Month: May 2017

Last week, we wrote that the proposed 18% Goods and Service Tax (GST) on solar modules could cause major disruption in the industry and affect over 10 GW of projects. Following uproar in the industry, India’s revenue secretary, Hasmukh Adhia, has clarified that the rate of tax on solar modules should be 5% and not 18%. He said that an official clarification in this regard may be issued on June 3 when the GST council meets next. Earlier last week, secretary for Ministry of New and Renewable Energy (MNRE) had also issued a statement that the 18% rate on solar modules seems to be an anomaly and that it should be corrected.

Total project capital cost is likely to rise by about 4% as against 10-12% envisaged earlier;

Revised rate structure will not have any material negative impact on the industry and will allow project developers to proceed with construction;

MNRE needs to still play a hands-on advisory role for all affected entities to ensure smooth transition for the industry;

5% GST rate for solar modules sounds reasonable and consistent with government guidance leading up to the rates announcement. The new tax regime will result in effective rate of indirect taxes to go up from zero to 5% on solar modules and around 3% on engineering and construction services. Impact on inverters is still not clear. Our current estimate is that the total project capital cost will rise by about 4%.

BRIDGE TO INDIA believes that the revised rate structure will not have any material negative impact on the industry because of the buffer afforded by sharp fall in equipment costs. It will allow project developers to proceed with construction. Some developers may still file compensation claims but many of them might simply absorb the additional burden to avoid scrutiny of sensitive commercial information.

As we stated last week, MNRE needs to play a hands-on role by advising all affected entities – project developers, DISCOMs, equipment manufacturers and EPC contractors – to ensure smooth transition for the solar industry.

Other news highlights of the week:

Compensation for grid curtailment to benefit renewable sector

Adani Green Energy defers its polysilicon manufacture plans

UP government setting up 750 MW solar plant at Bhadla

ACME Group looking to raise capital through InvIT

India’s southern region comprising Andhra Pradesh, Telangana, Karnataka, Tamil Nadu and Kerala accounts for 25% of national power consumption but 45% of total wind and solar power capacity in the country. Penetration of variable wind and solar energy, defined as generation from both these sources as a percentage of electricity consumption, in the southern region was 9% in 2016-17 as against the national average of 5%. Such high rate of penetration raises concerns regarding management of the grid and can result in high grid curtailment rate. South India represents a test case for the country for integration of variable renewable energy into the grid.

Increased RE deployment is changing the energy landscape in southern region and raises concerns regarding grid stability and power curtailment;

While strides have been made in enhancing transmission connectivity, a lot still needs to be done to enhance grid flexibility and develop ancillary services market;

Lessons should also be learnt from successful international experiences in allowing high renewable energy grid penetration;

Enhanced transmission connectivity as well as rapid RE deployment has helped south India in considerably reducing its power deficit from 7.3% in 2013-14 to only 0.2% in 2016-17. But another 9 GW of wind and solar energy capacity is estimated to be under development. Tamil Nadu is already facing the brunt of such high RE generation with wind curtailment rate of as high as 33% in 2013-14.

Significant steps are being taken to enhance transmission connectivity under the government’s green energy corridor scheme. Work has already commenced on an 1,800-km ultra-high voltage transmission link between central and southern India. However, little attention is being paid to other equally important and effective solutions including more accurate generation and load forecasting, ancillary services development (for frequency and voltage stability) and improved flexibility of conventional power plants. For instance, Karnataka is the only southern state to have finalised a regulation on forecasting and scheduling of power. The region is also a laggard in development of ancillary services market. In the first six months of implementation of regulatory reserve ancillary services (April-September 2016), only 6% of the total energy dispatched under “regulation up” service came from southern region.

Lessons should be learnt from other countries including the USA and Germany, which have a similar or higher RE penetration levels. The Electric Reliability Council of Texas (ERCOT) in the USA was successful in reducing wind curtailment rate from 17% in 2009 to 0.5% in 2014 in its region despite the share of wind power generation increasing from 6.2% to 10.6% in this period. It did so by building more transmission capacity, reducing scheduling time interval from 15 minutes to 5 minutes, introducing fast frequency response reserves for instantaneous increase/decrease in power output and various demand response programmes along with rapid deployment of smart meters. Germany has also been successful in keeping curtailment rates below 4%, despite having a renewable energy penetration level of as high as 30%, mainly because of adoption of a variety of market-based mechanisms to enhance grid flexibility and provision of ancillary services. For instance, during periods of excess power supply, the German power trading market fixes a negative price for inflexible power units. Moreover, through retrofits to existing coal power plants, Germany has also made thermal generation more flexible to respond to changes in renewable energy generation.

In order for India to support ongoing renewable energy deployment, it is essential to learn from international as well as domestic experience and make urgent changes to the power system.

The Indian government has released final Goods and Services Tax (GST) rates under the new indirect tax regime proposed to be rolled out from July 1. The biggest surprise for the power and renewable sector is the announcement of 18% tax rate for solar modules as compared to a present effective rate of zero. In contrast, GST rate for coal has been lowered to 5% as against current rate of 11.69% and most other renewable projects and equipment including wind mills, waste to energy plants, tidal energy plants and bio-gas plants and even solar power based devices or generating systems have been classified under the 5% rate bracket.

