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Government to become a key demand driver for rooftop solar market in India

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Rooftop solar market in India has grown at a CAGR of 98% in the last four years. As of September 30, 2016, total installed capacity stands at 1,020 MW (refer INDIA SOLAR ROOFTOP MAP 2016). Growth in this market is being primarily driven by improvement in price competitiveness of rooftop solar power vis-à-vis grid power.

Commercial and industrial (C&I) segment currently makes up for almost 63% of this market. The remaining 25% goes to residential and around 12% to government buildings. C&I segment has grown at a compounded annual growth rate (CAGR) of 103% in last four years. As viability improves, BRIDGE TO INDIA expects this segment to almost double by 2017 and then continue its expansion to achieve a CAGR of 51% until 2022.

Beyond the C&I segment, there is also a strong impetus on increasing rooftop solar deployment on government-owned buildings. The government rooftop solar segment has grown at a CAGR of 118% in last four years and now accounts of about 12% of the total rooftop market. Central government institutions have identified potential to install about 6 GW of solar capacity to meet their captive requirement for power. We estimate the government segment to achieve total rooftop solar capacity of 4 GW by 2022, accounting for 24% of the total rooftop solar market.

Public sector companies such as Solar Energy Corporation of India (SECI), Central Electronics Limited (CEL) and PEC Limited have been given responsibility to identify viable opportunities and allocate capacities on behalf of various departments through a tendering process. As a part of this initiative, SECI has already announced 1.5 GW of tenders for rooftop installations in some central government owned buildings. The tenders are likely to follow a mix of different business models to allocate the proposed capacity.

OPEX route, where a third-party developer owns and installs the solar system on customer’s roof, accounts for around 16% of total installed capacity. Despite concerns around bankability of such projects in the Indian context, the OPEX model has been gaining traction in recent years. The share of OPEX projects has increased from 3% in 2012 to 23% in 2016.

Given the fiscal constraints of government departments and their more urgent priorities for deployment of capital, the government segment is expected to play a very important role in scaling up of the OPEX market in India. Developers are understandably satisfied with government entities as reliable off-takers in comparison to most private businesses. BRIDGE TO INDIA estimates that by 2022, 44% of the total OPEX market will be accounted for by the government segment.

Prominent companies that are already participate actively in OPEX tenders for government tenders are: Tata Power Solar, ReNew, Amplus, CleanMax, Jakson and Hero Future Energies. We expect these companies to benefit from the anticipated growth ahead.

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Solar developers stay away from Tamil Nadu tender

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Last month, Tamil Nadu Generation and Distribution Corporation Limited (TANGEDCO) floated a tender for 500 MW of utility scale solar projects. This tender has received limited interest and that too predominantly from smaller developers who have submitted 20 bids totalling just 116 MW. This tender follows an allocation of approx. 1,200 MW in early 2015 where a fixed tariff of INR 7.01/kWh (USD 0.10/kWh) was offered to developers. For that allocation, interest was received for a capacity of around 3,200 MW from over 90 developers. Given such large oversubscription, Tamil Nadu tightened qualification criteria significantly for this tender. Bidders were required to own land at the time of bidding and fully commission the projects within 10 months of PPA execution, which is much more stringent in comparison to other tenders.

Developers had major concerns about grid curtailment, payment delays and a very tight timeline but no credible steps were taken to address these;

A rush to complete the tender in time has in fact proven counterproductive;

There is no reasonable justification for why Tamil Nadu does not go through National Thermal Power Corporation (NTPC) or Solar Energy Corporation of India (SECI) for allocations; this could enhance off-take bankability and help reduce tariffs;

Tamil Nadu now boasts of the largest installed wind and solar capacity in the country. It has a total wind and solar installed capacity of 9 GW as against base load of around 11 GW. The state has been suffering from grid congestion issues for some time and despite recent improvements in connectivity to the national grid, power evacuation remains a major problem particularly for renewable projects. As a result, developers are facing severe grid availability issues as well as long payment delays (refer). TANGEDCO, the state-owned utility, is in poor financial health with a credit rating of C+ as per the Ministry of Power framework (refer). Payments to power producers have been delayed by as much as eighteen months in the past. But the state has still been resisting signing up for Ujwal Discom Assurance Yojana (UDAY), the central government’s financial restructuring package for power utilities. At a pre-bid meeting held earlier this month, several developers expressed concerns about these issues (refer) but TANGEDCO failed to address these concerns.

