Month: April 2017

First round of bids was submitted for Solar Energy Corporation of India’s (SECI’s) 750 MW tender in Bhadla Solar Park, Rajasthan last week. A total of 33 developers are believed to have submitted bids for an aggregate capacity of 8,750 MW – an oversubscription of almost 12x. Coming in the wake of intensely competitive bidding in Rewa and Kadappa tenders, the signs are that competition for new projects is getting fiercer particularly as the supply of new projects has slowed down in the last twelve months.

The large oversubscription in Bhadla can be attributed primarily to easing up of new tender announcements and greater private sector interest in the sector;

Lower solar tariffs should ideally provide demand boost for solar projects but ironically they are adding to short-term slowdown as central and state governments reconsider procurement policies;

We expect a slight reduction in new solar capacity addition in India in 2018 before activity picks up again from 2019 onwards;

Most of the active project developers in India including Adani, ReNew, Acme, Azure, SolaireDirect (Engie), FRV, Sembcorp, EDF, Canadian Solar, Aditya Birla, Shapoorji Pallonji, Mytrah, Fortum and Trina Solar have participated in this tender. Notably, Welspun has made a comeback after the sale of its assets to Tata Power. ReNew, SoftBank and Saudi based Alfanar have submitted bids for the entire 750 MW capacity. Adani and SolaireDirect have bid for 550 MW and 500 MW respectively.

We believe that the large oversubscription in Bhadla tender is primarily due to slowdown in new tender issuance but improved credit rating of SECI is also a relevant factor.

The Indian government’s announcement of 100 GW solar target led to a big surge in new tender announcements in H2/2015 and H1/2016 with some large states front-loading their solar power procurement programs. At the peak of tender activity in 2016, SECI tenders were oversubscribed by only about 2x (Maharashtra 450 MW, Andhra Pradesh 400 MW) or even undersubscribed (Odisha 300 MW, Karnataka 950 MW). But growing interest from many large global and domestic solar developers in the sector combined with slowdown in new tenders is leading to a tough competitive environment for project developers.

Figure – Solar tender auction completion

The main problem here is sustaining a high level of new solar power demand from states when many of them are facing power surplus. Solar tariffs in the sub-INR 3.50/ kWh (US¢ 5.4) range should provide huge demand boost for solar power in the long run but ironically, lower tariffs have led to unique challenges in the short-term. Central and state governments are reconsidering their procurement policies leading to postponement of some tenders. Meanwhile, some DISCOMs, having completed auctions with higher tariffs (notably Jharkhand and Odisha), are now having second thoughts on signing PPA’s.

We believe that this short-term lull will lead to fierce competition for new tenders and a slight reduction in new solar capacity addition in 2018 before activity picks up again.

India achieved a record low solar tariff of INR 3.29 (US¢ 5.1)/kWh in the Rewa tender in February. That record was surpassed last week in an auction conducted by National Thermal Power Corporation (NTPC) for a 250 MW project in Kadappa, Andhra Pradesh, where Engie’s Solairedirect submitted the winning bid of INR 3.15 (US¢ 4.9)/kWh. The project will be built in a solar park, developed by the state government. Ostro, Canadian Solar, Greenko, Azure Power, Adani and Mahindra were some of the unsuccessful bidders.

Given that the overall Rewa tender structure was seen as uniquely beneficial to the developers, it is somewhat perplexing to find that tariffs have fallen even further so soon;

Slowdown in new tenders is putting pressure on developers, who are anxious to deploy capital and scale up quickly to monetize previous investments;

With module prices expected to keep falling through 2017, we are likely to see progressively new lows being achieved throughout the year;

Overall risk profile for Rewa and Kadappa projects is somewhat similar although it can be argued that the Rewa tender is more beneficial to project developers. It incorporates many unique provisions such as state government guarantee, deemed generation benefit and extended construction period of 18+12 months (additional reduction in module costs). It is therefore difficult to explain why Kadappa tariff has come even lower than the Rewa tariffs particularly as solar park charges are relatively higher in Kadappa.

One logical explanation for a new low is that Kadappa was the last of the 3,000 MW solar PV projects tendered by NTPC, the best offtaker in the Indian solar market. We had recently highlighted that pace of new utility scale solar tender announcements and project allocations has slowed down considerably to just 4.2 GW and 6 GW respectively, down 70% and 33% between FY 2015-16 and FY 2016-17. This slowdown is putting severe pressure on the 30-40 active developers in the market. The developer community is hungry for more projects to meet their internal targets and to scale up to monetize previous investments.

Tariffs for NTPC projects have declined by about 32% in the last eighteen months since its first auction in Andhra Pradesh in November 2015 for the 500 MW project won by SunEdison. This sharp decline is largely due to steep fall in module costs (33% in the respective period) and intense competition in the sector. We expect the trend to continue in the upcoming 750 MW auction by Solar Energy Corporation of India (SECI) in Bhadla solar park in Rajasthan.

