Month: December 2017

Three major auctions were completed last week – two for solar projects by SECI (Bhadla solar park 500 MW and 250 MW respectively) and one for wind projects by Gujarat Urja Vikas Nigam (GUVNL, fully owned by Gujarat government) (500 MW). The solar projects were won by Hero Future (300 MW), Softbank (200 MW), Azure (200 MW) and ReNew (50 MW) at tariffs between INR 2.47-2.49/ kWh (USD 0.04), a very slight increase over the previous auction tariff in Bhadla solar park back in May 2017. Wind tariffs, on the other hand, fell even further to INR 2.43-2.45/ kWh. Projects were won by Sprng (owned by Actis, 197 MW), KP (30 MW), Verdant (100 MW), Engie (30 MW), Powerica (50 MW) and ReNew (93 MW).

Figure: Recent bid tariffs for solar and wind tenders

Note: NTPC 250 MW DCR (domestic content requirement) auction in October 2017 is not shown as it has unique pricing fundamentals.

In the previous Bhadla auctions in May 2017, tariffs had touched an all-time low of INR 2.44/ kWh. Since then, module prices have risen by around 20% to USD 0.36/W. Including other cost inflationary factors such as 7.5% import duty on modules and 5% GST, capex has increased cumulatively by about 20% in the last six months. It is remarkable that tariffs have remained relatively unchanged despite such significant increase in capex and a very real risk of anti-dumping/ safeguard duties on modules. There is no material change in any other factors including solar park charges or financing costs in this period.

As per our analysis, module prices would need to fall to an impossible USD 0.16/W (55% reduction in 10 months) for winning bidders to earn a project IRR of 11%. This ignores the impending risk of anti-dumping duties.

The fall in wind tariffs, 33% in just ten months is equally stunning and hard to explain. There is no underlying industry trend that justifies such a significant tariff reduction.

The only way to explain the latest tariffs is that the developers, concerned by slowdown in power procurement, are anxious to win capacity at any cost. We have maintained for some time that renewable auction tariffs are becoming unsustainable, but the problem is getting even worse. Clearly, the industry is not convinced by the MNRE’s new exuberant plan of auctioning 17 GW of solar and 3-4 GW of wind projects by March 2018. But not only are the developers taking undue risk in these auctions, there is also a growing hazard that as and when there is a tariff correction, the DISCOMs would walk away creating challenges for projects yet to come.

As the year 2017 comes to an end, we take stock of the progress made by the Indian renewable energy sector. It was an eventful year, during which annual capacity addition is estimated to touch record levels of 10.9 GW (+66% over 2016) including utility scale solar (9 GW, +110%), rooftop solar (887 MW, +60%) and wind (4 GW, +11%). Utility scale solar capacity addition actually exceeded our original estimate by 17% because of timeline extensions given in some states (Telangana, Karnataka) and large capacity addition in Karnataka under open access and farmers’ schemes (total 450 MW).

Figure: Renewable capacity edition in India, MW

HIGHS

New, improved competitive bidding guidelines were issued for solar projects. The new guidelines did not receive much attention but incorporate some fundamentally important protections for developers including better payment security, strict timelines for completion of solar parks, termination compensation and lender substitution rights. More importantly, the guidelines mandate use of standard contract documents for projects across India.

Private sale business, both utility scale open access and rooftop solar, grew substantially during the year. Karnataka’s liberal open access has already resulted in new capacity addition of over 200 MW this year and another 1,000 MW is expected to come online in the next 3 months. Meanwhile, rooftop solar OPEX capacity is estimated to grow by 270 MW in 2017, y-o-y growth of 157%. We see growing investment interest in this business, in part because of slowdown in utility scale segment.

ReNew, Greenko and Azure Power accessed the green bond market on their own for the first time and raised a total of USD 2.1 billion between themselves. The funding allows them to diversify their debt sources and release banking lines for future expansion.

LOWS

Weak power demand in the country resulted in continued slowdown in new solar tender activity. Tender issuance during the year fell to 7 GW, down 37% over 2015. Notwithstanding the new bullish plan of the new Power Minister, we believe that DISCOMs remain reluctant to buy more power and total renewable capacity addition will stay below 2017 levels until at least 2020.

Project developers, anxious to scale up, bid solar tariffs to all-time lows of INR 2.44 (down 44% in just 16 months) in the SECI Bhadla auction in May 2017. Steep fall in tariffs led to many tender cancellations (total 2.7 GW), tariff renegotiations and contractual uncertainty in many states including Uttar Pradesh, Jharkhand, Andhra Pradesh, Karnataka and Tamil Nadu.

India conducted its first wind project auction in February 2017 and again, the low bid tariffs – INR 3.46, about 25% lower than average FIT across the country – resulted in not only overnight cancellation of all FIT schemes, but also contractual uncertainty for all projects under construction. As a result, wind sector activity almost stalled after Q1. Tariffs fell to an unbelievable INR 2.64 in subsequent auctions.

There were many nasty surprises for developers on the execution side. Module prices started rising from May 2017 onwards and securing supplies even at USD 0.36/Wp (+20% in less than six months) became difficult. GST implementation and import duties on modules resulted in further increase of 10% in project cost.

UDAY, Government of India’s financial and operational reform package for DISCOMs, has been successful in improving their balance-sheets. But operational improvements – reduction in T&D losses, separation of agricultural feeders, transformer level metering – have proven much more difficult. Moreover, tariff increases have been below required levels meaning that overall, UDAY has failed to have the widely expected positive impact on power demand or payment track record of DISCOMs.

