2017, a year of some 'highs' but many 'lows'

As the year 2017 comes to an end, we take stock of the progress made by the Indian renewable energy sector. It was an eventful year, during which annual capacity addition is estimated to touch record levels of 10.9 GW (+66% over 2016) including utility scale solar (9 GW, +110%), rooftop solar (887 MW, +60%) and wind (4 GW, +11%). Utility scale solar capacity addition actually exceeded our original estimate by 17% because of timeline extensions given in some states (Telangana, Karnataka) and large capacity addition in Karnataka under open access and farmers’ schemes (total 450 MW).

Figure: Renewable capacity edition in India, MW

HIGHS

New, improved competitive bidding guidelines were issued for solar projects. The new guidelines did not receive much attention but incorporate some fundamentally important protections for developers including better payment security, strict timelines for completion of solar parks, termination compensation and lender substitution rights. More importantly, the guidelines mandate use of standard contract documents for projects across India.
Private sale business, both utility scale open access and rooftop solar, grew substantially during the year. Karnataka’s liberal open access has already resulted in new capacity addition of over 200 MW this year and another 1,000 MW is expected to come online in the next 3 months. Meanwhile, rooftop solar OPEX capacity is estimated to grow by 270 MW in 2017, y-o-y growth of 157%. We see growing investment interest in this business, in part because of slowdown in utility scale segment.
ReNew, Greenko and Azure Power accessed the green bond market on their own for the first time and raised a total of USD 2.1 billion between themselves. The funding allows them to diversify their debt sources and release banking lines for future expansion.

LOWS

Weak power demand in the country resulted in continued slowdown in new solar tender activity. Tender issuance during the year fell to 7 GW, down 37% over 2015. Notwithstanding the new bullish plan of the new Power Minister, we believe that DISCOMs remain reluctant to buy more power and total renewable capacity addition will stay below 2017 levels until at least 2020.
Project developers, anxious to scale up, bid solar tariffs to all-time lows of INR 2.44 (down 44% in just 16 months) in the SECI Bhadla auction in May 2017. Steep fall in tariffs led to many tender cancellations (total 2.7 GW), tariff renegotiations and contractual uncertainty in many states including Uttar Pradesh, Jharkhand, Andhra Pradesh, Karnataka and Tamil Nadu.
India conducted its first wind project auction in February 2017 and again, the low bid tariffs – INR 3.46, about 25% lower than average FIT across the country – resulted in not only overnight cancellation of all FIT schemes, but also contractual uncertainty for all projects under construction. As a result, wind sector activity almost stalled after Q1. Tariffs fell to an unbelievable INR 2.64 in subsequent auctions.
There were many nasty surprises for developers on the execution side. Module prices started rising from May 2017 onwards and securing supplies even at USD 0.36/Wp (+20% in less than six months) became difficult. GST implementation and import duties on modules resulted in further increase of 10% in project cost.
UDAY, Government of India’s financial and operational reform package for DISCOMs, has been successful in improving their balance-sheets. But operational improvements – reduction in T&D losses, separation of agricultural feeders, transformer level metering – have proven much more difficult. Moreover, tariff increases have been below required levels meaning that overall, UDAY has failed to have the widely expected positive impact on power demand or payment track record of DISCOMs.
Domestic manufacturing continued in doldrums with imports meeting as much as 85% of total solar module demand in the last 12 months. The government seems keen to support manufacturing and is mulling over imposition of anti-dumping duty on solar cells and modules, creating another risk for project developers. But ironically, wind turbine manufacturing, a relative strength in the sector, suffered badly due to sharp fall in demand with manufacturers closing down plants and laying off workers.