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UDAY success to bring huge benefits for solar sector in India

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The Ministry of Power’s Ujwal DISCOM Assurance Yojana (UDAY), a financial and operational reform scheme for distribution companies (DISCOMs), announced in November 2015 (refer) is bearing surprisingly quick and positive results. The scheme aims to address debilitating financial health of most state power distribution companies (DISCOMs) leading to offtake concerns for private power generators and stress in the overall banking sector. So far, 18 states including some of the most distressed states – Uttar Pradesh, Bihar, Rajasthan, Haryana, Punjab and Jammu & Kashmir – have signed up for the scheme with Tamil Nadu also expected to sign up shortly. According to the Ministry of Power, UDAY has already addressed 62% of the Discom debt existing at the end of 2014-15 (refer).

Almost 80% of entire DISCOM debt would be removed from their balance sheets by the end of next year reducing their overall financial losses by more than 50%;

Improvement of DISCOM financials will have a hugely positive and long-lasting impact on the solar sector by way of improving availability of private capital and growing demand for power by DISCOMs;

By successful implementation of UDAY alongside development of government solar parks, the Indian government has addressed two of the most critical challenges facing the renewable sector;

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OPEX model takes hold in India but faces a key challenge

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India has added 513 MW of rooftop solar capacity over the past 12 months reaching total installed capacity of 1,020 MW. 22% of capacity addition in the last year has been built under OPEX model where a third party project developer finances and installs the system on rooftop owner/consumer’s premises and sells all power output to him under a long-term agreement. This model is extremely popular in the USA where almost half of the rooftop solar installations are owned by specialist OPEX developers such as SolarCity, Vivint, Sunrun etc.

The OPEX model has been very successful internationally and remains so for Indian consumers who don’t want to incur upfront capital costs but still want to benefit from falling costs of solar power;

Poor contract enforceability in India poses a significant risk to the growth of OPEX market;

Given the many fundamental benefits of the OPEX model and its attraction for both the consumers and project developers, policy makers need to urgently focus on addressing this risk for long-term growth of the rooftop market in India;

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MP announces a progressive decentralised RE policy

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Madhya Pradesh government has come out with a new decentralised renewable energy policy focusing primarily on rooftop solar systems. The policy’s target to install 2.2 GW of rooftop solar capacity by 2022, is consistent with the Government of India’s national rooftop plan of 40 GW by 2022. MP is ­­one of the first few states including Himachal Pradesh and Maharashtra to revise its decentralised renewable energy policy to align with national policy.

The policy provides flexibility to consumers willing to set up a project for complete captive consumption, on net metered basis or on gross metered basis with attractive open access incentives

The policy is applicable for projects up to a capacity of 2 MW

The policy also recognises and extends benefits to rooftop solar installations by Renewable Energy Service Companies (RESCOs)

As of September 2016, MP’s total rooftop capacity stood at a mere 13 MW. As per BRIDGE TO INDIA estimates, the state is likely to install total rooftop capacity of only about 650 MW by 2022 in the ‘business as usual’ scenario. The new policy has many consumer- and investor-friendly measures.

In our view, the policy has three key elements. First, it allows for both net- and gross-metering connection for rooftop systems with a capacity of up to 2 MW subject to certain limits depending upon local transformer capacity and consumer load. It is worth noting that most other states cap the system size for net metering at 1 MW. Second, the policy recognises the role of RESCOs in the rooftop solar sector and provides for an implementation framework for the same through BOOM/ BOOT models. This is expected to enhance consumer interest in the RESCO framework and in turn, increase rooftop installations in the state. Finally, the policy provides open access incentives, for a consumer/RESCO to sell surplus electricity to another consumer in the state, as detailed below.

Summary of key policy provisions

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Already installed distributed power systems are allowed to migrate to the current policy. Another positive element of the policy is that it lays out the registration and application process clearly for consumers wishing to set up distributed power systems.

Overall, the policy is a strong positive signal for development of the sector. It is a useful template for other states planning to push decentralised energy.