Energy transformation has arrived in India. According to the Ministry of New and Renewable Energy (MNRE), India’s total renewable capacity including solar, wind, bio-mass and small hydro grew by around 11.2 GW in FY 2016-17, at par with thermal capacity addition, which registered a decline of 50% in the year.

The country added 5,526 MW of new solar capacity (up 83% over FY 2015-16) and 5,400 MW of new wind capacity (up 63%) in the year. While these numbers are impressive, it is worth noting that the solar capacity addition including rooftop solar is almost 50% below the annual target of 12,000 MW. In contrast, wind capacity addition was +35% over the 4,000 MW target.

Figure – Renewable and thermal power capacity addition, MW

Sources: CEA, MNRE, BRIDGE TO INDIA research

India added 5.8 GW of renewable capacity in a single month as implementing agencies pushed for commissioning of projects before the close of the financial year;

There has been a downward trend in new renewable allocations in FY 2016-17 and the 2017-18 target of 20,450 MW will be impossible to meet;

As renewables continue to grow, prospects for thermal capacity addition seem limited and we expect renewables to decisively beat thermal capacity addition in the coming years;

The figures released by MNRE suggest that March was a blockbuster month with addition of 5.8 GW renewable capacity in a single month (more than the combined figure for previous eleven months). While financial year end is always busy, we suspect that there was considerable pressure on implementing agencies to boost March numbers to show respectable addition numbers. Second, the developers would also have been keen to bring numbers forward to take advantage of the many financial incentives including generation wind based incentive (GBI) for wind projects, accelerated depreciation and 10-year tax holiday that are going to be significantly cut or phased out completely from April 2017 onwards.

The sector performance on some other measures has been much weaker. Pace of new utility scale solar tender announcements and project allocations slowed down considerably at just 4.2 GW and 6 GW respectively, down 70% and 33% over last year. This downward trend in new allocations is likely to continue, perhaps for another six months, as the government seem to have gone back to drawing board to incorporate learnings from the Rewa tender and India’s first wind tender.

With an even more ambitious target of 20,450 MW for 2017-18 for the renewable sector, it is clear that much more needs to be done to spur further growth. Falling prices will undoubtedly be of major help, but better regulatory enforcement of renewable purchase obligations and the UDAY scheme is critical. Overall, BRIDGE TO INDIA expects 2017-18 to register a very modest growth in renewable capacity addition, which should nonetheless easily come ahead of thermal capacity addition.

It has been nearly eighteen months since the Ministry of Power announced the vital Ujwal DISCOM Assurance Yojana (UDAY) scheme for financial and operational reform of power distribution companies (DISCOMs) in India (refer, refer). Twenty six states and union territories, including four of the worst affected states – Rajasthan, Tamil Nadu, Uttar Pradesh and Haryana – have signed up for the scheme. The only notable omission is Odisha, which has not signed up because its DISCOMs are partly privately owned. The scheme has been undeniably successful in achieving its most important objective – of restoring financial health of DISCOMs – by transferring almost 75% of their debt to the state governments and reducing interest cost burden on the remaining 25% debt.

The financial surgery to deal with soaring debt and losses of the DISCOMs will provide vigour to the entire power sector;

As expected, progress on operational parameters such as aggregate technical and commercial (AT&C) losses and tariff hikes remains comparatively weak;

Scheme monitoring and enforcement need to ensure that there is no relapse of the bad times;

DISCOM financials were in a spectacular mess back in 2015 with aggregate debt of INR 4.3 trillion (USD 65 billion) and annual losses of INR 600 billion (USD 9 billion) at the end of March, 2015. Out of the total debt of INR 3.8 trillion (USD 58 billion) attributable to the 26 UDAY states and union territories, 61% has been already transferred to state governments and/or refinanced in the form of state government guaranteed bonds. Another 10% is expected to be similarly restructured shortly. These measures alone are expected to reduce annual aggregate interest cost burden by INR 160 billion (USD 2.4 billion) (down 65%). More importantly, apart from the one-off financial engineering exercise, a key difference of UDAY over previous restructuring schemes is that it is designed to reduce incentives for state governments to meddle in power pricing and DISCOM operations. All ongoing financial losses of the DISCOMs must be funded directly by the respective state governments instead of commercial borrowings. If this aspect is enforced in principle, we believe that it will break the cycle of financial boom and bust for DISCOMs forever.

Progress on the operational parameters has, however, been much slower than expected. AT&C losses have come down from 24.0% in FY2016 to 22.5% – the target is to reach 15% by FY2019. Tariff under recovery, which is expected to be eliminated completely by FY2019, has reduced only marginally from INR 0.61/kWh in FY2016 to INR 0.49/kWh.

Notwithstanding the somewhat weak performance on operational parameters, improvement in DISCOM finances will be hugely beneficial to the entire power sector. It will free up much needed financial resources for investment in infrastructure and other operational upgrades. It will also significantly improve upstream investment prospects by reducing offtake risk for power generators, investors and lenders.

The central government has linked availability of various central government funding programs, additional coal supplies and low cost power from central public sector generators to successful implementation of UDAY. Hopefully, these measures will encourage states to stay on track in the long run.