Month: July 2017

Greenko and Azure Power have together raised USD 1.5 billion from sales of green bonds in the last two weeks. Other offshore green bond issuances by ReNew Power, NTPC, Rural Electrification Corporation (REC), IDBI Bank, Axis Bank, Yes Bank and L&T Infrastructure Finance mean that India is amongst the top ten green bond markets in the world with a cumulative issuance of over USD 4 billion. In the first seven months of 2017, India’s green bond issuance reached USD 2.1 billion, sufficient to fund debt for over 3.5 GW of new renewable energy projects.

Indian renewable sector needs a significant amount capital (about USD 150 billion) to achieve the ambitious 175 GW target and there is abundant capital available internationally;

Renewable assets in India are still considered too risky by global funds due to poor offtaker ratings, frequent payment delays and weak regulatory enforcement;

The Indian government should try to reduce risks for private investors but the recent trend of PPA cancellations and renegotiation attempts is not helpful in this regard;

In 2015, the Securities and Exchange Board of India (SEBI) had endorsed the internationally recognized green bond principles, providing regulatory clearance for Indian renewable assets to tap into offshore green bonds. Indian renewable sector needs a significant amount capital (about USD 150 billion) to achieve the ambitious 175 GW target. There is plenty of capital available internationally with sovereign wealth funds, pension and insurance funds but expectations need to be tempered.

First, renewable assets in India are still considered too risky by these global funds. While Greenko and Azure were successfully able to place their bonds, Morgan Stanley owned wind developer, Continuum, failed to do so. It launched a USD 400 million issue but failed to raise the money because of the weak credit profile of its customers (poorly rated DISCOMs). International investors are highly selective about risk and most Indian renewable IPPs, rated 2-3 notches below investment grade, are not deemed sufficiently attractive.

Second, Indian regulators impose strict curbs on offshore issuance of bonds – both by quantum and cost – limiting the prospects of this route. Even so, there is little cost advantage for developers in raising funds through green bonds. Greenko and Azure issues have been completed at rates between 5.0-5.5% resulting in all-in cost of over 9% including hedging cost. This is hardly attractive in comparison to domestic borrowing cost particularly when refinancing risk is taken into account. Main advantage for the issuers is diversification of their funder profile and freeing up of their bank credit lines in India.

To make green bonds more attractive for Indian issuers, the Indian government should try to reduce risks for private investors and developers. NTPC offtake, UDAY scheme, solar park policy and SECI payment security fund are good steps but much more needs to be done. Documentation and risk allocation framework needs to be improved to match international standards. More importantly, we need alignment of policy objectives between central government and states as well as strict enforcement of regulatory framework. Recent PPA cancellations (wind projects) and renegotiation attempts are not helpful in this regard.

India has initiated a new investigation to probe dumping of solar cells and modules from China, Taiwan and Malaysia. The petition for this investigation was submitted by Indian Solar Manufacturers Association (ISMA) on behalf of Indosolar, Websol and Jupiter Solar. The investigation covers both crystalline and thin-film technologies and will affect all imports making up more than 85% of total cell and module sales in India.

Proving dumping for solar imports should be relatively easy as Chinese suppliers have been selling modules in India at prices lower than in China;

The investigation provides a great test case for design of Indian policy making as there is no evidence from other countries of protectionist duties benefitting the prospects of domestic manufacturers;

But with solar capacity addition growing at 100% CAGR in last 3 years and cost of solar power crashing to INR 2.44/kWh, we feel that the government may be more sympathetic to the demands of domestic manufacturers this time;

Dumping is defined as exporting a product at a price that is lower than the domestic price for the same product. For solar imports, proving dumping may not be difficult as it is common knowledge that Chinese suppliers have been selling modules in India at prices lower than in China.

The latest petition follows an earlier probe in 2012-14 on dumping of solar cells and modules, which had recommended anti-dumping duties of USD 0.11-0.81/Wp on cells and modules imported from China, US, Malaysia and Taiwan. However, the Indian government decided not to act on this recommendation following intervention by the then newly appointed Minister for Power, Piyush Goyal as the duties were seen detrimental to the growth prospects of solar industry in India. Instead, domestic manufacturers were promised assured demand through a Domestic Content Requirement (DCR) regime. Loss in the case against DCR at WTO has brought events full circle back to anti-dumping duties.

