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New push needed for net-metering implementation

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As the Indian solar sector continues to gather more momentum by the day, one area that often feels relatively neglected is rooftop solar. India’s rooftop solar capacity is currently estimated at 740 MW, only about 10% of total solar PV capacity in the country.

Delays in approvals, undefined responsibilities and accountability, unavailability of meters, restrictions on system sizes are some of the main issues that need to be resolved

International examples show that market wide adoption of rooftop solar can grow by up to 60% if net-metering is implemented effectively

Ensuring effective net-metering implementation should be the top priority of government and regulatory agencies

BRIDGE TO INDIA’s analysis shows that net-metering can be the single biggest government policy driver for increased adoption of rooftop solar with potential impact larger than that of capital subsidies or lower financing cost. International examples show that market wide adoption of rooftop solar can grow by up to 60% if net-metering is implemented effectively. Therefore, if India is to come anywhere close to meeting its ambitious target of 40 GW of rooftop solar capacity by 2022, the government focus should be on effective implementation of net-metering. The Central Electricity Regulatory Commission (CERC) issued its model net-metering regulations in 2013 and since then 27 states and union territories (UTs) have issued net-metering policies or regulations. However, progress on the ground remains slow and it is time to move to address the operational hurdles. A recent news report provides the best illustration of problems faced by consumers and investors for net-metering (refer).

Based on industry discussions, it seems that only a handful of states and union territories such as Andhra Pradesh, Telangana, Punjab, Delhi, Chandigarh and Karnataka have begun actual implementation. Some other states such as Haryana, Tamil Nadu and Rajasthan also seem to be catching on but there is a lot of work that needs to be done to ensure effective implementation. Delays in approvals, undefined responsibilities and accountability, unavailability of meters, restrictions on system sizes and inconsistencies on rules for interconnection of battery backed systems are some of the main issues that need to be resolved. Other area in which the policy framework needs to improve is to make it more friendly for BOOM/ BOOT/ lease models by removing ambiguity over open access (grid use) charges and mitigating power offtake risk for third party investors.

Rather than reinventing the wheel, state regulators can learn from each other to improve implementation and resolve other issues. Andhra Pradesh is a good example to follow for the application process, Karnataka already allows tri-partite signing of agreements with third-party investors and Punjab has explicitly waived off all open access charges. More flexibility is provided by Karnataka, Odisha, Andhra Pradesh and UTs as they allow both net and gross metering while Delhi’s solar policy allows virtual and group net-metering (refer).

A new model regulation by CERC collating the industry best practices and learning from actual on-the-ground experience will be extremely useful in giving a much needed boost to the rooftop sector. We believe that ensuring effective net-metering implementation should be the top priority of government and regulatory agencies.

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Delhi can become a model for rooftop solar implementation across India

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The Delhi government approved its first solar policy on June 6, 2016. The policy understandably focuses on rooftop solar development because of shortage of available land space in the city. It has many innovative provisions and provides for exemptions and simplification of procedures for rooftop system installation.

The policy introduces ‘Group Net Metering’ for the first time in India, whereby surplus energy exported from a solar plant can be credited against consumption at any other location of the same entity within the same DISCOM territory. In another first for India, the policy introduces ‘Virtual Net Metering’ whereby consumers with insufficient rooftop space can co-invest in a solar power system at any other location and get pro rata benefit of electricity output.

The policy also proposes to make several improvements to the existing net metering by providing for several tax and operational exemptions. Key highlights are:

The introduction of new concepts such as group net-metering and virtual net-metering really sets this policy apart. Group net metering concept would be most beneficial for large consumers with multiple buildings and electricity connections.

Given factors such as high afternoon peak demand and low potential for any other locally available renewable source of power, rooftop solar makes the utmost business case for Delhi. Delhi has to buy expensive power on a short-term basis to meet peak day time demand in summer months. This expensive thermal power can be replaced by locally developed rooftop solar power.

BRIDGE TO INDIA estimates rooftop solar potential of Delhi to be 2.5 GW (refer). Out of this, 26% potential exists in the government/ public sector, 25% in commercial/ industrial sector and 49% in domestic sector.

