Month: February 2017

India’s first ever wind power auction has resulted in a record low wind power tariff of INR 3.46 (US¢ 5.2)/kWh, just marginally higher than the record low levelized tariff of INR 3.29 (US¢ 4.9)/kWh in the recent Rewa solar auction (refer). Mytrah, Sembcorp, Inox and Ostro are the winning bidders and will be awarded 250 MW each. Successful bidders will sign 25-year PPAs with PTC India, a power trading company (partly owned by the Government of India), which will sign back-to-back PPAs with DISCOMs.

The old model of wind procurement had become dysfunctional and significant delays in signing PPAs, rising incidence of grid curtailment and payment delays of up to 18 months were hurting the developers very badly;

The sector is likely to shift entirely towards auction based allocation route but this transition may lead to a short-term hiatus in the market;

It remains to be seen if investments in transmission grid can keep up with increases in renewable generation capacity and inter-state flows of power;

Historically, states have been procuring wind power under a preferential regime with feed-in-tariffs ranging between INR 4.00-6.00 (US¢ 6-9)/ kWh. The move to auctions and replicate solar model has been very successful with tariffs falling below the critical INR 4.00 (US¢ 6)/kWh mark as predicted by BRIDGE TO INDIA (refer). Inevitably, there are questions about the viability of these tariffs. We believe that the fall is attributable to two main sets of reasons. First, the old model of wind procurement had become dysfunctional. Significant delays in signing PPAs, rising incidence of grid curtailment and payment delays of up to 18 months were hurting developers very badly and damaging sector prospects. By dealing with these risks, the tender has managed to attract intense competition from bidders. The tender also provides a template for locating projects in high wind resource states, Tamil Nadu and Gujarat, and reducing power costs for other states – as with Rewa solar projects supplying power to Delhi Metro Rail.

Second, the preferential tariff regime was used by some wind turbine manufacturers to bundle together land, turbines and EPC work. This allowed them to command significant price premium and dominate the market. Auctions will provide more transparency to the sector, break wind turbine manufacturers’ domination and make the wind turbine market more efficient.

Reduction in tariffs will spur demand and also force a drastic rethink of how wind power is procured in India. The sector is likely to shift entirely towards auction based allocation route. Indian government wants to tender out 4 GW of wind capacity next year but capacity addition through the tendering process often takes a long time. This may lead to a short-term demand hiatus in the market.

Concentrating projects in resource heavy states will also put more strain on the transmission grid. It remains to be seen if investments in grid can keep up with increases in generation capacity and inter-state flows of power.

In January 2017, India’s coal imports declined by 22 percent to 14 million tonnes (refer) because of lukewarm demand from power generating stations. Coal India Limited, which accounts for 80% of domestic coal production, has posted its worst ever financial results for H1-FY17 as revenues declined even as expenses rose (refer). At the same time, PLF of thermal power stations continues to be near all-time lows of under 60% (refer).

The Indian government’s aggressive electrification policy – with electrification of over 12,000 villages of the 18,452 unelectrified villages since 2015 – and UDAY reform package for DISCOMs are failing to bolster power demand;

India’s coal-fired power sector continues to suffer rising challenges posed by lack of demand, improving price competitiveness of renewable power and growing regulatory risk;

Private investors planning long-term investments in coal mining or thermal power generation are likely to be put off by the combination of demand, offtake, regulatory and environmental risks;

This is all a big change from just three years ago, when coal availability was the main constraint for India’s growing power generation capacity. The reason for this reversal: while both power generation capacity and coal production have grown significantly, demand growth for power has failed to keep up.

