Month: January 2017

In the second half of 2015, Jharkhand Renewable Energy Department (JREDA) had announced India’s then largest tender for allocation of 1,200 MW of ground mounted, grid connected solar projects. The tender size was so large as to meet over 90% of the state’s peak power consumption and over 20% of its overall power requirement. Despite this and the state being power surplus, the tender was subscribed by over two times.  As maintained by BRIDGE TO INDIA at the time, it makes no sense for the state to procure 1,200 MW of solar capacity (refer). As expected, Jharkhand Bijli Vitran Nigam Limited, the state power distribution company (DISCOM) has been dragging its feet and has not signed a single PPA so far, ten months after opening the bids.

As tariffs have fallen across India, Jharkhand may now renegotiate tariffs and sign much less than the planned 1,200 MW capacity;

Implementation and enforcement of renewable policies has been uneven across states;

Better state level planning is required to provide visibility to investors, build necessary transmission infrastructure for seamless integration in the grid and smoothen solar procurement costs for DISCOMs;

As the state continues to delay signing PPAs, solar tariffs have fallen substantially across India. This makes it increasingly unlikely that Jharkhand DISCOM will sign PPAs at bid tariffs of between INR 5.08 – 7.95 (US¢ 7.7 – 11.7)/ kWh. We expect that it will seek to renegotiate tariffs and sign much less than the planned 1,200 MW capacity. There have been multiple such precedences in other states including Andhra Pradesh, Madhya Pradesh and Haryana.

A somewhat similar point can be made about the ambitious quantum of solar capacity being developed in many southern states. Karnataka and Andhra Pradesh both need to add around 5 GW by 2022 (refer), but the two states have already built total installed plus pipeline capacity of 5 GW and 4.1 GW respectively. Such rapid ramp up of solar capacity increases the risk of grid failures and curtailment that may critically hamper sustained growth of renewable power in the country.

Solar capacity addition has been more than doubling every year in India aided by strong government support and falling costs/ tariffs. The Government of India has prescribed yearly capacity addition targets for states in line with their respective Renewable Purchase Obligation (RPO) requirements. But actual implementation across states has been uneven and haphazard. Derailment of one or two tenders does not do much harm to the sector. But such events highlight the huge need for improvement in conceptualization and implementation of state policies and tenders.

India is expected to add new solar capacity of over 9 GW this year as against less than 1 GW just three years ago. The country should join the exclusive top three solar countries club alongside China and USA. There are an estimated 15 GW of projects already allocated and in different stages of development.

Growing market has led to a burgeoning investment interest from Indian and international developers in the sector. The international developers are attracted by the prospect of a growing and open market. Notable players include Fortum, Softbank, Engie, EdF, Sky Power, First Solar, FRV, IBC Solar, Sembcorp and CLP. They have more solar experience and better access to technology and financial capital in comparison to Indian developers.

But we find that the international developers, despite their competitive advantage, have been reserved with their appetite. There are currently five Indian developers with a commissioned plus pipeline capacity of over 1,000 MW. In contrast, the biggest international developer so far is Engie (Solaire Direct) with total capacity of less than 400 MW. Utilities such as Sembcorp, CLP and Statkraft, who have been in India for many years, have barely shown any interest in the solar sector so far.

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We believe that there are multiple reasons for cautious approach of international players. Doing business in India remains difficult on a day-to-day basis.  For projects not located in solar parks, land acquisition is very tedious and costly. Offtaker creditworthiness and poor health of some of the distribution utilities still remain a big concern despite UDAY scheme. There is rising incidence of grid curtailment and payments delays in the sector.

The extremely competitive nature of solar auctions has also put off some international developers, who typically like to tie-up their equipment and EPC costs at the time of submitting bids. In contrast, the Indian developers are less risk averse and keep their procurement options open for as long as possible in order to benefit from falling prices and are therefore more aggressive with their bids. Overall, the international developers have a low-risk, low-return philosophy whereas their Indian counterparts usually have an opposite approach.

Based on our discussions with several leading international developers, we find that they are daunted by many project execution and operation challenges in India. Most of them have already won one or more projects and their primary focus right now is to execute these projects. They are keen to learn from their initial experiences and want to ramp up gradually. They are also much more selective in their bidding with a clear preference for solar park based projects tendered by central government entities such as National Thermal Power Corporation (NTPC) and Solar Energy Corporation of India (SECI).

Our expectation is that the project development competitive scenario will evolve as some Indian developers will find it challenging to sustain their growth because access to capital remains tight. Some Indian developers with gung-ho approach to risk will probably struggle in the future. Fall in tariffs will require developers to create value through superior technology such as trackers, robotic cleaning, storage integration and better design. International developers with a better understanding and experience of these technologies will have an advantage and they are well placed to play an important role in the sector growth.

Earlier this month, Solar Energy Corporation of India (SECI) received bids for India’s first wind power tender (refer). There are two unique aspects of this tender – i) successful bidders will sign 25-year power purchase agreements (PPAs) with a power trading company, PTC India Limited, which will sign back-to-back PPAs with as yet unknown distribution companies (DISCOMs); and ii) existing operational projects and/or under construction projects are eligible to participate.

