Month: March 2017

The Indian power sector is in early stages of transformation from coal-centric generation to variable renewable power generation (refer). This transformation will pose several daunting commercial and technical challenges for both policy makers and market players. It will also inevitably result in growing incidence of grid curtailment of renewable power, as seen worldwide, for a variety of reasons. It is time to institute a sweeping range of both demand and supply sides regulatory reform for effective management of the grid and providing long-term visibility to private sector investors.

As renewable capacity grows, capacity utilization for conventional power fleet could start touching 50% by 2021-22 assuming all renewable power output is evacuated;

In an era of cheaper renewables, we need to move away from the ‘must run’ incentivized structure to a comprehensive reform of pricing, grid utilization and related ancillary services;

As renewable power becomes more mainstream, it should stop expecting special advantages and compete on equal terms;

A back-of-the-paper calculation shows that if India realistically adds a combined wind and solar power capacity of 110 GW by 2021-22 and power demand grows by 5% annually, capacity utilization for conventional power fleet would drop below 50% at various times in the year, much lower than the critical rate of 55%. High growth in solar capacity addition in conjunction with India’s evening peak demand profile will add further to the woes of grid management.

There are several plans to enhance transmission infrastructure and introduce grid-level battery storage to address the increasing renewable penetration. Current regulatory approach to tackling this risk is predicated almost entirely on providing ‘must run’ status – priority access to the grid – to renewables. This simplistic approach has been very helpful to the renewable sector but is becoming untenable as it ignores the interests of conventional power generators, transmission companies and DISCOMs. There are already many instances of DISCOMs backing down renewable power for various commercial and technical reasons.

In an era of cheaper renewables, we now need compensatory mechanisms for backing down and ramping up conventional power. Developing an effective and economically sound ancillary grid services market should also be a priority. Power tariff structures in India are rigid and need to evolve to ‘time of use’ pricing to shift customer behaviour. Backing down of renewables may become unavoidable in future, so there is a growing clamour for renewable power to have a two-part tariff and do away with the ‘must run status’. However, this needs proper planning and consultation with the private sector so as to avoid a repeat like the coal linkage mess that we saw in the thermal power sector recently.

As renewable power becomes more mainstream, it should stop expecting special advantages and compete on equal terms. Recent Rewa tender allows deemed generation compensation for evacuation risk beyond a specified limit. Sector regulators need to take the lead and work closely with the industry to develop more innovative and workable tariff structures for sustainable long-term growth of the sector.

BRIDGE TO INDIA is launching India Solar Price Indices, a series of indices to track and monitor key price trends in the Indian solar market. Our objective is to publish pricing data specifically applicable to the Indian solar market – devoid of exchange rate movements or source of equipment. We expect the indices to bring more transparency to the sector and provide reliable, independent information to all key stakeholders including government and regulators, financial institutions, developers, equipment suppliers and contractors.

We plan to release updated price indices every quarter across for four categories:

Modules

Inverters

Utility scale EPC cost (excl land and transmission connectivity costs)

Rooftop solar EPC cost

Methodology

We aim to get pricing information by conducting interviews with a diversified group of 6-10 leading project developers, EPC contractors and module suppliers. Final pricing is obtained by taking a simple average of all responses while ignoring any outliers.

BTI India Solar Module Price Index

This index aims to provide pricing information for multi-crystalline PV modules from tier 1 Chinese suppliers for delivery in the next 3 months with a minimum order size of 50 MW.

Based on the methodology described above, our module price index for March 31, 2017 is INR 22/ Wp (US 33¢/ Wp). This price is CIF India, net of any further port or inland transportation costs.

Note: Prices for past quarters are based on BRIDGE TO INDIA research.

Module prices have been falling steeply due to oversupply and quarterly demand fluctuations in China. Prices have declined 29% y-o-y and 8% over the last quarter.

BTI India Solar Inverter Price Index

This index aims to provide pricing information for central inverters assembled in India for delivery in the next 3 months for a minimum order size of 50 MW.

Based on the methodology described above, our inverter price index for March 31, 2017 is INR 1.9/ Wp. This price is CIF India, net of any further port or inland transportation costs.

Note: Prices for past quarters are based on BRIDGE TO INDIA research.

Inverter prices have fallen considerable in last two years because of increasing competition and entry of new players like TBEA, Huawei and Sungrow. Prices have declined 21% y-o-y and 5% over the last quarter.

BTI India Solar EPC Price Index

This index provides lumpsum EPC price information for utility scale solar projects of 50 MW size. The price excludes land, transmission infrastructure and all soft-development costs.