But power demand from more than 300 million people unconnected to or unserved by the grid is failing to materialize despite the Indian government’s aggressive electrification policy – aim to achieve 100% electrification by 2018 – and UDAY reform package for DISCOMs. Politics continues to dictate power pricing. Just last week, the Government of Rajasthan decided to roll back a marginal but much-needed hike in electricity prices for agricultural consumers which pay a measly tariff of INR 0.90 (US¢ 1.3)/ kWh, significantly below the cost of supply. Elsewhere, UDAY stipulated tariff hikes are not happening and, in fact, difference between the average cost of supply and average revenue realized has widened in Haryana, Madhya Pradesh, Punjab, Karnataka, Jharkhand, Bihar and Uttarakhand (refer). Understandably, DISCOMs prefer to not supply power to loss-making consumers providing none-too-optimistic scenario for power demand.

Despite weak demand growth, the National Electricity Plan, December 2016 shows that around 50 GW of additional thermal capacity is under various stages of construction. Private investors in coal mines and thermal power generation projects will face the brunt if demand doesn’t pick up. In absence of demand growth, record low tariffs and ‘must run’ status of solar plants are likely to hurt sentiment for thermal power sector very badly.

We noted in our recent blog on Rewa solar project (refer) that falling cost provides a huge demand pull for solar power, which has suddenly become very desirable. But it is not all good news. Excess thermal capacity, poor financial condition of DISCOMs and low demand are also expected to hurt growth prospects for solar power in the long run.

The 750 MW Rewa solar project has seen tariffs fall to a record low of Rs 2.97/ kWh. Levellized tariff works out to Rs 3.29/ kWh, 24% below the previous low of Rs 4.34 seen in an NTPC tender in January 2016. Most of this fall can be attributed to lower equipment cost. Solar module prices, constituting about 60% of capital costs, have fallen by 26% in the last year.

The Rewa auction makes solar PV the lowest cost power source in India. In comparison, new coal-fired thermal power today costs about Rs 5/kWh. Gas power is not viable in India due to high cost (over Rs 6/ kWh) and short supply of feedstock. For wind power, even after auctions, tariffs are likely to stay closer to Rs 4/ kWh. The most exciting part of solar technology is that it is still in early stages of its evolution. Further advancements and growth in industry volumes will continue to make solar power ever cheaper. We are potentially looking at solar power costing Rs 2/ kWh by 2020. On top of that, cost of integrated solar-storage systems with 100% power back up is expected to fall below the critical threshold of Rs 5/kWh by 2020.

Such a dramatic fall in prices is highly likely and would change our energy landscape dramatically in the years to come. In our view, cost advantage trumps everything else in the power sector including COP21 commitments, environmental imperative and regulatory support. That makes solar technology the firm favourite for powering India’s future economic growth. All stakeholders – the government, regulators, DISCOMs, IPPs and consumers – need to take notice and adapt their plans accordingly.

TERI has recently published a report, Transitions in Indian Electricity Sector, which talks about a scenario where India can stop adding new thermal power capacity from now itself. This is a timely and bold report. We already have surplus power supply in the country and instead of planning to add more thermal capacity for future (gestation period of 4-5 years), we should be committing ourselves to achieving a complete transformation of the energy sector.

That means finding ways of solving the intermittency problem of solar power. Storage technology is evolving rapidly and the Indian government should devote more resources to capture future value in this crucial segment with favourable policies and investments in R&D, design, manufacturing and operations. We also need several policy, regulatory and technology related interventions to facilitate this energy transformation – more flexible generation capacity, time of day power pricing to adapt consumer behavior, better forecasting technologies, huge investments in smart grids and transmission systems as well as a redesigned regulatory framework.

Based on current market trends, most of the future investment in renewable power and allied storage and grid systems will come from the private sector. That also calls for financially strong DISCOMs with technical and financial capability to strengthen the last mile distribution infrastructure. Strenuous implementation of the UDAY reform package for DISCOMs is very critical. So far, the financial restructuring part of the package has gone off relatively smoothly but the more challenging aspects of operational restructuring, tariff reform and cutting T&D losses still lie ahead.

The renewable energy age will be as powerful as the industrial age or the internet age. It has the potential to transform our economy, environment and the lives of hundreds of millions of our citizens. Whether we acknowledge it or not, it has already begun.