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Public sector struggling to compete with private sector in solar power generation

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News reports suggest that Neyveli Lignite Corporation (NLC), a 90% Government of India owned company, has abandoned its plan to set up 2 x 65 MW solar projects in Rajasthan after failing to agree to sell power to local distribution companies at the required price (refer). This is a disappointing development as these projects were in very advanced stages with land already identified and EPC work awarded to Bharat Heavy Electronics Limited (BHEL) and Jakson group after a competitive bidding process.

Private sector developers are able to out-compete their public sector counterparts due to better financial engineering capability, more efficient operations and higher risk taking ability;

Power distribution companies want cheaper power and see no benefit in buying more expensive power from public sector developers;

Private sector is likely to continue to dominate solar project development landscape in India

Usually, public sector companies price power output by building a fixed financial return on project capital cost, which is typically discovered through a competitive bidding process. In our view, the project cancellation points to a larger trend that public sector companies, despite having a 60% share in the country’s overall power generation (primarily thermal, hydro and nuclear), are expected to find it extremely difficult to compete with private players in solar project development.

Private players’ competitive advantage lies in their better financial engineering capability, more efficient operations and higher risk taking ability. This is where the public sector companies lose out heavily. In particular, their more stringent technical specification reduces scope for cost optimization. Recent tenders have shown that EPC costs for public sector projects are typically 10-15% higher than such costs for private sector projects party because of domestic content requirement as in the case of NLC projects. Public sector companies may argue that their stringent approach results in better construction quality, but this approach is making them uncompetitive against private project developers.

Public sector companies have the benefit of lower financing cost – National Thermal Power Corporation (NTPC) recently raised USD 300 m through green masala bonds at a yield of 7.48% (refer). But their major strength, preferential access to critical mining rights, transportation infrastructure and environmental permits which helped them win major market share in thermal and hydro power segments is of little importance in solar.

We expect similar offtake problems with NTPC’s plan to develop 10,000 MW of solar capacity on its own books. The company is finding it difficult to attract offtakers when private project developers are competing aggressively and bringing tariffs down.

Going forward, we expect the private sector to continue to dominate solar project development landscape in India. Unless there is an external financing or procurement shock, the market is likely to stay extremely competitive as we have seen over the last 2 years.

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Ratification of climate accord to bring more focus on India’s renewable sector

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On 2nd October 2016, India ratified the Paris climate accord becoming the 62nd country to do so. India accounts for 4.1% of global carbon emissions. Countries with 52% of global emissions have now ratified the agreement. With European Union, accounting for 12.1% of total global emission, expected to join shortly, the 55% threshold for the agreement to come into effect would be met and the agreement should come into force by November.

India has committed to reduce emission intensity by 33% by 2030 and achieve 40% cumulative electric power installed capacity from non-fossil fuel based energy resources by 2030;

As a result, the renewable sector will attract much larger global scrutiny as well as flow of financing and technical support from international institutions;

Despite several sector related concerns, India’s global commitment to back its ambitious targets should further help sharpen policy agenda and attract investments in the renewable energy sector;

As part of its Intended Nationally Determined Contributions (INDCs), India has committed to a reduction in carbon emission intensity of its GDP by 33% to 35% by 2030 from 2005 levels. More pertinently for the power sector, India has committed that at least 40% of its installed power generation capacity will be non-fossil fuel based by 2030 (refer). The current number is 30%, if hydro and nuclear power are included. A big share of the commitment will be achieved, if India meets its 175 GW of renewable power capacity target by 2022. The big imponderable here is India’s insistence that it will achieve the targets only if developed countries give it money and discounts on new technology.

India has already become a leading global market for renewables. Ratification of climate accord would attract a much larger global scrutiny on the country’s ability to achieve yearly renewable targets and compliance with policies such as Renewable Purchase Obligation (RPO). We also expect significant increase in financing commitments from international agencies such as the World bank, International Financing Corporation (IFC), Asian Development Bank (ADB), Overseas Private Investment Corporation (OPIC), U.S. Export-Import (EXIM) Bank, European Investment Bank (EIB) and the Japan Bank for International Cooperation (JBIC).

India’s renewable targets are ambitious and delivery on ground in terms of new deployment has gathered considerable pace. The ambitious targets are now further backed by India’s global commitment under a formal multinational agreement. Despite several key concerns that remain, this should help focus government policies for the sector, attract domestic and international capital into the sector and assure growth for all stakeholders.

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