Month: October 2017

The Government of India has launched SAUBHAGYA scheme for providing universal electricity access to all households in India by March 2019. The government estimates that there are 46 million unelectrified households in India at present and this scheme will primarily target the 30 million below poverty line households not covered by other ongoing electrification schemes. Target households will be provided free or nominally priced connections (but not free electricity). Households in remote, inaccessible areas will be offered decentralised solar power generating systems of 200-300 Wp each with integrated batteries and 5 LED lights, a fan and a power socket.

The scheme would potentially have huge multiple economic benefits for the country although the government estimate of 7% demand growth is highly optimistic;

The government has announced multiple schemes with seemingly similar objectives and it is not clear how the SAUBHAGYA scheme will be different;

Despite provision of decentralised solar power generating systems for remote locations, the scheme is likely to deal a blow to the private off-grid businesses unnerving investors and consumers alike;

The new scheme is operational with immediate effect and is budgeted to cost INR 163 bn (USD 2.5 bn) at an average of INR 5,400 per connection (USD 84). Funds will be used to create last mile infrastructure including poles, cables and electricity meters. Up to 75% of the funding shall be provided by the Indian government (90% for some north-eastern states and union territories) with balance coming from respective DISCOMs, state governments and/or borrowings.

The scheme has been launched with much fanfare. Potentially, it is an important policy development as it would not only improve social, educational and economic status of millions of people but also lead to a much-needed power demand boost. The Ministry of Power believes that the scheme will grow power demand by 80 bn kWh (+7%). This estimate seems highly optimistic to us considering that most target households will be fractional users of electricity. Also, it is important to remember that electricity connection in India does not mean getting regular, reliable electricity. Power cuts are common across the country despite a power ‘surplus’ situation. We estimate actual uplift in power demand to be closer to 2%.

It is also difficult to understand how this scheme is different from multiple overlapping schemes announced in the past. The DDUGJY (Deendayal Upadhyaya Gram Jyoti Yojana) scheme was launched in 2015 with the aim of electrifying all 18,000 unelectrified villages by May 2018. The Modi government also launched the ‘24×7 Power for All’ programme in 2015 with the objective of providing 24×7 power to all consumers across India by 2019. It is hard to escape the conclusion that the SAUBHAGYA scheme is old wine in new bottle.

The provision of decentralised solar power generating systems with integrated batteries for households with no grid supply is a heartening feature although we remain cautious. Such systems would cost about INR 35,000 (USD 540) per household and given the limited funds availability, their use will be highly restricted in our view. On the contrary, launch of this scheme is likely to hurt prospects of multitude of off-grid operators offering market based solutions in the country.

The Indian solar market is being tested to its limits. GST has increased execution costs. Module prices have shot up when bidders were factoring in another 20% price decline by the end of this year. Chinese module suppliers are even reluctant to supply to India. The government is considering anti-dumping duty petition to support domestic solar manufacturers. But perhaps, the biggest challenge facing the sector is slowing power demand. Lack of visibility over project pipeline is forcing developers to bid aggressive tariffs and reconsider strategic options including consolidation. It is therefore relevant to ask what does the future pipeline scenario look like?

Seven states – Karnataka, Andhra Pradesh, Tamil Nadu, Telangana, Rajasthan, Madhya Pradesh and Punjab – together make up over 80% of India’s total installed and pipeline capacity of 27 GW;

Other states continue to lag and progress is expected to be slow because of surplus power situation in the country;

After peaking at about 8 GW in 2017, India’s utility scale solar capacity addition is expected to stabilize at a much lower level of 5-6 GW per annum for next few years;

The ten largest states in India have power consumption greater than 50 billion units each and together, they account for 75% of India’s total power demand. These states, located mainly in central and southern India, should also account for bulk of solar power demand in the country. Five of these states – Karnataka, Andhra Pradesh, Tamil Nadu, Telangana and Rajasthan – have led the sector growth so far and tied up more than 3 GW of solar capacity each. Madhya Pradesh and Punjab have tied up another 2 GW and 1 GW respectively. These seven states together make up for over 80% of India’s total installed and pipeline capacity of 27 GW. They have front-loaded their solar power demand and are well ahead of their annual targets determined by the Ministry of New and Renewable Energy (MNRE). Solar activity in these states is inevitably expected to slow down going forward and indeed, some of them are already cancelling ongoing tenders.

