 – 5% of the total available stock at the exchanges.

In absence of a strong RPO framework, BRIDGE TO INDIA believes that the key factors driving solar demand are strong political backing to renewable power particularly in BJP ruled states, improved economic fundamentals, short gestation period and even political showmanship.

As economics for solar power improve further, we expect the RPO mechanism to become more of a measuring stick than an underlying driver for new capacity addition. Indeed, that’s already happening to some extent. In fact, the central government is also exploring ways to tweak the RPO mechanism such that different states get different targets (as a percentage of power to be procured from solar) based on economic viability of solar in these states (refer).

India received 263 GW of private sector renewable investment commitments at Re-Invest last year. New developers continue to enter the market on an on-going basis resulting in over-subscription for most bids and dramatic falls in tariffs. On the face of it, with so much interest in the market, shortage of equity investors should not be an issue. But many developers seem to be bidding for projects first and planning to raise capital later. The question is: will they all be able to raise capital at the current tariff levels and in time to meet the stringent deadlines?

The market is in uncharted territory as none of the sub-INR 5.00/kWh (US 7.50 cents/kWh) projects have closed financing yet

Developers are hoping for a reduction in equipment cost but there is a possibility of prices firming up at least in the 6-9 month horizon; implementation of GST also poses a risk to these projects

Over the next one year, we believe that a significant number of projects are likely to get delayed or cancelled and tariffs may either stabilize or even rise marginally from current levels

There have been recent announcements about companies such as ReNew Power and Hero Future Energies successfully raising fresh capital (refer). But in the backdrop of falls in international renewable stock prices and significant decline in solar tariffs in India, many developers including companies such as SkyPower and SunEdison seem to be struggling to raise capital (refer).  BRIDGE TO INDIA believes that banks are also extremely reluctant to commit debt for the recent aggressive bids.

While developers are hoping for cost reduction in equipment and services to improve viability of their projects, a significant swelling up of demand from India and other countries may, in fact, lead to prices firming up. Implementation of GST also poses a risk to these projects (refer), making capital raising even more difficult.

In such a scenario, there are genuine concerns about many developers’ ability to raise financing and build projects on time. We have seen a trend in the past particularly in state tenders where the timelines tend to be generally more flexible and significant project delays are very common (refer).

Overall, BRIDGE TO INDIA is of the opinion that while annual capacity addition in the Indian solar sector will continue to go up over the next few years, actual capacity added will be much smaller than MNRE estimates of 12 GW and 15 GW for FY17 and FY18 respectively. We also expect tariffs to stabilize or even rise marginally from current levels to attract sufficient interest from the financing community.

In March 2016, the Government of Haryana revised its state solar power policy which was launched two years back. The new solar policy is a six-year policy spanning 2016 to 2022. Under the new policy the target is to add 3200 MW of solar power by 2022. This target is in line with central government target to add 100 GW of solar power by 2022 for which the state renewable purchase obligation (RPO) requirements are also increased from 3% to 8% now. As per Ministry of New and Renewable Energy (MNRE) and National Institute of Solar Energy (NISE), Haryana has an overall solar potential of 5 GWp (refer).

As of March 2016, only 12 MW capacity was commissioned in Haryana, and another 200 MW is allotted under its state policy. A comparative analysis with Solar Policy of 2014 is below:

ParametersSolar Policy 2014Solar Policy 2016Operative period2014-20172016-2022Target·         1,300 MW by 2022 (RPO target of 3%)
 
 
·         50 MW of rooftop target
·         Off grid solar capacity of 35 MW
·         3,200 MW by 2022 (RPO target of 8%) including 1,600 MW of rooftop capacityIncentives and exemptions·         Exemption from land use charges, external development charges, scrutiny fee and infrastructure development charges.·         A price preference of 2% given to the solar plants of 1-2 MW capacity
 
 
·         Exemption from land use approval, external development charges, scrutiny fee and infrastructure development charges
·         Exemption from environment clearance, clearance from Forest Department
·         Single window clearance for rooftop projects.
Initiatives planned·         The State govt. to create a separate fund known as Green Energy Fund for accelerated development of solar power projects in the state
 