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Successful sale of solar assets driving confidence in the sector

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As the Indian solar sector grows, there has been growing pressure on Indian project developers to churn their capital. The merger and acquisition (M&A) activity in the sector is gathering pace and it is believed that as many as 3,000 MW of projects are on sale right now. Last week, a report quoted that IDFC Alternatives, an Indian private equity fund, is in advanced discussions to buy 275 MW of solar assets from Acme Solar (refer). This comes on the heels of successful closure of Welspun’s sale of 990 MW of solar assets to Tata Power (refer) and another reported sale of 337 MW of renewables capacity by NSL to Brookfield Asset Management.

Sale of post-development renewables assets is a time-tested and proven method to free up capital but there have been very few successful exits in India

The Indian solar market is shifting gears to move into the next phase of its development and a liquid secondary market is essential for its sustainable growth

A few more successful deals and/ or listings will help set more industry benchmarks, act as a proof of concept and attract other investors to the sector

There are essentially two routes for project developers to recycle their investment and free up capital for future growth. Sale of post-development renewables assets is a time-tested and proven method in other countries. It is relatively quick and easy with a highly standardised approach but India does not have the kind of domestic patient capital – typically utilities and pension funds or insurance companies looking for long-term predictable cash flows – needed for buyout of such assets. International pension and insurance funds have been the mainstay of secondary markets worldwide, but so far they have stayed out of India. Public listing of businesses or special purpose investment vehicles is another viable option with many successful international examples (NRG Yield, NextEra Energy, Abengoa Yield, Pattern Energy Group and TransAlta Renewables in the USA) but so far, there is none in India. Indian renewable IPPs have not been able to muster the scale or profitability to successfully list on stock exchanges.

The lack of secondary capital raising options has been a big concern. Other than the transactions listed above, examples of successful exits in the sector have been very few so far. Sembcorp, the Singapore based utility was a notable exception when it bought majority control in Green Infra with a total capacity of 516 MW in 2014. Part of the problem is the big gap in valuation expectations of developers and secondary market investors. Competitive bidding nature of the Indian market means that margins are relatively thin to pay a reasonable premium to initial developers as well as a satisfactory risk adjusted return to secondary investors.

It appears that things are beginning to change slowly. With yields in their home markets at all-time lows, international pension and insurance funds are eyeing Indian investments. Some transactions have already fructified in the road sector (refer) and we believe that solar transactions are not far away. Meanwhile, Azure Power and Renew Power are believed to be planning an Initial Public Offering (IPO).

The Indian solar market is shifting gears to move into the next phase of its development and a liquid secondary market is essential for its sustainable growth. A few more successful deals and/ or listings will help set more industry benchmarks, act as a proof of concept and attract other investors to the sector.

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Indian corporates assert themselves as bidding intensity comes down

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Results were announced last week for 1,050 MW of projects tendered by Solar Energy Corporation of India (SECI) in Karnataka (950 MW) and Chhattisgarh (100 MW) under the Viability Gap Funding (VGF) scheme. These projects will be set up outside solar parks and will have no module sourcing restrictions. Adani (350 MW), Hero Future Energies (200 MW), Energon (100 MW), Acme Solar (160 MW) and Solar Arise (30 MW) are the big winners in Karnataka with Adani winning the entire 100 MW capacity available in Chhattisgarh.

Recent tenders show that level of oversubscription and/or bidding intensity has come down markedly over the last 6 months

While international developers have won a majority (58%) of NTPC projects, 62% of SECI pipeline and 51% of state policy pipeline has been allocated to Indian corporates

As many of the leading developers get occupied with execution and/or capital raising, reduction in bidding intensity should provide an attractive bidding opportunity to newer players

Both tenders saw limited participation and the level of oversubscription and/or bidding intensity has come down markedly over the last 6 months. With an extraordinary 12 GW of projects in pipeline where tender process has already been completed, developers appear to be getting more selective and disciplined in their bids. The winning VGF in Karnataka is in the range of INR 6.8m/MW to INR 7.35m/MW and the Chhattisgarh project has been won at a VGF of INR 5.9m/MW. These levels are considerably higher in comparison to VGF quoted recently in Andhra Pradesh in May 2016 where the lowest VGF was INR 4.45m/MW. However, it is interesting to note that Hero Future Energies and Adani submitted more aggressive bids in Karnataka and Chhattisgarh tenders respectively with other bidders refusing to match their levels.