The Union Budget of India for financial year 2017-18 was presented last week. The Indian budget making exercise is somewhat unique as it is seen as setting the tone for major government policy and reform agenda rather than merely a record of financial book-keeping. From that perspective, the budget was a disappointment as it didn’t break any new ground for the renewable sector. It included a mix of some tinkering manoeuvres and reiteration of previously announced measures.

Key highlights for the sector:

Provision of INR 7.45 billion (USD 110 million) for promoting electronics manufacturing under Modified Special Incentive Package (MSIP) and Electronic Development Fund (EDF) schemes;

Reduction of corporate taxes from 30% to 25% for businesses with annual income of less than Rs. 500 million (USD 7.3 million) and extension of MAT credit from 10 years to 15 years;

Increase in the Ministry of New and Renewable Energy (MNRE) total annual budgeted expenditure by 9%

Additional money granted under MSIP and EDF schemes (15 times the amount provisioned for the current year) would help domestic manufacturers of solar cells and modules. But this amount is very small as it would cover gross investment of only INR 35 billion (USD 514 million) for the entire electronics sector. Allocation for solar is expected to be relatively inconsequential for the sector.

Reduction of corporate tax rates and MAT credit extension will help all small-medium size players in the sector. But the benefit will be eroded by phasing out of the ten-year corporate tax holiday. Net final impact on most IPPs will be marginal.

The budget also included a few other minor announcements including a reiteration of the plan to expand the solar park scheme by another 20,000 MW (capital outlay of approximately INR Rs. 40 billion, USD 588 million), plan to install rooftop solar systems on 7,000 railway stations (expected to be installed under BOOT model ie, no capital support from exchequer) and rationalization of indirect taxes on some components used in solar module manufacturing.

One area where the budget is very unequivocal is the government’s intent to gradually remove all financial subsidies for renewables as both wind and solar energy have gained generation cost parity. Apart from phasing out the ten-year corporate tax holiday, the Generation Based Incentive (GBI) for wind sector will also lapse from April 2017 onwards. Similarly, accelerated depreciation benefit will stand reduced from 80% to 40% from next year.

Overall, there is no big bang or material announcement in the budget. We are disappointed that there is no increment funding for investment in transmission schemes or development of smart grid or storage initiatives. Integration of growing renewable capacity will pose a formidable challenge for the sector in the coming years. Nor are there any skilling or customer education initiatives, which are a crying need for the sector in our view.

Madhya Pradesh government completed auction process for the 750 MW Rewa solar project last week (see our previous blogs – link 1 and link2), where tariffs fell to a record low of INR 2.97 (US¢ 4.4)/kWh. Acme Solar, Mahindra Renewables and Solenergi Power won 250 MW each. The tariff will rise annually by INR 0.05 (US ¢ 0.07)/kWh for 15 years equating to a levelized tariff of INR 3.29 (US¢ 4.9)/kWh, 24% below the previous low of INR 4.34 (US¢ 6.5)/kWh seen in NTPC’s Rajasthan tender in January 2016. Most of this fall can be attributed to lower equipment cost (solar module prices have fallen by 26% in the last year) and an improved contractual structure. Project developers will benefit from an unconditional state government offtake guarantee and deemed generation compensation for grid unavailability.

The tender would help open the long-term open access market especially for bulk public sector consumers;

Solar power is now the most competitive greenfield source of power with a 15-45% cost advantage over other power sources;

As cost of renewables falls and capacity increases, policy making focus should shift towards energy storage solutions and redesign of energy markets to address intermittency risk of renewable power;

A unique element of Rewa project is that about 25% of the power output will be sold to Delhi Metro Rail Corporation (DMRC) using inter-state open access transmission. DMRC will assume all open-access related risk and costs expected to be about INR 0.50 (US¢ 0.7)/kWh. It will save more than 50% on its power cost bill and draw more consumers to this market. Madhya Pradesh government is already planning to develop further projects for supplies to other bulk consumers across the country (refer).