The new regime will result in an increase of 18% in module cost, about 12% in inverter cost and 3% in all service costs – increasing overall project cost by about 12%;

New rates would hit more than 10 GW of ongoing utility scale projects and pose a threat to their viability;

It is critical for MNRE to step up and play a coordinating role with central and state regulators to ensure that the process of tariff adjustment is as smooth as possible;

As of today, most states levy a 5% Value Added Tax (VAT) on solar modules. However, in practice, the actual tax rate levied is zero because of waiver on import duty and VAT in many states. Effective tax rate on solar inverter imports will also go up from 5.15% to 18%. The new regime will therefore result in an increase of 18% in module cost, about 12% in inverter cost and 3% in all service costs – increasing overall project cost by about 12%. Importantly, we do not believe that the new rate structure will give any advantage to domestic manufacturing as cost of import of raw material, including cells and wafers, will go up in the same proportion.

There was widespread expectation that solar modules would be classified under zero or 5% bracket to continue growth momentum in the sector. However, sharp reduction in equipment costs and solar tariffs seems to have convinced the government that the sector doesn’t need any more financial incentives.

Nonetheless, more than 10 GW of ongoing utility scale projects would be hit badly by the new rates. The Ministry of New and Renewable Energy (MNRE) has been verbally assuring the industry that it will be insulated from any GST impact by passing any burden through to the offtakers. But we believe that this process will be complex and challenging. First, there are multiple templates for power purchase agreements (PPAs) in the country with huge variation in change in law provisions. Second, the DISCOMs will obviously resist any tariff increase particularly when tariffs for new auctions are reaching all-time lows. Third, the entire process for tariff determination, ratification and documentation amendments would easily take up to 6 months or even more. Meanwhile, developers will be under pressure to complete projects on time and lenders will be unwilling to fund extra costs. It wouldn’t be surprising if this process leads to cancellation of some projects altogether.

It is critical for MNRE to step up and play a coordinating role with central and state regulators to ensure that the process of tariff adjustment is as smooth as possible.

We believe that the long-term prospects of the industry would not be impacted by GST move as an increase in tax rates will be quickly offset by falling costs. A commercially viable, non-subsidy dependent sector is naturally more sustainable in the long run. However, we do wonder why solar equipment is attracting higher taxes than coal or other power equipment.

Last week, Solar Energy Corporation of India’s (SECI) 750 MW utility scale auction in Bhadla solar park saw tariffs fall to a new astounding low of INR 2.44 (US¢ 3.79)/ kWh. This comes after much brouhaha over tariffs falling to INR 3.25/ kWh (levelized) and INR 3.15/ kWh in Rewa, Madhya Pradesh and Kadapa, Andhra Pradesh respectively in the last three months. At the same time last year, tariffs for most tenders were observed around INR 4.60 (US¢ 7.1)/kWh mark. What explains a tariff reduction of almost 50% in one year or 25% in just three months?

Module prices fell by 30% in the last one year and developers seem to be counting on a similar fall next year;

Competition amongst developers has intensified due to easing up of new tender announcements and greater private sector interest;

The industry is evolving at break-neck speed and catching policy makers, DISCOMs and even developers unawares;

Winning bidders for the two tenders in Bhadla include ACME (INR 2.44/kWh, 200 MW), Softbank (INR 2.45/kWh, 300 MW), Phelan (INR 2.62/kWh, 50 MW), Avaada (INR 2.62/kWh, 100 MW) and Softbank (INR 2.63/kWh, 100 MW).

A key obvious contributor to falling tariffs is sharp reduction in module prices, down almost 30% in the last one year. And developers seem to be pricing in similar price reduction going forward – at about US ¢ 23/Wp in the next 10 months. Although module industry dynamics remain benign, it seems a very bold call to price such reduction in base case.

Fall in Indian debt cost by up to 1.00% per annum over the last year (equivalent to tariff reduction of approximately INR 0.10/ kWh), higher irradiation in Bhadla (INR 0.15/ kWh), lower solar park charges (INR 0.05/ kWh) and stronger Rupee go some way in explaining the tariff reduction. Another relevant factor is improvement in SECI’s credit rating. The participating bidders’ list in Bhadla tender shows that both Indian and international developers are growing comfortable with SECI offtake risk.

But the other very important factor is increased competition amongst developers due to fewer new tenders and complete lack of pipeline visibility over the next year. We have maintained for some time that the Indian solar market is getting overheated and that these tariffs are unsustainable.

Falling tariffs are a double-edged sword for the sector. They make solar power more attractive for consumers but are also making investors and lenders jittery. In the near term, they are also creating uncertainty in the minds of policy makers and creating new risks for older projects auctioned at 2-3x higher tariffs.

