Month: May 2016

Over the past two years, the rooftop solar market in India has grown at a compounded annual growth rate of 90%. As of March 31, 2016 the cumulative installed capacity stands at 740 MW (refer INDIA SOLAR HANDBOOK 2016). This growth is directly linked to the improvement in price competitiveness of rooftop solar power vs grid power.

Commercial and industrial (C&I) segment makes up almost 73% of the market, leaving the remaining 27% for the residential segment. As viability improves, we expect industrial rooftop segment to account for the fastest expansion at an annual growth rate of 248% until 2020.

Tamil Nadu leads the installations due to high consumer awareness and lack of reliable grid power. Gujarat comes in second place and here the rooftop market has been primarily driven by state government initiatives.  Maharashtra comes in third driven by high consumer tariffs across all consumer categories is very high.

Around 87% of all rooftop capacity in India is based on the CAPEX model while about 13% (102 MW) is based on the OPEX/ RESCO model. However, the OPEX based project market is showing a year on year growth of about 150%, and is expected to take up a higher market share as the market matures. In other developed countries like the US and UK, the OPEX model is a preferred choice for consumers.

Figure 1: Rooftop solar market capacity in India, MW

Source: BRIDGE TO INDIA research

Despite the impressive growth, the market is still way behind on achieving the 40 GW rooftop capacity target for 2022. This is especially true if we compare it to the success of the utility scale solar segment. The key challenges that the government needs to address are improving net metering policy framework and cost/ availability of financing for consumer and start-up RESCO’s. Consumer education remains another major hurdle for the sector.

The Modi government recently completed two years in office. Substantial progress has been made in our view on improving overall sector investment outlook and policy environment in these two years under minister Piyush Goyal.

There is a very supportive broad policy framework in place;

Specific policies and/or plans have either been put in place or are being deliberated upon for each of the key sectoral issues including land and transmission availability, distribution company (DISCOM) finances and grid capacity;

More needs to be done on boosting rooftop solar market and improving long-term financing flow to the sector but the industry seems broadly satisfied with overall progress;

Most importantly, the identification of issues and priorities has been spot on. In addition to developing a strong over-arching policy framework through amendments to the Electricity Act (increase in renewable purchase obligations, separation of content and carriage for DISCOMs), the government has moved decisively on facilitating greater private investment in the sector through solar park policy (land acquisition and power evacuation) and UDAY scheme (improving DISCOM finances). Now, the attention is shifting to: i) the grid’s ability to accommodate a larger share of intermittent power (green corridor program, national smart grid mission); and ii) ability of domestic manufacturers to compete with leading global players.

Despite some niggles, the solar parks policy has been very successful in our view and recent reports suggest that the Ministry of New and Renewable Energy (MNRE) is trying to expand the solar parks program and also unveil a solar zones policy very shortly (refer), wherein the government proposes to pre-identify suitable areas with sufficient land and evacuation capacity for development of small-mid size capacities.

UDAY has already achieved tremendous success in a very short period of time by reducing aggregate DISCOM debt by INR 1 trillion (USD 15 billion, approximately 25% of total debt) and materially improving off-take risk outlook.

To improve grid capacity to accommodate a larger share of intermittent power, a green corridor plan has been launched. Also, a technical committee has recently recommended several actions such as bringing flexibility in the conventional generation, frequency control, generation reserves, ancillary services, renewable energy management centers, transmission system augmentation and strengthening as well as certain compliance actions for renewable generation (refer). Implementing these plans will be difficult and time consuming but the deliberations show that the government understands the issues and is actively working to find solutions.

The recent solar CEO survey conducted by BRIDGE TO INDIA showed that 74% of the respondents rated the central government’s policy push as good or very good, showcasing a very high confidence level amongst the industry. That is also highly evident in the way leading international and Indian investors have become increasingly active in the market helping to bring prices down.

What can be improved further? For sure, much still remains to be done on rooftop solar, which seems to be struggling in comparison to utility scale solar.  And the lack of long-term debt financing solutions also needs to be tackled. But if the government continues with the same level of commitment, we are sure that these challenges can also be addressed over time.

In our last weekly update, we discussed the state of domestic manufacturing and Indian government’s efforts to improve prospects of the sector after the domestic content requirement mechanism was challenged successfully by the USA at the World Trade Organization (WTO) (refer). Recent reports suggest that the government is planning to offer incentives directly to domestic manufacturers instead of compulsory domestic content requirement (refer). The Indian government seems totally committed to support local manufacturing with Mr Piyush Goyal, Minister for new and renewable energy, being emphatic that India needs a vibrant manufacturing sector to go hand-in-hand with boost in solar power generation.