 
·         Govt. to promote 50,000 Sqm of collector area of SWHS by providing financial incentive @40% of the cost of system (including 30% assistance provided by MNRE, and additional 10% from green energy fund)
·         For small rooftop systems of 5-100 kW, additional 10% subsidy from green energy fund to be given apart from MNRE 30% assistance
·         Mandated installation of solar power plant of 3% to 5% of connected load for residential buildings above 500 Square Yards size, all private and government institutions having connected load of 30 kW and industrial establishments above 50 kW load
 
 
·         The rooftop space available in the Government institutions can be provided on lease/rent for setting solar projects
·         Development of solar parks through Saur Urja Nigam Haryana Ltd. (SUN Haryana).

On comparing both the policies, it is seen that while in previous 2014 policy, the concept of setting up green fund for promoting small scale solar projects was given however in the new policy nothing is been said about that. Further, the rooftop target is increased multi-fold from 50 MW to 1600 MW under the new policy. There are some notable new incentives and initiatives that are introduced in the new 2016 policy:

Focus on rooftop solar sector with revised target of 1600 MW and mandatory installation clauses in place now for buildings above 500 sq yards.

For rooftop projects, all the statutory clearances and approvals shall be provided to the IPP through a single window facility, in a time bound manner within a period of 60 days after the submission of complete application along with necessary enclosures, fees/charges including LOI.

Net metering also made viable with additional pay-out of 25 paise/ unit for excess units exported to grid by solar plant owner

Madhya Pradesh Power Management Company Limited (MPPM), Delhi Metro Rail Corporation (DMRC) and International Finance Corporation (IFC) have announced a tender for a 3 x 250 MW solar project in Rewa, Madhya Pradesh. MPPM, a holding company for all power distribution companies in the state, will buy most of the power from the proposed project but interestingly, DMRC will procure 363 million units of power in a year, equivalent to 210 MW, from this project through open access route.

Key highlights:

Largest long-term procurement of open access solar power by a bulk power consumer in India heralding the case for economic viability of solar power

Attractive opportunity for large international developers because of its large size and ready solar park infrastructure availability

Rajasthan and Madhya Pradesh to benefit from a surge in open access power procurement because of high irradiation and relatively easy availability of land

The Rewa 750 MW project has been in development for almost 2 years now. The original plan was that it will be developed by Solar Energy Corporation of India (SECI) and funded with concessional World Bank financing alongside participation of private developers as minority shareholders (refer). However, the project structure has been completely revamped due to onerous conditions attached with World Bank funding and lack of interest from private developers for minority shareholding.

A joint venture between Solar Energy Corporation of India (SECI) and Madhya Pradesh Urja Vikas Nigam Limited (MPUVN), the state implementing authority, will provide solar park infrastructure for the project. The solar park is likely to secure World Bank financing for development of internal substation and transmission lines. The tender provides 18 months for commissioning of the projects from the date of signing of the Power Purchase Agreements (PPAs). Assuming that the PPAs are signed by December 2016, these projects can be expected to be commissioned by the middle of 2018.

Until now, most of the utility scale solar capacity addition in India has been driven by Renewable Purchase Obligations (RPOs). Delhi Metro’s purchase of solar power from this project will perhaps be the largest such long-term procurement of open access power in the country, driven purely by cheaper cost of landed solar power after factoring in transmission costs and associated charges. Rapidly improving economic viability of solar power means that procurement by bulk power consumers through the open access route could account for a sizeable part of the Indian solar market.

Our understanding is that Delhi Metro will assume all cost risk associated with open access use of power and provide a demand forecast for the day ahead. Each project will need to then prepare a day ahead forecast of availability for every 15-minute time block taking into account the requirement of DMRC and preparing a matching schedule in coordination with MPPM.  Overall, BRIDGE TO INDIA believes that once transmission and open access related issues are addressed, the Rewa project will be very attractive particularly for large international developers because of its large size and ready solar park infrastructure availability.

With the central government waiving off inter-state transmission charges for solar power, states such as Madhya Pradesh and Rajasthan, that have high irradiation and plentiful waste land are likely to attract a large part of these new investments.