Based on the methodology described above, our EPC price index for March 31, 2017 is INR 35/ Wp.

Note: Prices for past quarters are based on BRIDGE TO INDIA research.

EPC prices have declined 22% y-o-y and 8% over the last quarter.

BTI India Solar Rooftop EPC Price Index

This index provides EPC price information for a 500 kW rooftop solar project on an industrial pre-fabricated metal structure. Our rooftop solar EPC price index for March 31, 2017 is INR 45/ Wp.

Note: Prices for past quarters are based on BRIDGE TO INDIA research.

Rooftop EPC prices have declined 21% y-o-y and 6% over the last quarter.

Last week, BRIDGE TO INDIA launched its latest report: “Analysis of utility scale solar tenders in India”. This report examines recent bidding history for all PPA-based, open category tendered projects to understand risk-return relationship in the sector.

From July 2015 to December 2016, India allocated 12.6 GW of solar projects to private developers through an open, competitive tender process. These tenders have seen tariffs trending downward from about INR 5.50 – 6.00 (US¢ 8.4 – 9.2)/ kWh in mid-2015 to INR 3.29 (US ¢ 5.0)/kWh in 2017 (refer), equivalent to an annualized decline of over 25%. Common perception is that auctions and increased competition are forcing developers to bid aggressively resulting in tariffs coming down so fast. But our analysis shows that changes in equipment costs and other factors are responsible for most of the decline. Adjusted for these changes, tariffs haven’t trended down in the last 18 months.

Average harmonized tariff across 24 tenders gives us equity IRR of 14.20%, significantly below the benchmark expectation of 18-20%;

Auction based tender process has forced developers to build forward-looking, favorable assumptions for solar module prices, debt refinancing and many other parameters;

Inadequate risk pricing poses a severe viability challenge for the sector;

To compare tariffs across different tenders on a like-for-like basis, we have harmonized bid results across all tenders by removing impact of key variables such as capital expenditure, cost of debt, irradiation, land and transmission infrastructure costs. As an example, in July 2015, weighted average successful tariff for the Madhya Pradesh 300 MW state tender was INR 5.35 (US ¢ 8.2)/kWh. But if that bidding were to happen in September 2016 in another state of Andhra Pradesh, the same tender would yield a weighted average tariff of INR 4.29/kWh because of changes in capital expenditure, cost of debt, irradiation and land and transmission infrastructure costs.

Figure – Actual and harmonized tariffs for tenders analyzed by BRIDGE TO INDIA

Several interesting conclusions can be drawn by comparing bid results across different off-takers, states and over time. Harmonized tariffs have stayed reasonably stable around the average level. Projects tendered by NTPC and located inside the solar park were highly oversubscribed and subsequently had the lowest tariffs. For other tenders, we see no material relationship between offtake risk and bid results except in some extreme cases – Gujarat (credit rating of A+ by ICRA; tariff discount of INR 0.32/ kWh) or Uttar Pradesh (credit rating of C by CARE; tariff premium INR 2.68/ kWh).

But the most relevant insight, in our view, is that the average harmonized tariff from our study gives an equity IRR of only 14.20%, significantly below the benchmark expectation of 18-20% and that too without any material risk contingencies. Auction based tender process has forced developers to be very aggressive. The industry is trying to bridge the returns gap by improving technical execution and finding innovative, cost effective means of financing. But it is also becoming increasingly common place to build forward-looking, favorable assumptions for solar module prices, debt refinancing and many other parameters.

The developers have benefited hugely from rapid falls in solar module prices and softening in interest rates. Our pricing outlook for 2017 shows this trend is likely to continue through the year (refer). Nonetheless, steep module price declines pose critical threat to the financial health of module suppliers and a risk for winning project bidders. In general, risk pricing, particularly for capital cost, interest rate, offtake and transmission risks, appears inadequate.

You can download our full report here.

After squeezing global solar module manufacturers out of business, China is at it again. It is using every trick available – government subsidies, domestic quotas, restriction on foreign players and cornering raw material supplies – to dominate energy storage industry, which has been so far led by Japanese and Korean manufacturers such as Panasonic, Samsung SDI and LG Chem. The country is spending billions of dollars subsidising local companies to push them at the forefront of storage and electric mobility technologies (refer).