Existing manufacturers may not gain any direct benefit from the new policy, which is likely to focus on creating new, large scale and vertically integrated investments

Financial incentives and/or assured market demand may be provided using a bidding based mechanism

Long-term outlook for the sector will remain uncertain unless there is a genuine competitive advantage arising from lower costs, better infrastructure and/or access to superior technologies

No details of the new manufacturing policy are available at this stage but stock prices for existing manufacturers have already shot up in anticipation – see stock price charts of Websol Energy and Surana Solar. This rally may be unwarranted, however, as we believe that the incentives are likely to be available only for new, large scale manufacturing investments. Most of the existing manufacturers with small, uncompetitive capacities may not gain any direct benefit from the new policy. The prospects of market consolidation are also slim in our view because of obsolete and fragmented technologies being currently used.

We are curious to see how any incentive policy will be designed – apart from the usual questions of how much incentives will be provided to whom, the main challenge for the government will be to ensure that the new policy stays within the WTO framework. There have been unconfirmed reports that the incentives may be provided in the form of viability gap funding allocated through a bidding process. It is also possible that some business certainty in the form of assured market demand or project development preference is given to new manufacturers.

BRIDGE TO INDIA agrees that supporting investments into large scale, vertically integrated production lines is a better policy move than supporting existing manufacturers. But financial incentives and assured market demand can play only a limited role in creating a vibrant manufacturing sector. Long-term prospects for the sector will depend on ease of doing business in India, infrastructure availability and other business policies.

With a target of 100 GW, India is hoping to get 8% of its power requirements from solar PV by 2022. In comparison, Germany got around 7.5%[1] of its power consumption from solar PV in 2015 and China is still at around 3%[2]. In Germany, where most of the solar capacity has been deployed in the form of distributed solar projects, billions of Euros are being spent on grid projects to help reduce curtailment in green power. Despite that, according to a government report[3], Germany curtailed about 1,581 gigawatt-hours of green energy in 2014, a threefold increase over the previous year. In China, grid curtailment issues continue to impact the export of power from solar projects and some provinces such as Gansu (31%) and Xinjiang (26%) have been hit particularly badly[4].

In Germany, on sunny weekdays, solar power can cover 35 percent of the momentary electricity demand. On weekends and holidays this ratio goes up to 50 percent and sometimes even higher. At such times, power pricing gets distorted, renewable and other sources of generation often need to be backed down. These problems are occurring despite Germany’s peak daily demand hours coinciding with peak solar generating hours. An integrated European grid, smarter grid management and abundant availability of dispatchable gas based power comes in handy at such times.

India is not as lucky as it is an evening peak country and dispatchable sources of power are limited resulting in much higher risk of curtailment for solar power. This risk is not too far out into the future as many states are expected to achieve significant grid penetration in the next 1-2 years. Telangana is expected to add around 3 GW of solar power capacity by 2017 and the state is known to be planning further significant allocations. With average estimated day time demand of 6 GW in 2017, 50% of the state’s daytime demand is likely to be met from solar power.

Karnataka and Andhra Pradesh are likely to face similar issues. But the most extreme case is Jharkhand where the average day time power demand is less than 1 GW but the state has already tendered 1.2 GW of solar projects. The government is planning upgradation of transmission infrastructure through its green corridor program but such projects can typically take up to five years to become operational. In comparison, solar projects become operational within 12-18 months. States with such high solar penetration are therefore expected to face significant grid curtailment.  But Indian solar project developers typically assume that they will maintain uptime of 99% or more for a period of 25 years.

BRIDGE TO INDIA believes that the future risk of curtailment of power due to grid congestion especially in high renewable penetration areas, can upset project cash flows and return expectations. In an aggressive bidding scenario, developers may not be appropriately pricing in such risks.

Curtailment risk could have a substantial negative impact on the investment climate for the sector in the years to come. The government needs to prioritize investments into the transmission infrastructure to proactively assuage concerns of the sector.

[1] https://www.ise.fraunhofer.de/en/publications/veroeffentlichungen-pdf-dateien-en/studien-und-konzeptpapiere/recent-facts-about-photovoltaics-in-germany.pdf

[2] http://www.economist.com/news/business/21696941-solar-power-reshaping-energy-production-developing-world-follow-sun

[3]http://www.bundesnetzagentur.de/SharedDocs/Downloads/EN/BNetzA/PressSection/ReportsPublications/2015/Monitoring_Report_2015_Korr.pdf?__blob=publicationFile&v=4

[4] http://www.pv-tech.org/news/china-displaces-germany-as-solar-capacity-leader

Earlier this month, the Ministry of New and Renewable Energy (MNRE) published an update stating that India’s cell and module manufacturing capacity now stands at 1,212 MW and 5,620 MW respectively (refer). These numbers appear respectable in the context of India’s solar power generation capacity but the average size of a cell and module manufacturing line in India is just 86 MW and 69 MW respectively. In comparison, module production capacity of Trina Solar is expected to surpass 6 GW by the end of this year, higher than all 81 Indian module manufacturers put together.