The pace of new tender announcements and completed auctions has slowed down significantly in the last year (-68% and -59% respectively). Southern states have frontloaded capacity buildout – Andhra Pradesh (installed plus tendered capacity of 74% as against March 2022 target), Telangana (70%), Karnataka (69%) – and are bound to slow down. Amongst other large states, Maharashtra and Gujarat, like many others, have surplus power availability and remain unenthusiastic to large solar procurement programs.

Some states that have completed auctions with prices of INR 4.00-5.50/kWh in the last 6-12 months are refusing to sign PPAs creating uncertainty in the market;

Visibility for new tenders has dropped sharply because of surplus power supply in most parts of the country;

Gujarat and Uttar Pradesh could be the two major demand drivers for solar power in the coming years;

Rewa and Kadappa tender results have given new food for thought to policy makers, DISCOMs, project developers and investors. Greenfield solar power at current prices of INR 3.00- 3.50 (US 5¢)/ kWh should create strong demand pull in the medium-to-long term. But in the near term, it is leading to buyer’s remorse for projects already built and under development. In particular, states that have completed auctions with prices of INR 4.00-5.50/kWh in the last 6-12 months (Jharkhand, Andhra Pradesh, Haryana) are refusing to sign PPAs, which is creating uncertainty in the market.

With states unwilling to sign new PPAs, both National Thermal Power Corporation of India (NTPC) and Solar Energy Corporation of India (SECI) are delaying proposed tenders and the pipeline of tenders is running dry. Recently, Gujarat also dropped its plan for setting up a new 4,000 MW coal-based power project because of sufficient supply of power. But encouragingly, the state has indicated that it wishes to focus on renewable power for future procurement. Gujarat is setting up two new solar parks for 500 MW each but the state’s price expectation is believed to be around INR 3 (US 4.7¢)/ kWh in the wake of recent auctions.

BRIDGE TO INDIA believes that as one of the few large states with high power deficit, Uttar Pradesh (UP) could be a major demand driver for solar power in the coming years. The state has the largest peak demand-supply gap in the country and rural electrification rate is as low as 60%. Even though UP has historically been a tough state for private businesses because of poor law and order situation and highly erratic power supply, the state is making steady progress under central government’s UDAY scheme. The new BJP government also seems more business friendly and has made reliable power supply as one of its core policies.

To know more about the performance of various Indian states and our long-term estimates for the market including results from our latest India Solar CEO Survey, read our newly released report – India Solar Handbook 2017.

“We are going to introduce electric vehicles in a very big way,” India’s Minister of Power, Piyush Goyal, stated last week. The Ministry of Heavy Industries and the NITI Aayog are working on a comprehensive policy for promotion of electric vehicles. This policy is expected to provide support for both domestic manufacturing and scaling consumer demand.

India’s electric vehicles industry is nascent with just 0.1% global market share and almost no competitive advantage;

Other countries, particularly China, are spending billions of dollars subsidizing local companies to push them at the forefront of storage and electric mobility technologies;

Growth in electric vehicles can facilitate greatly in energy transition but the market poses formidable infrastructure and financing challenges for Indian policy makers;

India has made little progress in electric mobility since the announcement of the National Electric Mobility Mission Plan in 2013 aiming for over 6 million electric/hybrid vehicles by 2020. As per available government data, only 790 battery operated electric passenger cars were sold in India in 2015-16 (global market share of 0.1%). The National Electric Mobility Mission Plan provides financial incentives of up to INR 138,000 (USD 2,100) for electric and hybrid vehicles. But the budget of INR 1.75 billion (USD 27 million) for FY 2017-18 is too low considering that the ministry’s own estimate for the program is INR 140 billion (USD 2.2 billion) annually.

Many automotive groups including Mahindra, Toyota, Maruti Suzuki, BMW and Volvo already sell battery operated electric or hybrid models in India. Other suppliers are expected to join this market soon but these companies are looking to rely almost completely on imports for key components including batteries. So far, the only exception is a recent announcement from Suzuki Motor Corporation, Toshiba Corporation and Denso Corporation to manufacture lithium-ion battery packs in India.

In comparison, China is a world leader in electric vehicles with over 50% global annual market share. Local manufacturers such as BYD and BAIC are world leaders in this market. The country is considering ramping up progress even further and wants 8% of all vehicles to be electrically powered by next year. China is spending billions of dollars subsidizing local companies to push them at the forefront of electric mobility technologies. It accounted for half of the USD 16 billion in subsidies offered to new-energy car makers in the past decade.

Electric vehicles market is growing rapidly worldwide fueled by stricter environmental measures, technology improvements and cost reduction in energy storage. It is also seen as a vital link in achieving energy transition. That explains the lead taken by the power minister, Piyush Goyal, on the electric mobility initiative despite automobiles falling under the ambit of the Ministry of Heavy Industries. Growth in sales of electric vehicles will lead to more demand for (renewable) power, help in creating a flexible demand source to tackle intermittency issues of renewable power and reduce reliance on (mostly imported) oil.

The ambitions now need to be backed with actions. But while India has a large domestic market, it lacks the fiscal capability and ambition of China and the technology expertise of Japan or South Korea. There are also formidable infrastructure and financing challenges and addressing these will not be easy.