This auction makes solar PV the lowest cost power source and a firm favourite for powering India’s future economic growth. Both consumers and IPPs will take notice and adapt their strategies accordingly. Successful bids for new thermal power plants in India in the past two years have been between INR 3.93 – 4.98 (US¢ 5.9-7.4)/kWh. For wind power, most states are still offering FITs of about INR 4.00-6.00 (US¢ 6-9)/ kWh although upcoming auctions may bring that to about INR 4.00 (US¢ 6)/ kWh. Gas power is simply not viable in India due to high cost (over INR 6.00/kWh) and short supply of feedstock. This clearly makes solar power a key contender for future power capacity addition in the country.

The government and private sector should now be focusing their attention on how to address intermittency risk of growing solar capacity. Cost effective energy storage solutions, about three years away, and redesign of energy markets should provide the answers. India has already taken first steps for adopting energy storage. Recent tenders by Solar Energy Corporation of India (SECI) aim to use storage to smoothen the supply curve for solar power plants (refer). The next step would be to use storage with solar projects to carry out peak shifting and match solar power’s supply profile with the demand profile.

India’s power sector regulations are defined for generation, transmission and distribution and most regulations had to undergo changes over the past few years to accommodate renewables in the generation mix. It is time to take out the editing pens again to add the fourth dimension of storage in India’s power sector regulations.

In a very pleasing development for renewable IPPs, Solar Energy Corporation of India (SECI) has been included as a beneficiary in a tripartite agreement between the Government of India, state governments and the Reserve Bank of India (RBI). The tripartite agreement serves as a payment security mechanism for central government undertakings whereby, in the event of a payment default by any state government undertakings including DISCOMs, they can withhold funds from the centre’s financial assistance to the states. National Thermal Power Corporation (NTPC) has been a beneficiary of this agreement since 2002 and past experience shows that the tripartite agreement acts as a strong deterrent against payment default by state government undertakings.

SECI is India’s largest procurer of solar power but it faces persistent concerns about its financial strength despite being owned 100% by the Government of India and a payment security fund being set up;

Analysis of previous bids shows that tariffs for SECI tenders are higher by up to INR 0.20 – 0.50 (US¢ 0.30 – 0.75)/kWh in comparison to NTPC tenders;

Inclusion in the tripartite agreement is the most decisive and efficient way of dealing with SECI’s offtake risk perception;

NTPC has been a beneficiary of the original tripartite agreement since 2002. On expiry of the old agreement, a new agreement was signed recently and SECI has also been included as a beneficiary entity. As per the last update, 13 of the 30 states had signed the agreement and more are expected to do so in the near future (refer). Inclusion in the tripartite agreement has led ICRA, a rating agency, to enhance SECI’s domestic credit rating from AA- to AA+ (refer).

SECI has emerged as India’s largest off-taker of solar power. It has already completed tenders for 4 GW of utility scale solar capacity and has a mandate to develop an additional capacity of 8 GW under the National Solar Mission. In contrast, NTPC has tendered 3 GW to private project developers and plans to allocate an additional 5 GW. However, as a relatively new organisation with no major operational assets or revenues, SECI has faced persistent concerns about its capability to cope with payment defaults by the DISCOMs despite being owned 100% by the Government of India.

A CEO survey conducted by BRIDGE TO INDIA in May 2016 showed that 50% of the CEOs considered SECI’s off-take risk as ‘not acceptable’ or only ‘fairly acceptable’ (refer). BRIDGE TO INDIA’s analysis of bids in the last eighteen months shows that NTPC enjoys tariff discount of as much as INR 0.20 – 0.50 (US¢ 0.30 – 0.75)/kWh over SECI. To address private developer concerns, the Indian government has been building a payment security mechanism equivalent to 6 months of revenue payments to IPPs (refer).

We believe that the extended tripartite agreement is the most decisive and efficient way of dealing with SECI’s offtake risk perception. It would enable SECI to attract more interest in future tenders and bring down tariffs even lower.