The Indian government is committed to support domestic manufacturing and is working on a new policy on this front

Despite commitments from several leading industry players and an improved demand outlook, Trina Solar and Adani Group are the only parties still considering domestic manufacturing plans in earnest

It remains to be seen if the planned capacities can become genuinely globally competitive but Scale being a key determinant of competitiveness, outlook is not very promising for Indian manufacturers despite the solar power generation business going through a boom phase.

The Indian government has lost against the US at World Trade Organization (WTO) on defending domestic content requirement for solar projects, but it is not willing to back down. In fact, the government is in the process of filing counter cases against the US to bring it back to the negotiation table (refer). However, we remain firmly of the opinion that imposing anti-dumping duties on imports or providing assured demand for domestic manufacturers is not a sustainable basis for solar manufacturing sector in India. It is worth noting that last May, during Prime Minister Narendra Modi’s visit to China, 3 MoUs were signed for solar manufacturing between Trina Solar, JA Solar, Canadian Solar and Welspun Energy, Essel Solar, Sun Group respectively (refer). Separately, Adani Group had signed an MoU with SunEdison to set up a large integrated solar manufacturing facility in Gujarat. As we had surmised at the time, none of these discussions have led to concrete investments so far (refer). Amongst all these players, Trina Solar and Adani Group are the only parties still considering domestic manufacturing plans in earnest despite the fact that demand outlook for modules in India has improved tremendously over the last year.

What a fundamentally competitive manufacturing sector needs is a thriving ecosystem, access to leading technologies, efficient infrastructure and low cost capital. None of these measures are easy to implement but strong domestic demand and a committed government can make a big difference. Meanwhile, the government is also working on a policy to boost large scale manufacturing for solar in the country (refer).

Our recent CEO survey (refer) findings were largely positive about the potential of domestic manufacturing in India but 60% of the participants don’t expect India to have any fully integrated manufacturing line even by 2022.

Going forward, we expect a handful of serious players, most likely Trina and Adani Group, to make significant investments in the segment partly to exploit the opportunity arising from anti-dumping duties imposed by USA and Europe on Chinese modules. But it will remain to be seen if their facilities can become genuinely globally competitive.

Auction results for the NTPC (350 MW) tender in Telangana were announced last week. The capacity was fragmented into 35 projects of 10 MW each and a bidder could apply for a maximum of 10 projects. The tender was not attached to a solar park and hence, land acquisition and transmission would be in the developer’s scope. NTPC has now allocated 2,520 MW out of the total 3,000 MW target under state specific bundling scheme (NSM Phase II, Batch II)

Renew Power (100 MW), Karvy Consultants (50 MW), Azure Power (100 MW), Adani (50 MW) and Acme (50 MW) have won projects with tariffs ranging from 4.66/kWh to 4.67/kWh

The tender was oversubscribed by more than 2x, developers such as Mahindra, Acme, Solar Pack, Suzlon are a few among other companies that participated but did not win any projects

International developers refrained from participation in this tender largely due to unavailability of solar park infrastructure

We believe that these prices are relatively attractive in comparison to the NTPC allocations in neighboring state Andhra Pradesh because it is expected that developers will be able to arrange land and transmission at almost half the cost of solar park infrastructure and there has also been a 2-3% reduction in module prices in the last 6 months. NTPC has been successful at maintaining a competitive environment in its auctions and it is likely that they will receive tariff bids in the similar range (INR 4.65/kWh-INR 4.75/kWh) in the forthcoming Andhra Pradesh 250 MW (Solar Park) auction as it comes close to allocating the 3,000 MW for project development.

A total capacity of 527 MW has been commissioned in Telangana and around 2,500 MW is in the pipeline, which is due to be commissioned in 2017. Power demand Telangana is expected to be around 6,000 MW by the year 2017, which means that the state would meet approximately 50% of its power demand from solar at peak generation. Due to high penetration of solar in the southern states of Telangana, Andhra Pradesh and Karnataka, grid stability in that region is likely to become an increasingly critical issue.

Distribution companies (DISCOMs) are the weakest link in India’s power sector with accumulated financial losses of INR 3.8 trillion (USD 57 billion) and debt of INR 4.3 trillion (USD 65 billion) as of 2015 (refer). Government restructuring plan for the DISCOMs, Ujjwal Discom Assurance Yojana (UDAY), is pivoted around states taking over 75 per cent of their outstanding debt as of 30th September 2015 and funding ongoing losses on a regular basis. Through lowering of interest costs and other efficiency measures proposed in the reform, the government expects UDAY to lead to an overall saving of INR 1.8 trillion (USD 27 billion) per annum for DISCOMs.

