Month: July 2016

In a ground-breaking step for the Indian solar market, Solar Energy Corporation of India (SECI) has announced that it will soon release tenders for solar project developers to install storage solutions along with their projects. In the upcoming tenders for 100 MW capacity in Andhra Pradesh and 200 MW in Karnataka, each 50MW project would be connected to a storage capacity of 2.5 MWh (refer). These tenders would help India draw attention of some key storage systems suppliers such as NGK Insulators, AES Energy Storage, Sumitomo Electric, LG Chem, Samsung SDI, NEC Energy, BYD, Toshiba, GE and Saft. BYD is already known to be exploring this opportunity and may offer a joint bid with SkyPower (refer).

The primary commercial objective of these particular tenders would be to showcase India as an upcoming market for utility scale energy storage solutions

For proposed specifications, including storage may lead to a 10 paisa increase in tariffs, however, the technical benefits of storage of this size will be negligible

These projects should just be seen as a start of the process to acclimatize project developers and grid operators with utility scale storage

The Indian government seems to be ready to push through the much anticipated Goods and Services Tax (GST) bill in the Parliament in the upcoming monsoon session (July 18 to August 13). If passed, the government will aim to implement the reformed tax regime from April 2017. A key proposal of the reform is to do away with a maze of taxes and exemptions therein and replace them with uniform tax structure across different states and product categories. While this new tax regime promises to be positive for the overall economy, it is not good for the solar industry which stands to lose several tax exemptions.

A committee constituted by the current government has recommended three tax slabs for GST: a standard rate of 17-18% for most items, a merit list where the rate would be 12% and a demerit list where the rate would be 40%. This is in addition to an exemption list of around 100 essential items where GST would be completely waived off.

The industry had been expecting solar cells and modules to find a place in the exemption list of around 100 essential items where GST would be waived off. However, this seems increasingly unlikely in view of recent comments made by minister Piyush Goyal where he said that the GST would help provide a level playing field to local manufacturing. Solar equipment would fall either under the standard list or merit list. In either scenario, the overall project cost is likely to increase and pare most of the price reduction gains made over the last 1-2 years.

Under the current regime, there is no tax or duty applicable on import of solar cells or modules as against an import duty of 26-29% applicable to most goods. As solar modules are often procured directly by the project developers, there is also no additional local tax. Under the GST regime, this nil rate would be replaced by a combination of basic custom duty and the applicable GST rate. It is expected that the basic custom duty will continue to be waived off for solar cells and modules but the standard GST rate will need to be paid.

The standard import duty for inverters in India is 28.44% but this is reduced to just 5.15% for solar projects. Therefore, the cost of imported solar inverters would also increase under the GST regime. However, many prominent international inverter suppliers assemble their inverters in India and tax inefficiencies weeded out by GST should benefit local manufacturing by providing them with a level playing field against imports.

Currently, VAT and/or a Central Sales Tax (CST) is applicable on sale of equipment within India. Several states including Uttar Pradesh and Rajasthan have completely waived off VAT, normally around 14%, for solar equipment and most other states have set it around the 5% mark. Excise duty on manufacturers is also waived off for items such as solar module mounting structures. As all these exemptions go away and VAT, CST and excise duty get replaced with GST, the project cost would undoubtedly increase. However, a part of this increase will be offset as a pass through will be allowed on the GST paid at the time of import and savings on multiple taxes and duties along the value chain.

The magnitude of actual cost increase will depend on the applicable GST rate and the procurement pattern. MNRE estimates the cost increase to be in the range of 12-16% for a GST rate of 20%. Now the question is, how do developers manage the risk of GST being implemented when they are bidding for projects and signing PPAs?

Most PPAs in India include a ‘change in law’ clause, wherein, any impact due to change in law is passed through to power off-takers. However, there is no precedence or a process in place for calculating the pass through impact of such a change for bidding based solar project. This uncertainty will be a cause of concern for the investors.

Post implementation of GST, DISCOMs’ willingness to buy more solar power at higher tariffs will also be affected and could pose another short-term challenge for the sector.

Recent market reports suggest that an oversupply situation is building up in PV module manufacturing in China, especially for the second half of 2016 and this is likely to lead to significant price corrections in the market (refer to story 1, story 2 and story 3). China has a target of supporting 18 GW of solar installations in 2016 as against 15 GW of actual capacity addition in 2015. But the fall in Feed-in-Tariff (FiT) from 30th June brought forward demand in Q2-2016 and 13 GW is estimated to have been installed in the first half itself. As a result, demand is expected to slow down sharply in the remaining part of the year. Analysts from IHS research believe that PV installations in China in Q3-2016 may drop by as much as 80%. (refer).