The tender paves way for a move away from feed in tariffs (FITs) to competitive auction for wind power and should make it more attractive for DISCOMs by bringing down tariffs;

The proposed offtake structure may pose challenges for developers as well as DISCOMs;

Policy makers need to proactively ensure that renewable project capacity is evenly distributed across the country for easier integration in the grid;

Solar sector has leapfrogged wind in the last two years since the announcement of enhanced 2022 target of 100 GW for solar power and 60 GW for wind power. Solar project capacity addition is expected to go up from about 1 GW per annum three years ago to 9 GW in 2017. In contrast, wind capacity addition continues to stagnate at about 3 GW annually. There are many reasons for this including solar technology’s potential for wider geographical deployment (wind is restricted to southern and western India) and technology enhancements. More importantly, however, the auction route has driven solar tariffs sharply down whereas wind tariffs have been steady under the FIT regime. The Power Minister, Mr. Piyush Goyal, has been reiterating for some time that wind power should also be procured through auctions to lower tariffs and scale up capacity addition. This tender is a first step towards that change and should pave way for future development of wind power in the country.

The tender provides for project sizes between 50 – 250 MW. Bidders are free to locate projects anywhere in India but they need to connect to the national grid at 220 kV level allowing DISCOMs anywhere to purchase this power. Gamesa, ReNew, Adani, Hero, Mytrah, Ostro and Inox are some of the prominent bidders. Tamil Nadu is believed to have received bids for 1,800 MW, Gujarat for 700 MW and Karnataka for 100 MW.

Most states in India are currently offering wind FITs of about INR 4.00-6.00 (US¢ 6-9)/ kWh. Tariffs in this tender are expected to fall below INR 4.00/ kWh in line with upcoming solar tenders (refer). Reduction in tariffs will make wind more attractive to DISCOMs. But SECI may still struggle to find willing buyers as it requires them to provide a considerable collateral package of 6 months letter of credit and an escrow account over revenues. Not knowing the identity of ultimate power offtaker also carries a significant risk for project developers.

We also believe that concentrating projects in resource heavy states and putting strain on the transmission grid is undesirable. Solar project allocation has already moved to state level auctions for this reason and some states are further trying to limit renewable capacity development at sub-state (taluka) level. There is no good reason why this learning from solar sector should not be utilized for wind tenders.

Overall, the first wind tender is a step in the right direction. Over time, we expect project allocation for the entire renewable sector to be streamlined and become technology agnostic.

Bids for the proposed and much delayed 750 MW solar power tender in the Rewa district of Madhya Pradesh are expected to be submitted early next week (refer our previous blog) although another extension still seems likely. The project is being tendered by Rewa Ultra Mega Solar (RUMS), a joint venture between Solar Energy Corporation of India (SECI) and the Government of Madhya Pradesh. Developers can bid for three project units of 250 MW each in a solar park being developed by RUMS. The tender offers large scale and enhanced bankability because of its unique structuring aspects:

Power output will be sold to Madhya Pradesh utilities and Delhi Metro Rail on an open access basis plus the projects would benefit from state government payment guarantee and deemed generation compensation for grid unavailability significantly improving their risk profile particularly in comparison to other state government tendered projects;

BRIDGE TO INDIA expects tariffs to fall substantially below the INR 4.00 (US ¢ 5.9)/ kWh mark, the lowest ever for any utility scale project in India;

More states may incorporate some of the innovative measures from this tender to lower cost of their solar power procurement;

There are three unique features of this tender, which has been designed by the Government of Madhya Pradesh with assistance from International Finance Corporation (IFC) – inter-state open access sale of about 25% of power output to Delhi Metro Rail, a state government offtake payment guarantee and deemed generation compensation for grid unavailability. All these features are being adopted for the first time in a public solar procurement tender in India and may provide a template for future.

We believe that the overall risk profile for Rewa tender is amongst the best in India and similar to projects tendered by National Thermal Power Corporation (NTPC), which received the lowest-ever tariff bid in India of INR 4.34 (US¢ 6.4)/ kWh for a 70 MW project in Rajasthan in January 2016. Since then, module prices have declined by about 28%. Bidding interest in the tender seems strong with likely participants including SoftBank, Adani, ReNew Power, Enel, Engie, AES, FRV, Essel Infra, Azure Power and Hero Future Energies amongst others. Looking at all these factors, BRIDGE TO INDIA expects tariffs to fall substantially below the INR 4.00 (US ¢ 5.9)/ kWh mark, especially as there is a INR 0.05/kWh annual escalation in tariffs for 15 years and the tender provides 18 months for execution in a phased manner.

The Rewa tender has many unique features and addresses two of the most critical risks for solar project developers in India – offtake and grid availability. If the tender results are as competitive as expected, it would provide a template for other states for solar power procurement.

In a new policy move, the Ministry of New and Renewable Energy (MNRE) has announced financial incentives for DISCOMs to support rooftop solar installations (refer). The notification proposes a financial support of up to INR 3.75m (USD 55,000)/MW for up to 1,350 MW of rooftop solar capacity. The funds can be used by DISCOMs for multiple activities including upgradation of distribution network and IT infrastructure, building consumer awareness campaigns, setting up consumer helplines, training employees, rating installers etc.