Source: BRIDGE TO INDIA research

In contrast, combined installed and tendered pipeline capacity of the three largest power consuming states, Maharashtra, Uttar Pradesh and Gujarat, is lower than that of Karnataka on a stand-alone basis. In May 2017, we predicted that Uttar Pradesh could be a dark horse for India’s new solar allocations. Since then, it has issued a 750 MW tender under SECI scheme and is believed to be considering further tenders. Maharashtra’s power consumption is almost three times that of Andhra Pradesh but its installed solar capacity is just one-third in comparison. Gujarat, a solar frontrunner back in 2012-13, is also lagging way behind. It added a paltry 211 MW in the last two years against almost 1 GW in neighbouring Rajasthan and 2 GW in both Andhra Pradesh and Telangana.

Unfortunately, the prevailing power surplus situation in India suggests that slowdown in solar power demand may continue for 3-4 years. We expect India’s utility scale solar capacity addition to peak in the current year (at about 8 GW) and then stabilize at a much lower 5-6 GW per annum for the next 2-3 years. Rooftop solar is expected to, however, provide some relief by continuing to grow at a healthy rate and becoming a 3 GW per annum market by 2020.

NLC India Limited, a government of India owned coal mining company, recently completed auction for a 20 MW solar project integrated with 28 MWh storage capacity in Andaman & Nicobar Islands. This is the first utility scale storage tender in India to announce results. The tender includes provision of complete EPC and O&M services for twenty-five years. Mahindra Susten won the auction with a final all-in price of INR 2.99 bn (USD 46 mn).

Replacement of diesel fired power is the most obvious application for solar cum storage plants both commercially and environmentally;

Large variation in bid prices suggests inconsistent understanding of technical specification amongst bidders;

Utility scale storage adoption in India is expected to be slow as DISCOMs are highly cost sensitive and lack awareness of its technological potential;

There have been four other utility scale storage tenders in India until now by Solar Energy Corporation of India (SECI) and NTPC in the states of Andhra Pradesh, Karnataka and Andaman & Nicobar Islands respectively. But all these tenders, with aggregate capacity of 35 MWh, have been scrapped without any reasons being given.

Andaman & Nicobar Islands is a group of islands in the Bay of Bengal with a total population of 400,000 and aggregate peak demand of 67 MW. The islands get their power mainly from diesel gensets and replacing them with integrated solar cum storage plants is highly desirable from an economic and environmental perspective. As seen in the US, Australia and elsewhere, replacement of diesel fired power is the most obvious application for solar cum storage plants. High cost of storage is not a deterrent because of the very high cost of diesel fired power of about INR 15/ kWh (USD 0.23).

The NLC tender has fairly stringent technical specification with performance warranties and associated penalties for full 25-year duration of the contract. Despite that, the auction received an enthusiastic response from players across the solar (Mahindra, Adani, Hero, Sterling & Wilson and Ujaas, amongst others) and storage (Exide, BHEL) spectrum. There was a huge variation in prices particularly for the EPC component – ranging from INR 1.79 bn for Mahindra Susten to INR 3.42 bn for Hero – suggesting inconsistent understanding of technical specification. SECI’s storage tenders have also faced this problem in the past with bidders struggling to interpret technical requirements.

It is encouraging to see this tender progress but as we stated in a recent note, India is doing very little to capture energy storage opportunity. The underlying problem is a mix of high cost sensitivity and lack of awareness about technical potential of storage. DISCOMs believe that they can use a mix of power cuts and curtailment to balance power demand and supply rather than committing to the use of expensive storage solutions. Our view is that storage will need 3-4 years of techno-commercial advancements before finding scale in India.

Solar Energy Corporation of India (SECI) completed a 1,000 MW wind project auction last week. Tariffs fell to a new low of INR 2.64 (US¢ 4)/ kWh. Winning bidders include ReNew (INR 2.64, 250 MW), Orange Power (INR 2.64, 200 MW), INOX Wind (INR 2.65, 250 MW), Sembcorp Green Infra (INR 2.65, 250 MW) and Adani (INR 2.65, 50 MW).

This auction comes 7 months after the first wind auction in India when tariffs were observed to be around INR 3.46 (US¢ 5.3)/kWh, implying a price reduction of 24% in a relatively short time.