For global sales, module prices shipping in the fourth quarter of 2016 have already declined by as much as 10%, since the first half of 2016

Price reduction in India is being further aided by a significant depreciation of the Chinese Yuan against the Indian rupee

Indian solar project developers will be relieved to see prices coming down much more sharply than expected, providing an opportunity to improve returns despite aggressive bidding

In the midst of this demand slowdown, tier-II and tier-III module suppliers from China have lowered prices due to their over exposure to the domestic market and tier-I companies are now being forced to narrow the gap. IHS noted that module prices for Q4-2016 have already declined by as much as 10% since the first half of 2016 (refer).

The fall in prices comes at a perfect time for Indian solar market as Q1-2017 is expected to be the biggest quarter for new capacity addition till date. BRIDGE TO INDIA estimates new capacity addition of around 2 GW in this quarter. Price reduction in India should be further aided by depreciation of Chinese Yuan against Rupee by about 3-4% over last year. As a result, we expect tier-1 module prices to fall to INR 27.50/Wp for shipments in Q1-2017, a significant decline of almost 10% in less than a year. Indian project developers will welcome the steep fall in prices, which will provide much needed relief after the intense price bidding seen recently. Projects from the Telangana state allocations are expected to be biggest beneficiaries of this price drop as they have relatively better tariffs and a bulk of the projects are likely to be commissioned in Q1 2017.

With near term trends pointing to market stagnation in China and Japan and trade restrictions continuing in US and Europe, India has emerged as a key growth market for the Chinese suppliers. Unless there is a change in Chinese demand sentiment or EU removes its trade barriers against Chinese suppliers, we expect prices to stay soft for the next few quarters.

SECI has completed auctions of 160 MW capacity of projects to be developed in the Charanka solar park in Gujarat under the viability gap funding (VGF) scheme. The original tender of 250 MW was broken down into five projects of 40 MW each and two projects of 25 MW but bids were received for just four projects of 40 MW. Auctions for other projects may now be completed at a later date. Most private developers steered clear of this Gujarat tender due to the extremely high solar park charge – INR 9.6 million per MW – equivalent to the VGF ceiling of INR 10 million/MW and more than double the solar park charges in Andhra Pradesh. This effectively means that even if a developer got the maximum VGF of INR 10 million/MW, it would spend the entire VGF on paying for solar park charges. The combination of VGF plus fixed tariff of INR 4.43/kWh as payable by SECI was not seen as attractive by most developers.

Bidding for this tender has been delayed for over 10 months as developers have been reluctant to participate

Considering that Gujarat has one of the highest RPO requirements in the country and its Discoms are most bankable amongst peers, the state must aim to add more capacity

There is a need for the state to revisit its high solar park charges but short-term project development opportunities in the state are very limited

It is the first such tender where SECI proposes to disburse 100% VGF on commissioning of the project instead of tranche wise disbursement over 6 years. This move is very positive for developers but still failed to generate enough interest in the tender.

The online auction saw projects being allocated to Gujarat Industries Power Co. Ltd (80 MW, VGF of INR 6.97 million/MW), Orange Renewables (40 MW, INR 7.02 million/MW) and Mahindra Renewables (40 MW, INR 7.77 million/MW). The bids are relatively high compared to recent SECI allocations in Chhattisgarh, Karnataka and Andhra Pradesh but are very aggressive in our view considering the high solar park charges.

Gujarat was one of the first movers in the solar sector with a 1,000 MW allocation in 2010 under the feed in tariff scheme. But the state has seen very little solar action since then due to surplus power availability. Gujarat’s 2022 solar RPO target of 8 GW and high DISCOM ratings should provide an attractive market for solar project developers. But we expect few short-term opportunities for the sector unless there is a very strong demand upturn.

Last week, a news report suggested that India will shortly announce new tenders with modified Domestic Content Requirement (DCR) where modules used will need to be assembled in India but the cells may be imported (refer). This is a departure from the existing DCR rules where both cells and modules are required to be manufactured in India. The policy shift would benefit module assembling companies such as Vikram Solar and Waaree.