Based on an analysis of past bidding trends, BRIDGE TO INDIA has observed that risk premium for poorly rated utilities can be as high as 600 bps in comparison to AAA rated offtakers such as NTPC. Poor bankability leads to higher tariffs and higher tariffs reduce profitability for power distribution companies. It has become a vicious cycle.

Tamil Nadu needs an urgent reform of its power sector operational and financial organization. In the meantime, it would be much better off by procuring new renewable capacity through NTPC or SECI, which would enhance off-take bankability, reduce project risk for developers and bring down power cost for consumers.

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Net-metering battles in the US hold crucial lessons for India

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Rapid growth in the US rooftop solar market and the number of net-metering connections has opened a battle-front between utilities on one hand and solar developers and consumers on the other hand. Utilities are arguing against the rationale of giving customers full retail credit for their excess energy and vigorously challenging the current net-metering framework in many states including Arizona, Nevada, Maine, Florida, and Alabama. Future net-metering policy in these ‘battle ground states’ is now being decided by public hearings, ballots, regulatory intervention and court rulings.

Evolution of net metering policy in USA holds vital lessons for the fledgling rooftop solar market in India, which is still very small but growing rapidly (refer).

Many Indian utilities are already resisting net-metering connections for commercial and industrial (C&I) customers;

The current Indian net-metering regulations are too simplistic and they need to be overhauled urgently for sustainable growth of rooftop solar in India;

Waivers provided for promoting the rooftop solar market need to be phased out over time and both utilities and customers should be aware about how this transition will happen;

Last year, a decision by Public Utilities Commission (equivalent to a state electricity regulator in India) allowed utilities in Nevada to reduce net-metering credit provided to consumers by as much as 75%. Most installers and customers were badly hit by this decision, which led SolarCity, one the largest installers, to completely stop new deployments in Nevada. The original ruling revoked net-metering benefits for around 32,000 customers, who won relief only after a long regulatory battle and reliance on grandfathering provisions. If something similar were to happen in India, customers here may not be as lucky.

If a state like Tamil Nadu realistically installs around 700 MW of C&I rooftop solar by 2020 based on BRIDGE TO INDIA’s overall market projection, the state utilities will lose 0.8% of their power sales by volume but 1.4% by revenues, equivalent to INR 9.7 billion (USD 140 million) annually. The reason for disproportionate loss of revenues is that C&I customers pay the highest tariffs to subsidize residential and agricultural customers. Some states including Tamil Nadu and Maharashtra are already resisting net-metering connections for C&I customers b. Other states are also likely to take that view.

Owners of rooftop solar installations should obviously pay for access to the grid and for services such as banking of power. In the Indian context, the utilities also have to account for aspects such as universal service obligation and cross subsidization of power. The problem is that determining these charges is easy in theory but extremely cumbersome and contentious in practice. Moreover, any waivers provided for promoting the rooftop market need to be phased out over time as it is not fair to expect the utilities (or other customers) to bear the burden in the long-run.

The current Indian net-metering regulations are too simplistic. There is usually no grandfathering protection for customers and no satisfactory financial compensation for the utilities. If the utilities are forced to provide ‘free’ net metering connections as at present, they will resist growth in this market and rooftop solar will fail to realise its true potential. India has the advantage of being a late mover and the regulators should learn from international experience.

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Indian solar capacity crosses 10 GW milestone

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India’s total installed solar capacity including rooftop and off-grid segments has crossed 10 GW mark, a major milestone for the sector.