The other key trend we see is that with NTPC coming close to completing its target of 3,000 MW of project allocations, the Indian corporate houses are playing a leading role in the sector. Both tenders were dominated by Indian developers. Adani has been a dark horse in the sector. It entered the market only about a year back but is now on track to build a portfolio of 1.2 GW, amongst one of the highest in the country. In contrast, many of the large international developers, interested primarily in NTPC tenders, are relatively quiet.

Our analysis shows that Indian corporates are leading the charge in SECI and state tenders particularly where there is no solar park availability. They are understandably more willing to take higher offtake and development risk. While international developers have won a majority (58%) of NTPC projects, Indian corporates have won the majority of SECI pipeline (62%) and state policy pipeline (51%).

SECI is expected to announce new tenders in Andhra Pradesh and Maharashtra very shortly. As many of the leading developers get occupied with execution and/or capital raising, reduction in bidding intensity should provide an attractive bidding opportunity to newer players.

In other sector news, capital raising seems high on the agenda of many developers. Welspun has just agreed to sell its 990 MW portfolio to Tata Power again affirming the growing appetite of Indian corporate houses in the sector. Meanwhile, Azure and ReNew Power are busy with preparations for IPO.

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India issues a credible draft of mini and micro grid policy

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The Ministry of New and Renewable Energy (MNRE) has issued a draft national policy for mini and micro grids (refer). The policy aims to create up to 500 MW capacity in the private sector in the next five years.

India has a terrible record on providing reliable grid electricity to large parts of the country; several startups have enjoyed limited success in the mini and micro grid sector but a scalable, profitable model seems to be exclusive

The policy provides some much needed policy certainty to the sector and includes measures such as single window clearance, grid connectivity and pricing visibility for evolution of bankable business models

Grid power is heavily subsidized for residential and agricultural consumers and the ability of these consumers to pay for more expensive mini/micro grid power continues to be a concern

The Modi government wants to provide ‘24×7 power for all’ in the country by 2019. This is a very lofty target as India has up to 250 million people without access to grid and many more still who have grid connection but face outages of up to 16 hours a day.

As a part of the Deen Dayal Upadhyaya Gram Jyoti Yojna (DDUGJY), the government is in the process of electrifying 18,452 villages by May 2018. Out of this, 14,204 villages have been identified for extension of the grid and 3,449 villages are to be electrified through off-grid power projects (refer). As per the government data, grid extension work is progressing ahead of schedule and 49% of the target has been achieved in the past one year. However, only 16% of the off-grid target has been achieved so far (refer).

Several start-up enterprises have sprung up in the last few years offering multiple business models and product solutions in this space. Companies like Husk Power, Gram Power, Gram Oorja and OMC Power have enjoyed reasonable success but a scalable, profitable model seems to be largely elusive. Main challenges include customer inability to pay (poor affordability), poor policy framework and multiple implementation challenges.

The draft policy is technology agnostic and tries to address many of these challenges:

determination of regulated prices for mini grid projects with some tariff determination flexibility provided to mini/micro grid operators;

single window clearances for seeking regulatory approvals and right of way, availability of information on taxes and exemptions;

notification of areas where grid extension is not planned;

creation of local village committees to ensure customer adoption, payment collection and faster dispute resolution;

provision of grid connection to enable sale of power to local utilities;

RPO multiplier to make interconnection more attractive for distribution companies; and

specification of quality and performance standards.

The policy is still in draft stage and is meant as a guideline for states, who can adapt or modify the policy based on their local needs. BRIDGE TO INDIA believes that it provides some much needed policy certainty to the sector and includes many of the measures needed for evolution of bankable business models for mini and micro grids. But somewhat surprisingly, it doesn’t offer any direct financial incentives or subsidies. Grid power is heavily subsidized for residential and agricultural consumers and the ability of these consumers to pay for more expensive mini/micro grid power continues to be a concern.

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