China is spurring a huge domestic supply ecosystem for lithium-ion based batteries through demand creation and incentives;

By 2020, it is expected that China will have over 60% of the global lithium ion battery production;

Unless India acts now, it is going to miss the bus on domestic manufacturing for a vital upcoming technology;

Energy storage is the next frontier in evolution of energy markets after renewable energy. It is expected to play a catalytic role in growth of both renewable energy and electric vehicles. China is undertaking not only the world’s largest deployment of renewable energy capacity, but is also planning to be a leader in electric mobility with a target of 5 m electric vehicles by 2020 (by way of comparison, the US is expected to add just about 1 m electric vehicles in the same period). China is using its large domestic demand and extensive subsidies to create fully integrated domestic manufacturing giants. It accounted for half of the USD 16 billion in subsidies countries offered to new-energy car makers in the past decade (refer).

Tesla and Panasonic’s gigafactory in the US has been drawing a lot of global attention for its massive scale. Their plan is to manufacture 35 GWh of cells and 50 GWh of battery packs annually by 2020. However, a relatively unknown Chinese company, Contemporary Amperex Technology Ltd (CATL), is already manufacturing 7.6 GWh of cells per year and plans to ramp that up to 50 GWh by 2020, making it the largest battery manufacturer in the world (refer). Alongside BYD, another local player that is expected to become the world’s leading electric vehicle manufacturer by 2020, the company is close to taking over Panasonic as the world’s largest electric vehicle battery manufacturer. By that time, it is estimated that China will have over 60% of the global lithium ion battery mass production.

In contrast, India has barely woken up to the potential of electric vehicles or energy storage. Domestic battery manufacturing capacity is almost non-existent. A report from last week suggested that Indian government is expected to brainstorm on the country’s policy for electric vehicles (refer). Indian government wants an ambitious 6 m electric and hybrid vehicles on the roads by 2020 under the National Electric Mobility Mission. Meanwhile, National Thermal Power Corporation (NTPC) has announced that it will look to create a battery charging ecosystem across the country to promote adoption of electric vehicles (refer). However, in the absence of any cogent, long-term policy, such plans remain pipe dreams.

Unless India moves quickly and decisively, it runs a very real risk of missing the bus on domestic manufacturing for a very vital technology of future.

Solar module prices are expected to continue declining in 2017 as global supply continues to exceed demand. As the largest supplier and installer of solar modules, China will continue to drive global pricing. The country’s demand is expected to be up to 20% lower than in 2016 – as against a record 34 GW of installations in 2016, it is expected to add only about 28 GW in 2017 – putting downward pressure on prices.

Q2 is typically the year’s busiest period in China so we expect to see some hardening in prices in Q2, followed by a steep decline in third and fourth quarters;

Global demand is expected to be nearly stagnant in 2017 even as several large suppliers have announced significant expansions;

We believe that 2017 is likely to end with prices in the range of US¢ 25-26/Wp;

Price movements in 2017 are likely to follow a similar trend as in 2016. Q2 is typically the year’s busiest period in China because of the June 30 deadline for the country’s annual feed-in tariff cycle. So, we expect to see second quarter hardening in prices followed by a steep decline in third and fourth quarters.

Elsewhere, demand in the Japanese PV market has been seeing a continued downturn for seven consecutive quarters; European market has been contracting; and the rooftop solar market in the US seems to be losing steam as tussles with state utilities continue. This means that even with lower pricing and rapid demand growth in developing countries such as India, global demand is expected to be nearly stagnant in 2017 at about 75 GW even as capacity continues to go up. Several large suppliers have announced significant expansions and we estimate year end global manufacturing capacity at over 100 GW.

Taking all these factors into account, we believe that 2017 is likely to end with prices in the range of US¢ 25-26/Wp. That would be equivalent to a 20% decline in annual terms following the 26% decline in 2016. This is very welcome news for project developers and power purchasers in India. It would bolster demand and ease financial concerns of developers and lenders when levelized tariffs have fallen below INR 3.30 (US¢ 4.9)/kWh (refer).

On the other hand, steep price declines pose critical threat to the financial health of module suppliers. It is also a blow for domestic manufacturers and the Indian government’s aspirations to promote domestic manufacturing. Many leading global suppliers have seen their share prices fall by 30-50% in the last year. At the same time, they are also facing investment costs to upgrade to higher efficiency technologies like PERC (passivated emitter rear cell), multi/heterojunction, bifacial panels, etc to stay ahead of the curve (refer). The possibility of a dislocation in module manufacturing industry cannot be ruled out. If and when that happens, it will spell trouble for winning project bidders, who are already building expected price falls in their financial models.