India is expected to add new solar capacity of 5.1 GW this year, which is a growth of 137% over last year. BRIDGE TO INDIA expects average annual capacity addition of 8-10 GW per annum from next year onwards. The pace of sector activity has picked up tremendously in the last two years (see chart below) because of strong government support and increasing price competitiveness of solar power. India is expected to become the world’s third biggest solar market from next year onwards after China and the USA.

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After the BJP government came to power in 2014, it announced a major policy shift in India’s energy sector by multiplying the 2022 solar target five-fold to 100,000 MW. Since then, it has launched multiple policy initiatives to support the sector. Ujwal DISCOM Assurance Yojana (UDAY) scheme is probably the most important such initiative as it seeks to strengthen India’s weak distribution sector. The policy has already shown extremely positive results in the short-term. At least eight of the 17 states/union territories including some of the worst performing states like Haryana and Uttar Pradesh that have joined the UDAY scheme so far have reduced the deficit per unit of electricity. Moreover, 13 states/union territories have reported a material decline in Aggregate Technical and Commercial (AT&C) losses.

The solar park scheme has also been very instrumental in tackling the two major issues of land acquisition and power evacuation for project development. The government originally envisaged to develop 20 GW of solar park capacity by 2020 but the scheme has had an enthusiastic response from the private sector and the government is already planning to double this capacity to 40,000 MW. Further, eight green energy corridors are under construction, with financial assistance from German development bank KFW, to evacuate and integrate growing share of renewable energy into the grid. The corridors will allow transmission of solar power from solar rich states to other states.

Some key themes can be observed in the growth of the Indian solar market so far. Amongst states, Tamil Nadu has the highest installed capacity, followed by Rajasthan, Andhra Pradesh, Gujarat, Telangana, Madhya Pradesh and Punjab. These seven states collectively account for more than 80% of total installed capacity as of mid-November, 2016. Some of the larger power consuming states such as Maharashtra and Uttar Pradesh are way behind in the sector.

Utility-scale solar accounts for more than 85% of total installed capacity. Rooftop solar, so far about 10% of the sector, has also been growing at a very healthy CAGR of 98% from 2011 to 2015 and is expected to play an increasingly important role in the sector. Improving net metering implementation and subsidy disbursal are expected to lead to significant demand boost for rooftop solar across all consumer segments. There is also a very strong impetus on increasing rooftop solar deployment in government-owned buildings. Around 1.5 GW of potential rooftop solar capacity has been identified in central ministries and departments alone.

The off-grid segment, which is important from the point of view of increasing access to electricity and relieving stress on the transmission grid, has reached only 360 MW till mid-November 2016. With the government committed to expanding the grid and aiming to provide 24×7 electricity throughout India by 2018, this segment is unfortunately expected to perform below potential.

The growing market has attracted attention of leading investors from both India and other countries including USA, Europe, Japan and China. The list of active project developers in the market includes very prestigious names including Softbank, Fortum, CLP, Adani, Tata Power, ReNew and First Solar.

Many people are going to ask the obvious question – if we have taken more than 5 years to achieve 10 GW, can we reach 100 GW in another 5 years? It is a very steep target in our view. But rather than quibble about the target, the important point is to acknowledge the transformational economic, environmental and social potential of solar technology and to create a conducive environment for its growth.

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Launching a clean-up drive for the Indian renewable sector

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The Indian government has launched a momentous demonetisation drive to weed out black money and clean up the economy (refer). We have often heard gossip about some of the black money, estimated to be close to INR 30 trillion (USD 440 billion) or about 20% of Indian GDP, finding its way into the Indian solar sector and possibly explaining some of the overly aggressive bidding behaviour in solar projects. It is impossible to ascertain veracity of such claims but the sector seems to have its share of other unethical practices. Other commonly heard chatter is that some project developers over-estimate project costs to draw down more debt and reduce their equity contribution.