India is sticking to DCR to showcase policy stability but the policy’s impact is being negated by the continuous US pressure on the subject

A policy to provide direct incentives to new manufacturers is in the works but its legality is also questionable

It is difficult to promote local without solving the macro issues such as ease of doing business, infrastructure, cost of power, cost of finance and local ecosystem for raw materials

The Indian government is emphatic that India needs to support domestic manufacturing. In addition to modifying the DCR rules, it is believed to be in the process of releasing a new solar manufacturing policy, which will provide companies setting up domestic integrated manufacturers with Viability Gap Funding (VGF), a financial subsidy, to compete with their global counterparts (refer). The amount of VGF would be determined through a competitive bidding process. Companies such as Adani and Trina, that are already in the process of setting up manufacturing facilities, are likely to benefit from this policy.

The Indian argument is that state support is provided to manufacturers to partly compensate them for the high cost of credit in the country and that this policy does not distort trade. This policy extends to other sectors, for example, textiles where India offers interest rate subsidy to the sector but the US is not convinced. It has been asking India to withdraw this incentive and has already raised the issue at World Trade Organization (WTO) (refer).

The US has similarly challenged the DCR through WTO which has already termed it as illegal. India has appealed against the judgement and continues to allocate projects under DCR. It is most likely that the US will again take India to WTO for providing subsidies and/or DCR benefits to domestic manufacturers. But India may be simply banking on the fact that that by the time any conclusive ruling is made by the WTO, the policy would have already achieved its objectives.

It is clearly very difficult to promote domestic manufacturing in India without solving the macro issues such as ease of doing business, infrastructure, cost of power, cost of finance and local ecosystem for raw materials. The government has been attempting various initiatives including DCR and now incentives to support domestic manufacturing. BRIDGE TO INDIA has consistently opposed the use of protectionist measures as we believe that simply paying higher tariffs or subsidies does not help in creating globally competitive manufacturing in the country.

Solar Energy Corporation of India (SECI) has received bids totalling 602 MW for a 500 MW tender where SECI proposes to provide 30% capital subsidy to the lowest cost bidders. The tender is restricted to rooftop solar projects for residential and institutional segments (refer).

The smaller projects category (less than 25 kWp) has been most heavily oversubscribed

Due to undersubscription in the OPEX category, we estimate actual capacity allocation under this tender of only about 407 MW but actual installation to be even smaller at about 250-300 MW

The tender should provide a major boost to the residential and institutional market segments

The SECI tender is broken up in three parts:

200 MW for projects greater than 25 kWp and commissioned on CAPEX basis where bids have been received for 254 MW from 52 companies – main bidders include Ujaas Energy, Renew, Hero, Jakson, Bosch, Fourth Partner, Sterling & Wilson and Rays Power;

200 MW for projects greater than 25 kWp and commissioned on OPEX basis where bids have been received for just 108 MW from 16 companies – main bidders include Renew, Ujaas, Amplus, Cambridge Energy Resources, Cleanmax and Jakson; and

100 MW for projects up to 25 kWp and commissioned on CAPEX basis where bids have been received for 240 MW from 91 companies – main bidders include Ujaas, Rays Power and Renew.

BRIDGE TO INDIA had previously pointed out that capacity reserved for sub-25 kWp category was very low as we anticipated a much larger interest for that category (refer). Even though this limit was subsequently increased from 50 MW to 100 MW, this category was heavily oversubscribed. The OPEX category has been understandably undersubscribed as developers’ appetite to offer OPEX model to residential and institutional customers is relatively small.

While there are many large bidders on the list, many prominent rooftop solar names such as Tata Power Solar, Su-Kam, Chemtrols, Vikram Solar and Thermax did not participate in the tender. The most likely reason for this is that the tender conditions are somewhat onerous, in particular the requirement to complete projects within 1 year of subsidy grant, especially as subsidy is available in parallel through state nodal agencies without tendering.

Due to undersubscription in the OPEX category, subsidy is likely to be provided under the tender for only 407 MW capacity. But we believe that the actual installed solar capacity would be much smaller as some inexperienced bidders are likely to struggle to provide the necessary bank guarantees and some other bidders would not be able to execute the capacities they win. The success rate of past subsidy based tenders from SECI has been around 70% but as this tender is much larger than previous tenders, we expect actual success rate to be in the 50-60% range.

Nonetheless, the Indian rooftop market is currently growing at over 100% annually aided by fundamental shift in the sector and this tender will provide a major boost to the residential and institutional market segments.