The dumping investigation will be carried out by Directorate General of Anti-Dumping and Allied Duties (DGAD), who will consider a 15-month period from Apr-16 to Jun-17 to probe dumping and three-year financial data of the petitioning companies to analyse injury to domestic manufacturers. All other affected parties have a period of 40 days to share their response to the domestic industry’s application. While the investigation can take 12 to 18 months, a provisional duty can be announced as early as on 22 September, 60 days after commencement of the investigation. This coincidentally is the same date when the USA is expected to decide on a safeguard duty petition from Suniva.

ISMA has submitted a separate parallel petition to Directorate General of Safeguards to consider imposition of safeguard duty on solar cells and modules. Safeguard duty is defined as temporary measure in defense of the domestic industry which is injured or has potential threat of injury due to sudden surge in imports. Unlike anti-dumping duty, a safeguard duty is country agnostic, is imposed on all imports and can be implemented much faster. In a recent precedent, India imposed safeguard duty of 10 per cent on import of specified steel products.

As we have always maintained, we see little upside to imposition of anti-dumping or safeguard duties on solar cells and modules. There is no evidence from other countries of such duties resulting in any long-lasting benefits for domestic manufacturers. At the same time, any duties raise the risk of side-tracking India’s solar capacity addition target affecting more than 10,000 MW of project pipeline.

Unlike last time around, however, we believe that there is more sympathy within government for imposition of anti-dumping and/or safeguard duties. In our previous commentary, we had highlighted that with cost of solar power crashing to INR 2.44/kWh, there is a risk that the government may be tempted into a knee-jerk decision to protect domestic manufacturers at the cost of causing disruption in the solar market.

BRIDGE TO INDIA has released its latest edition of the India Solar Rooftop Map report. As per the report, India added 678 MW of rooftop solar capacity in FY 2016-17, growing at 81% Y-o-Y. Total installed rooftop solar capacity reached 1.4 GW as of March 2017. Strong market fundamentals including falling costs and improving debt financing mean that the market will continue strong growth trajectory for many years to come.

Commercial and industrial customers (C&I) remains the biggest market segment as economic viability is most pronounced for such customers;

OPEX model has been gaining market share, doubling from 12% in FY 2014-15 to 24% last year and large public sector procurement programs will drive further growth in this market in the next few years;

Yearly capacity addition is expected to scale up to over 2 GW by 2019 and over 3 GW by 2020 presenting attractive growth opportunities for all market participants;

With 65% of total installed capacity, C&I remains the biggest market segment. These consumers account for more than 50% of India’s total power demand and make savings of up to 50% through rooftop solar systems as their grid tariffs are typically between INR 7-10 (US₵ 11-16)/ kWh. Public sector segment is also expected to show robust growth in the coming years because of a strong government push combined with 25-30% capital subsidy. In contrast, the residential segment is expected to grow relatively slowly because of poor economic viability and lack of financing solutions.

OPEX (or BOOT) business model, where a third-party investor owns and builds the system under a long-term PPA with the site occupant, saw new capacity addition of 162 MW in FY 2016-17, accounting for 24% of total market (up from 12% in FY 2014-15 and 19% in FY 2015-16). This market is fairly consolidated as access to capital remains tight and on-the-ground execution is challenging. Top five developers account for over 60% market share – CleanMax Solar (24%), Cleantech Solar (12%), Azure Power (11%), Amplus Solar (8%) and Rattan India (5%). Going forward, we believe that this model will continue to grow but will be increasingly driven by tender-based public sector projects.

As seen previously, EPC for rooftop solar continues to be highly fragmented with over 1,000 registered installers and 35 largest players accounting for less than 35% market share. Only three companies have more than 2% market share – Tata Power Solar (6.4%), Sure Energy (2.5%) and Fourth Partner (2.2%).

In the inverter market, just two companies account for over 60% market share –  Delta Electronics (36%) and SMA (including Zever Solar, 25%). ABB, KACO and Fronius are other noteworthy suppliers with about 5-6% market share each. An increasing market share for ABB and entry of companies such as SolarEdge and Huawei may result in minor changes in the leaderboard in future.

Overall, we believe that rooftop solar market in India is beginning to realize its potential. Annual market size greater than 1 GW in the current year will be an important milestone for the market. We expect India to build a total rooftop solar capacity of 13.2 GW by 2021.