Delay in grid connection is one of the main challenges affecting the growth of rooftop solar in India;

By offering financial support to the DISCOMs, MNRE is trying to alleviate their concerns about loss of profitable customers and additional network investments required for growth of rooftop solar;

Financial support for DISCOMs is a very good move but MNRE needs to make sure that eligibility conditions and funds disbursement process is not unduly restrictive;

Indian government’s aim is to grow rooftop solar to 40x the current installed base of 1 GW in a little over five years. This is a formidable target and grid connection is one of the main challenges affecting the growth of this market (refer). BRIDGE TO INDIA’s analysis shows that effective grid connection and net-metering policies can increase customer adoption rates by up to 50%.

Despite an overtly supportive rooftop solar policy and regulatory framework across most states, the DISCOMs remain largely reluctant and ill-equipped for large scale market adoption. Their concerns are mainly twofold and entirely understandable – i) potential loss of revenue and in particular, loss of high-paying commercial and industrial consumers; and ii) additional implementation burden of modernising the grid and inspecting, certifying and billing rooftop systems. If a state has 700 MW of rooftop solar capacity on by 2020 consistent with BRIDGE TO INDIA’s rooftop solar market projection, the state DISCOMs will lose 0.8% of their power sales by volume and 1.4% by revenues. These numbers may seem small but so long as the DISCOMs remain in a perilous financial condition, it is unrealistic to expect them to support growth of rooftop solar.

The policy of financially incentivising DISCOMs is therefore a much-needed step in the right direction even as the amount of incentive being offered is relatively small as per MNRE’s own calculations. However, the process of claiming the proposed incentive is extremely onerous as MNRE has specified a tough and long list of mandatory conditions for DISCOMs, most of which not only need further clarification but also run afoul of prevailing state-level policies and regulations. For example, it has specified the rate of purchase of surplus power to be at the same level as retail tariffs but most state policies either do not allow any purchase of surplus power or usually offer a much lower price. Another condition stipulates that the DISCOMs should comply with the ambitious rooftop target specified by MNRE. This would be impossible for any DISCOM to comply with.

BRIDGE TO INDIA has been arguing for some time for the need to bring DISCOMs on board not just by diktat but through financial incentives (refer). Our view is that financial support for DISCOMs should continue until they can adapt their business models and find new sources of revenue from distributed energy generation (refer). But for the policy to be effective, MNRE needs to make sure that that eligibility conditions and funds disbursement process is not unduly restrictive.

In our last bulletin in 2016, we presented our summary of key sector developments in India in 2016 (refer). Here, we look at key anticipated themes and developments for 2017. We start the year with a pipeline of around 14 GW of utility scale projects, out of which 7.7 GW is expected to be commissioned in the year (growth of around 90% over 2016). Combined with 1.1 GW of expected rooftop solar capacity, India should add a total of 8.8 GW in 2017, ranking it amongst the top three global markets after China and the USA. On the policy front, impact of central government policies related to manufacturing, power distribution (UDAY) and implementation of GST is awaited keenly.

As the Indian market ramps up, it will become a key pillar for demand growth when demand in other leading countries including China, Japan and even possibly the USA is expected to slow down;

Despite concerns about weak power demand growth and growing incidence of grid curtailment, solar power outlook in India remains very strong;

2017 will be a bumper year for the sector in India with total installed capacity reaching around 18 GW by the end of the year;

There has been some concern about weak power demand growth in India and growing incidence of grid curtailment and what it means for growth of solar power. Demonetization may also impact power demand negatively. But we believe that continuing reduction in module prices and downward trend in domestic interest rates will provide strong ongoing demand impetus to the market. Solar tariffs are expected to fall below the critical INR 4.00 (USD 0.06)/ kWh mark making solar power the cheapest new source of power. At the same time, improving financial health of power distribution companies due to UDAY implementation will also help in sustaining renewable energy demand in particular. We expect sustainable demand of 6-8 GW for utility scale solar in the coming years.

As the Indian market ramps up, it will become a key pillar for demand growth when demand in other leading countries including China, Japan and even possibly the USA is expected to slow down. We already see leading international equipment suppliers paying more attention to this market and developing specific pricing and product strategies for India.

However, we are still unsure if improving domestic demand will lead to large-scale investments in greenfield manufacturing capacity. Notwithstanding the Indian government’s keenness to support domestic manufacturing as part of ‘Make in India’ campaign, the competitive dynamics are stacked against this sector.

Implementation of Goods and Services Tax (GST) during the year will lead to marginal cost increases and may create uncertainty for developers and contractors although there is a widespread expectation that any adverse impact will be passed through to the distribution companies.

Rooftop solar will also continue its spectacular growth trajectory in 2017. We expect around 1.1 GW of rooftop solar capacity to be added in 2017, up 75% from 2016, driven by capital subsidies and substantial demand from public sector.

Overall, 2017 will prove to be a bumper year for the solar power sector in India. Total installed capacity is expected to reach 18 GW by the end of the year.