Parity in prices means that there is likely to be further alignment between wind and solar power procurement policies and regulations;

The main reason for the reduced tariffs is simply increased competition;

Rapid reduction in tariffs makes wind power more attractive but also increases dissonance risk for DISCOMs who have agreed to previously pay much higher feed-in-tariffs;

Developers will sign 25-year, fixed price PPAs with SECI, which will in turn sell power to DISCOMs in Uttar Pradesh, Bihar, Jharkhand, Assam and Goa. The developers are free to locate projects anywhere in India and connect to the more reliable inter-state transmission network.

Fall in tariffs makes wind power competitive with solar power (last auction tariff of INR 2.64/ kWh in Gujarat last month) and significantly cheaper than other greenfield sources including thermal, hydro and nuclear. It helps in boosting growth prospects of wind power, which has been struggling vis-à-vis solar power. Wind capacity addition in FY2017-18 is expected to slow down to a mere 1,000 MW or even less in comparison to 5,300 MW of capacity addition in FY2016-17. Price parity also means that there is likely to be further alignment between wind and solar sectors in procurement policies and regulations.

With inter-state transmission charges waived until December 2019, resource rich states in western and southern India can continue to build more capacity to supply power to inland states in north, east and north-east (mainly Punjab, Haryana, Uttar Pradesh, Bihar and West Bengal). Hopefully, cheaper power will pave way for more demand from these states as they continue to lag behind in power supply as well as RPO compliance.

The latest auction was an intensely fought affair going into early hours of next morning. The inevitable question is what explains the 24% tariff fall in just seven months? Wind turbine prices have declined about 8-10% because of the slowdown; debt cost has also come down slightly by about 0.50% in this period but that together accounts for only about 7% tariff reduction. Another relevant but subjective factor is change in offtaker from PTC India, a power trading company (partly owned by the Government of India) to SECI, which enjoys better credit rating. But the main reason is simply increased competition. After the end of feed in tariff regime, states have been slow in coming out with new tenders. This slowdown is forcing developers to be more aggressive to win capacity and meet commitments made to their investors.

We believe that the new wind tariffs are too aggressive. As we stated in a recent blog, fall in tariffs makes renewable power more attractive for consumers but is creating risks for investors and lenders. It also further increases dissonance risk for DISCOMs, which had previously agreed to pay much higher feed-in-tariffs.

Acme Solar and Sembcorp have announced plans to access capital markets for raising equity capital. Acme has filed preliminary papers for an INR 22 bn (USD 336 mn) initial public offering (IPO) with Securities Exchange Board of India (SEBI). Sembcorp has said that it may list its Indian unit either in India or elsewhere. Azure Power was the last Indian renewable IPP to list on New York Stock Exchange (NYSE) about 12 months ago. Our understanding is that Renew Power is also keen to launch an IPO sometime in the coming year.

Financial investors looking for exits and developers looking to raise capital for new projects is creating urgency in equity market activity;

Deals are held up because of mismatch in pricing expectations and portfolio performance, investors are likely to take a cautious view because of poor performance of previous issues from both conventional and renewable IPPs;

Investors are driving hard bargains and closures are likely only for credible developers at the right price levels;

Solar sector has seen significant capacity addition and allocations in the past two years and developers are scrambling to raise capital to sustain business growth. Nine private developers have built up solar portfolios exceeding 500 MW in the past couple of years – Adani (2,038 MW), Acme (1,713 MW), Renew (1,659 MW), Greenko (1,407 MW), Tata Power Renewable (1,382 MW), Azure Power (1,102 MW), Essel Infra (710 MW), Engie (694 MW) and Hero Future Energies (540 MW) in addition to wind capacity as of September 2017. Financial investors, in particular, are looking for exits and that is creating urgency in primary and secondary equity market activity. Adani, Greenko and Tata Power Renewable, because of their large portfolio size, are the other potential candidates for an IPO in near future.

Unfortunately, the infrastructure investment trust (InvIT) and M&A routes do not appear very promising for renewable IPPs. The InvIT structure enjoys tax and regulatory benefits over conventional IPOs but poor performance of initial InvITs – IRB and India Grid, both trading at about 5% below their issue price – has spooked the markets. Investors, financial or strategic, are aware of key risks facing the sector – slowing pipeline and falling tariffs, poor DISCOM credit, uncertainty about grid availability, plant performance etc. They have burnt fingers in thermal power IPOs (Reliance, Jaiprakash, Adani) and even Azure Power has been trading at more than 10% below its issue price.

In such an environment, lots of portfolios, across market, are available for sale or IPOs but deals are held up because of mismatch in pricing expectations. Our view is that investors are driving hard bargains and closures are likely to happen only for credible developers at the right prices.