Two months ago, we wrote about how Uttar Pradesh (UP) could be the dark horse for solar power demand in the country. Since then, the state has announced a 750 MW tender with Solar Energy Corporation of India (SECI) in Bhadla and a new solar policy to build 10.7 GW of solar capacity by 2022. But UP can be a tough place to do business as proven yet again by the state renewable nodal agency, UP New & Renewable Energy Development Agency (UPNEDA), asking developers to reduce tariffs for a 215 MW state tender closed in 2015. UPNEDA claims to be acting on behest of the state electricity regulator (UPERC), which is apparently refusing to approve power procurement at tariffs ranging between INR 7.02 – 8.60/kWh even though the benchmark regulated tariff for the tender was INR 9.33/kWh.

Many project developers are already wary of entering UP and the state’s move to renegotiate tariffs after signing PPA’s will further damage its credibility;

It makes no sense for UP to renegotiate tariffs for a mere 165 MW of capacity when it wants to add more than 10 GW of solar capacity in the next 5 years;

Such unilateral, post-facto moves to renegotiate tariffs detract from the Indian government’s ambitious plans and need to attract more private capital in the sector;

Only 130 MW of projects have been completed under this UP tender so far and several projects have been granted ad-hoc extension. UPNEDA may feel that it is justified in seeking lower tariffs when capex costs/ tariffs having been falling across the sector. But such a move is short-sighted as the harm to the state’s credibility and the negative impact of this step on future tenders will far outweigh the benefit of any tariff reduction.

Project developers already attach a very high risk premium to UP. The state is notorious for poor law and order situation and has a low ‘Ease of doing business’ ranking, 14th among Indian states. Our recent report, Assessment of utility scale tender results in India, showed that UP tariffs have been higher than other state tariffs by up to 50% after adjustment for radiation, timing and other factors.

But UP is also the most populous state in India with a population of 220 million (17% of India’s population) and per capita electricity consumption of only 532 kWh as against 1,537 kWh for Gujarat and 1,192 kWh for Maharashtra. The new BJP government has a huge economic opportunity to turn around the state’s economy by exploiting cheap renewable power and reforming the local power transmission and distribution system. It has indeed made reliable power supply as one of its core policies. UP has already cancelled over 7 GW of planned thermal projects and is believed to be planning to procure another 1,500 MW of solar power in the near future. In such a scenario, it makes no sense for the state to renegotiate tariffs for a mere 165 MW of capacity.

Moreover, any unilateral, post-facto move by any state to renegotiate tariffs detracts from the overall national growth story and Indian government’s attempts to attract more private capital in energy and infrastructure sector. The national and state governments, together with the regulators, need to clamp down on such regressive short-term measures.

Three days into implementation of the Goods and Services Tax (GST), Indian solar industry continues to face uncertainty regarding GST rates. We know that GST will be applied to solar modules at a concessional rate of 5%. Central government officials including the Minister for Power, Piyush Goyal, have confirmed on multiple occasions that the 5% concessional rate will extend to all equipment for solar power generating plants. But operational clarity for these other capital goods used in solar projects is lacking in practice.

There is confusion in the market on how to avail of the concessional 5% GST rate when many of the same components are taxed at higher rates for use in other industries;

MNRE is still working to evolve a mechanism in consultation with Ministry of Finance to try and resolve this issue;

Net increase in project EPC costs is expected to be around 6% if the issue is not resolved;

We spoke to four inverter suppliers today – two of them said that the GST rate for inverters is 18%, one said that it is 5% and another one said that that it is 5% for end-users and 18% for EPC companies.

The reason for the rate confusion is that it is not clear how to avail of the concessional 5% GST rate – as defined and intended under chapter 84 of the rate schedule for goods – when many of the same components are taxed at higher rates for use in other industries. For example, transformers used for solar projects are intended to be taxed at 5% but they are taxed at 18% for other applications. In the absence of any specific notification for solar projects, GST rate varies from 18% for capital goods such as inverters and module mounting structures to 28% for cables and batteries.

We understand that MNRE is still working to evolve a mechanism in consultation with Ministry of Finance to try and resolve this issue. Almost 10 GW of India’s pipeline solar capacity is impacted by increase in indirect tax rates under GST and lack of clarity adds to the complexity. If all capital goods for solar projects are taxed at 5% rate, we expect overall increase in EPC cost at around 3%. If, however, only modules are taxed at 5% and other capital goods are taxed at rates between 18-28%, the net increase in EPC cost is expected to be around 6%.

With global solar module prices firming up this quarter due to extension of solar FIT deadline in China, GST comes at an unfavorable time for the sector. We expect project delays and cannot rule out the risk of litigation between project developers and DISCOMs over sharing of the additional cost burden. Adverse impact will also be felt in the rooftop solar market, where we expect market activity to slow down in the near future.