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2016 was a great year for the Indian solar industry but the best is yet to come

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As 2016 comes to an end, it is worth taking a holistic look at the Indian solar sector to analyse key trends, challenges and outlook. Key highlights include record project volumes – both for capacity addition and issue of new tenders, improving power distribution company (DISCOM) financial position as a result of UDAY scheme, steep fall in equipment prices, improving M&A activity and India’s ratification of climate accord adding credibility to the country’s ambitious 100 GW target for 2022.

The year has been bountiful in all respects for the sector with most key indicators growing 2-3x over last year. The country added total solar capacity of 4.9 GW (estimated), an increase of 101% over 2015 and crossed the 10 GW cumulative installed capacity mark. New tenders were floated for 9 GW of grid connected solar projects including 900 MW for rooftop solar systems.

As solar tariffs fell below INR 5 (USD 0.07)/ kWh, solar power gained parity with other sources of greenfield power. Falling cost has been instrumental in boosting solar demand from the DISCOMs despite total power demand staying relatively weak throughout the year. Both Solar Energy Corporation of India (SECI) and National Thermal Power Corporation (NTPC) are expected to allocate substantial new capacity in 2017 attracting even more competitive tariff bids. We expect the INR 4 tariff level to be breached in early 2017, which will be a radical moment for the entire power sector in India.

Indian project developers asserted themselves strongly in 2016 winning over 90% of tendered capacity. All of the top 10 developers by pipeline capacity are now ‘home-grown’ IPPs and corporates. Successful sale of solar assets of Welspun (to Tata Power), SunEdison (Greenko), Punj Lloyd (IDFC Alternatives) among others and international IPO by Azure has helped instil confidence in the sector’s growth prospects. Falling module prices proved to be a gift that keeps on giving to aggressive bidders. Reduced Chinese demand in the second half of 2016 resulted in prices tumbling by 20% during the year.

India’s rooftop solar segment also crossed the symbolic 1 GW mark in September this year, growing by 135% over last year. Attractive capital subsidies and substantial demand from public sector are expected to continue to provide great demand boost to the segment over the next few years.

All this positivity is somewhat tempered by growing incidence of delayed power purchase payments by many DISCOMs and curtailment risk, two risks which badly affected wind power sector during the year. Solar sector has so far been lucky to escape likely because of smaller capacity (9 GW vs 28 GW of wind power capacity) and much greater political attention. However, these risks pose significant challenges to the sector despite strong government support and UDAY scheme.

The global supply glut in modules consolidated the hold of Chinese suppliers in the Indian market as over 80% of all modules installed in India in 2016 came from China. The World Trade Organization (WTO) declared India’s policy for domestic content requirement illegal and the proposed policy to support local manufacturing seems to be getting delayed. As a result, several ‘Make in India’ plans announced by various Indian and international suppliers have come to a naught.

Looking forward to 2017, we expect total new capacity addition of over 9 GW (up 90% over 2016) and up to 8 GW of new utility scale capacity allocation by NTPC, SECI and states including Madhya Pradesh, Maharashtra and Tamil Nadu. As other international markets including China, Japan and Europe slow down, India will remain one of the fastest growing markets around the world. But we remain pessimistic about the new domestic manufacturing policy.

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India’s largest rooftop solar tender to see record low tariffs

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Solar Energy Corporation of India (SECI) has issued a tender for development of 1,000 MW rooftop solar capacity on pre-identified central government/ department owned buildings (refer). It is the largest such tender in India’s fledgling rooftop solar market (refer). 700 MW of capacity is proposed to be allocated under the OPEX route, where project developers shall fund and own the solar systems and sell power to the respective government departments under a 25-year power purchase agreement. Balance 300 MW is proposed to be set up under the CAPEX route. Bidding shall be conducted on a state-by-state basis and all bidders will be expected to match the lowest bid (L1) for the respective states.