UDAY seeks to kill two birds with one stone by improving financial performance of DISCOMs and freeing up banks to provide more debt to the power sector

By taking decisive action as well as monitoring progress on an active basis, the government has successfully allayed one of the major risk factors for the sector

All major financially stressed DISCOMs except those of Tamil Nadu, which accounts for over 18% of the total DISCOM debt in the country, have joined the scheme

Until now, 18 states and one union territory have given an in-principle agreement to join UDAY and 10 have already signed the Memorandum of Understanding (MoU) (refer). Notable absentees from the scheme are Tamil Nadu, Karnataka and West Bengal. The Reserve Bank of India has so far issued bonds on behalf of eight state governments worth almost INR 1 trillion (USD 15 billion) (refer for state-wise details) reducing banking sector exposure to the power sector by an equivalent amount. Value of bonds placed by Rajasthan, Haryana and Uttar Pradesh alone is equivalent to 18% of the overall power sector debt in the country. These bonds have been readily subscribed by investors such as Employees’ Provident Fund, Kotak Mutual Fund, Reliance Mutual Fund, UTI MF and the Life Insurance Corp of India (refer) because of marginally higher yields. By shifting debt from DISCOMs to the state governments, the government has not only achieved improved financial profile of the DISCOMs but also improved future debt funding prospects for the sector because of reduction in banking sector exposure to the sector.

A recent survey of solar CEOs carried out by BRIDGE TO INDIA revealed that 54% of the participants are optimistic about the UDAY scheme and contrary to traditional fright about DISCOM financial health, only 8% of them thought that poor off-take was the biggest challenge for achieving the 100 GW target (refer).

The reform process has started on a positive note and it seems that the Ministry of Power is constantly supervising progress which is a very big positive for the sector. BRIDGE TO INDIA believes that better financial ratings of the DISCOMs and lower banking sector exposure for the power sector will be a tremendous boost for attracting private investments in the sector.

Solar Energy Corporation of India (SECI) has released a tender to allocate 30% capital subsidy for 500 MW of residential and institutional rooftop solar projects across India (refer). This is by far the largest rooftop solar subsidy tender in the country till date. According to BRIDGE TO INDIA estimates, residential and institutional segments accounted for rooftop solar capacity addition of around 60 MW in the last year. The SECI tender envisages the entire 500 MW to be commissioned within 12 months of sanction essentially meaning that these market segments will need to grow by more than 8x, making the tender size extremely ambitious. The 500 MW tender capacity is split into 300 MW capacity for EPC installers and 200 MW for project developers. Further, the tender requires state wise bids where all winning bidders in a state would need to match the lowest bid (L1) for that state.

The tender will serve to boost rooftop solar demand but design of the tender is very restrictive resulting in likely undersubscription

Measures to promote aggressive bidding may be counterproductive particularly because of the very tight 12-month commissioning deadline

It is not very clear why the residential segment has been effectively restricted to only 50 MW

Late last year, the government approved a capital subsidy of INR 50 billion (USD 750 million) as part of central government’s push for rooftop solar (refer), which has been struggling in comparison to the utility scale solar market. As part of this subsidy disbursement plan, MNRE would disburse subsidies through SECI, state nodal agencies and select banks (refer).

SECI will therefore be competing with other subsidy providers but the tender terms are very restrictive in our view. The subsidy will be provided to the lowest cost bidders who will also have to provide a bid bond of INR 1.5 million/MW (USD 23,000/MW), a performance bond of INR 2.25 million/MW (USD 34,000/MW), a service charge of 3.75% of the project cost and pay an additional bid processing fee of over INR 17,000 per states that they want to participate in. SECI will disburse 20% subsidy at the time of commissioning with balance 10% provided one year after commissioning. The subsidy also only available to projects using modules that are made in India. As the subsidy scheme requires using only domestic modules (extra cost of 6-10%), it means that the bidders will lose a significant share of the subsidy gain by way of extra costs.

As against this, a customer can receive the entire 30% subsidy under the same central government scheme at the time of commissioning from a state nodal agency.

The tender requirement to commission the entire allocated capacity within 12 months (or face penalties) is also harsh in view of the small market size at present and significant delays observed in net-metering approvals across India.

Finally, a very large part of the tender, 450 MW, is reserved for project sizes greater than 25 kW meaning that only 50 MW has been set aside for residential and SME customer segments. The rationale for doing so is not very clear as these segments are estimated to be as big in size as the institutional market.

Overall, this tender should act as a catalyst for the residential and institutional segments of the rooftop solar market but the tender design has lot of scope for improvement. Unless some of the conditions are relaxed, we anticipate that the tender subscription would be very low for the institutional market segment.