We do not believe that demonetization will have any material impact on the Indian renewable sector as most leading project developers are backed by reputable Indian and international sponsors with robust corporate governance practices;

Indian lenders can help in curbing unethical practices in the sector by improving their risk assessment capability and tightening credit criteria;

Poor risk assessment and documentation capability of Indian lenders poses one of the most underestimated challenges for the sector;

By some accounts, some project developers reduce their actual equity contribution to as low as 5-10% of total project cost through over-invoicing. This allows the developers to stretch their meagre equity capital and build a bigger project pipeline. Despite competitive pricing, the developers can meet key cash flow metrics such as DSCR, LLCR etc by making optimistic assumptions for power generation and input costs. Some developers are also believed to willingly compromise project quality to achieve the same outcome.

The reason such practices seemingly thrive is the lax due diligence standards of Indian lenders, particularly public sector banks and financial institutions. Instead of carrying out rigorous risk assessment and due diligence, these lenders typically rely on comfort from non-project assets, which can come in the form of implicit or explicit sponsor support or other collateral.

We believe that poor risk assessment and due diligence capability of Indian lenders is one of the most under estimated challenges facing the sector. In other sectors such as thermal power generation, roads and steel, this problem has led to large distressed bank portfolios and eventually a liquidity drought. Project lenders can bring a lot of external scrutiny and discipline but despite increasing concerns about quality of banking sector portfolio, there doesn’t unfortunately seem to have been any material improvement in lending practices.

Going back to the current demonetisation drive of the Indian government, we do not believe that it will have any material impact on the Indian renewable sector. But sector malpractices such as over-invoicing and deliberate compromises in project execution need to be stamped out to ensure consistent availability of capital for the sector. Indian lenders can play an important role here by improving their risk assessment capability and tightening credit criteria.

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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

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Poor implementation of net-metering policies poses a major challenge for rooftop solar

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India’s rooftop solar market is growing rapidly with the country adding more capacity in the past 12 months than all previous years put together (refer). However, grid interconnection regulations and processes remain challenging in most parts of the country despite almost all states announcing net- and/or gross-metering policies for rooftop solar.

Our survey of industry participants shows that overall implementation of net metering policy remains patchy across the country;

The policy framework needs an urgent overhaul to make it more consumer friendly and to make it suitable for evolving technologies and business models;

International examples show that effective net-metering implementation can increase rooftop solar adoption by as much as 50%;

Slow progress on net metering policy front can be attributed largely to – i) an inadequate policy framework, ii) passive opposition from DISCOMs, and iii) lack of appropriate training and process protocols at the local utility level.

To judge implementation status of net-metering in key states, we conducted a survey of 15 industry professionals and asked them to rate states on parameters such as – average time taken for connection, process transparency and clarity, DISCOM support and competence, meter availability and support for different business models. Delhi, Telangana, Andhra Pradesh, Karnataka and Rajasthan emerged as top states followed by Gujarat, Haryana, Punjab, Chhattisgarh and Kerala (refer). Most installers rated their experiences in Maharashtra, Tamil Nadu, Uttar Pradesh, Bihar, Jharkhand, Odisha and West Bengal as poor. Average time taken for connection is high as 90-100 days in states such as Haryana and Uttar Pradesh. The results show that overall implementation remains patchy across the country and even within the same states, installers have varying experiences presumably because of different policy interpretation by local implementation authorities.

Interestingly, we observe that contrary to expectations, implementation is not improving with more experience or years of policy in operation. Rather it is the efficacy of policy design which seems to have principal influence on on-the-ground implementation. Most net metering policies in India are based on the guiding regulations issued by Central Electricity Regulatory Commission (CERC) in 2013. In our view, these are too restrictive and need an urgent overhaul to relax constraints on system size, type of connections, consumer categories and business models. Moreover, learning from industry experience and best practices adopted by other countries or even some progressive states should be used to help improve the policy framework.

Fundamental drivers for rooftop solar are becoming more compelling by the day and the government has shown a very strong desire to drive growth in this sector. It is already offering a generous mix of capital subsidies, tax incentives and cheaper debt financing schemes for the sector. The government is also substantially ramping up demand in the public sector. All these efforts will fail to produce the desired results unless net-metering policy framework is urgently reformed. International examples show that effective net-metering implementation can increase rooftop solar adoption by as much as 50%.

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