Government customer segment is likely to play a crucial role in scaling up of the rooftop solar market in India as various central government departments and agencies have made commitments to install aggregate rooftop solar capacity of 6 GW for internal consumption;

A majority of systems under this tender are likely to be installed on educational and training institutes;

With capital subsidies of up to 35-90% available as part of this tender, we expect project costs and tariffs to reach record lows;

Various departments and ministries under central government have collectively committed to deploying 5,938 MW of rooftop solar capacity for their internal power consumption (refer). SECI is aggregating demand for a part of this requirement and helping in procuring rooftop solar systems. It has already identified suitable rooftops with the potential to install at least 1,000 MW solar capacity. Buildings under the Ministry of Human Resources and Development account for over 70% of the identified capacity. This means that most of the systems are likely to be installed on educational and training institutes. Gujarat accounts for 267 MW of identified capacity, followed by Uttar Pradesh (62 MW), Maharashtra (50 MW), Delhi (46 MW) and Telangana (44 MW).

Bidders are expected to sign PPAs or EPC contracts within 6 months and complete construction within 15 months after the award date. SECI shall provide a capital subsidy of 35-90% of total capital cost ranging from INR 18,750 (USD 277)/kWp for general category states and INR 45,000 (USD 665)/kWp for special category states (refer). In a departure from previous such tenders, the subsidy amount shall be substantially reduced in the event of delays in construction time-table.

BRIDGE TO INDIA expects a very enthusiastic response to the tender both from rooftop solar specialists and utility solar players. In the last 500 MW rooftop solar tender by SECI, tariffs dropped to an all-time low of INR 3 (US¢ 4.4)/kWh for special category states on the back of a significant capital subsidy. We expect tariffs under this tender to fall even lower for special category states as buildings have already been identified and government off-take is more bankable than private sector offtake.

This tender provides a great opportunity for scaling up of Indian rooftop solar market, which has a total installed capacity of only 1,020 MW as of September 2016, or about 10% of total installed solar capacity in the country. Read our blog from last month to understand how we expect the government customer segment to become a key demand driver for rooftop solar market in India (refer).

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India’s solar water pump market struggling to take off

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In 2014, India’s Modi government announced a target to install 1 million solar water pumps, equivalent to approximately 3,000 MW, for irrigation and drinking water by 2021 (refer). But actual cumulative installed base stood at merely 25,000 pumps as of April 2016 (refer). The bleak performance is despite the government offering massive subsidies of as much as 75-95% of upfront capital cost of the pumps.

Andhra Pradesh, Gujarat and Tamil Nadu have made some progress but overall results are disappointing despite generous capital subsidies being offered to farmers;

Poor progress is down primarily to flawed procurement process, over emphasis on capital subsidies and lack of awareness amongst farmers;

To improve implementation and reduce subsidy outgo, alternate procurement and financing models need to be explored;

Andhra Pradesh is the leading state by total number of solar pumps deployed with an installed base of nearly 6,000 pumps. Gujarat, Rajasthan, Tamil Nadu, Madhya Pradesh, Uttar Pradesh and Karnataka are other leading states.

Solar water pumps offer a very compelling application of solar technology for many reasons – improving energy access in remote areas, replacement of dirty and costly diesel-pumps and reduction in agricultural power subsidies. Some experts have questioned the rationale behind having such an ambitious target for solar water pumps as they believe that solar water pumps lead to over-exploitation of ground water and benefit only the relatively wealthy farmers. However, the government counter-argument is that solar pumps combined with drip irrigation can avoid over-exploitation of ground water and capital subsidies on solar water pumps offer a much better value for money than subsidies on sales of rural electricity and diesel.

The government has therefore identified solar water pumps as a policy priority with ambitious targets and substantial capital subsidy support. However, progress has been botched by muddled procurement process and erratic implementation on-the-ground, bane of most rural support schemes in India.

Maharashtra provides a useful case-study. Intending to take a lead in this market, the state recently completed a tender process for procuring 10,000 solar water pumps. However, despite offering 95% capital subsidy to farmers, only 6,500 farmers showed interest and out of them, only 650 provided an advance deposit by July 2016 even after the state government signed contracts for procurement of 10,000 pumps. The limited interest was allegedly because of stringent eligibility criteria, poor tender design and lack of awareness amongst farmers (refer). The tender process was also riven with allegations of bungling and corruption (refer).

According to BRIDGE TO INDIA, there are many lessons to be learnt here. Procurement design and financing models need to draw on learning from other areas. The government could also potentially widen the Domestic Efficient Lighting Programme, for nation-wide bulk procurement and sale of LED lamps and now energy efficient ceiling fans and electric water pumps (refer), to include solar water pumps to improve implementation and lower subsidy abuse.

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