Domestic manufacturing continued in doldrums with imports meeting as much as 85% of total solar module demand in the last 12 months. The government seems keen to support manufacturing and is mulling over imposition of anti-dumping duty on solar cells and modules, creating another risk for project developers. But ironically, wind turbine manufacturing, a relative strength in the sector, suffered badly due to sharp fall in demand with manufacturers closing down plants and laying off workers.

International Solar Alliance (ISA), launched by India and France at COP 21 summit in November 2015, finally became a recognized organization under United Nations charter on December 6, 2017. It has initiated three programs so far – scaling solar applications such as solar water pumps and lighting systems for agricultural use, ensuring sufficient flow of affordable finance and promoting installation of solar mini grids. Another program on promoting rooftop solar on government buildings in member nations is believed to be in preparatory stage.

Majority of member nations are the least developed African nations or small island nations under threat from climate change;

Aggregation of demand through global tenders appears to be one of the central tenets of ISA to reduce cost and improve scale;

Securing large scale funding remains critical to ISA’s success but concrete commitments have not really materialized so far;

ISA was conceived with the objective of undertaking collective activities to ensure better access to finance and promotion of R&D, innovation and capacity building in the sector. The goal is to facilitate installation of 1,000 GW of solar capacity globally by mobilizing USD 1,000 billion in investments by 2030.

But turning the vision into tangible progress has been difficult. A total of 121 solar resource rich countries lying between the Tropic of Cancer and the Tropic of Capricorn had agreed to join the alliance. But so far, only 46 countries have signed up. And only 19 of these – mostly from Africa (Ghana, Guinea, Malawi, Mali, Niger, South Sudan, Somalia) and small island nations in Indian and Pacific Ocean (Fiji, Seychelles, Comoros, Cuba, Mauritius, Nauru, Tuvalu) – have ratified the framework agreement.

Using some lessons learnt from the Indian market, ISA plans to use aggregation of demand and global procurement to scale up deployment at reduced costs. There are talks of floating a global tender for installation of 500,000 solar water pumps in India, Bangladesh and Uganda. More details are awaited but we suspect that such schemes will face challenges because of differences in local requirements, technical specifications and payment systems.

As we stated previously, ISA’s real opportunity lies in raising international funding support to fight climate change. ISA has signed some tentative financial cooperation agreements with European Bank for Reconstruction and Development, European Investment Bank and the World Bank but there are no firm commitments.

It is not surprising that ISA is struggling to define its core agenda and rally support from other nations and international institutions. It is the first sectoral body of its kind. As a founding member, it is up to India to show clarity of vision and demonstrate leadership through progress in domestic market.

The UP state government has approved a new solar policy with a target of developing 10,700 MW of total solar capacity in the state by the year 2022. 60% of this target (6,400 MW) is proposed to be developed through utility scale projects and balance 40% is planned for rooftop solar systems.  The total target has been determined so as to achieve renewable purchase obligation of 8%. The policy has some attractive provisions on paper in line with many other states. But it lacks specifics and is very generic in nature leading us to question if it will make any material difference on-the-ground.

Key provisions are given below.

First 2,000 MW of capacity will benefit from ‘must run’ status with all subsequent capacity to be subject to merit order desptach;

Inter-state sale of power shall be eligible for waiver of 50% transmission/ wheeling charges and 100% electricity duty (for 10 years);

The state shall provide single window clearance and 100% waiver of stamp duty charges on purchase of land to all solar projects;

Rooftop solar systems can avail of net- or gross-metering connections although the policy is silent on tariff payable for power injected into the grid;

Rooftop solar systems shall be exempted from building bye-law requirements. Plus, systems less than 10 kW in size shall not require clearance from Chief Electrical Inspector;

Residential rooftop solar systems shall be offered state capital subsidies of up to INR 30,000 (USD 460) on top of the 30% subsidy available from central government;

It is notable that UP is one of the largest, most populous and poorest states in India. It is also the second largest power consuming state after Maharashtra. The state has a population of 200 million (16.5% of total) and a peak load requirement of around 17,000 MW (11%). It has one of the lowest per capita consumption in the country, less than half of leading states such as Maharashtra and Gujarat, and as much as 48% of the households are without access to grid power (source: Ministry of Power). Despite that, progress in renewables remains woeful – as of September 30, 2017, the land-locked state had solar capacity of only 500 MW (3.1%) and no wind capacity. In view of all these factors, it has a huge opportunity to leverage solar power to turn around the local economy. We have maintained for some time that UP could be a major demand driver for solar power in the coming years.

Unfortunately, UP remains a notoriously difficult state for doing business. Most project developers are wary of the state and the recent tariff renegotiation for a 215 MW state tender closed in 2015 has not helped alter that perception.

Tender floodgates set to open

After a prolonged slowdown and subsequent to MNRE’s recent announcement of a new RE rollout plan, we expect a flurry of new tender announcements in the coming months. Solar Energy Corporation of India has released a new tender for development of 2,000 MW wind power projects. Projects can be set up anywhere in India and will be eligible for connectivity to the inter-state transmission system. The premise is that projects would be set up in high wind zones for supply of power to hinterland states with no wind generation potential. Developers shall have 18 months for construction and can bid between 50-400 MW capacity. Auction is expected in about 3 months time.

Meanwhile, Karnataka has announced a new 860 MW solar tender for development of taluk-based projects along the lines of a similar tender two years ago. A list of 43 taluks (sub-districts) has been identified out of a total 177 taluks in the state and each taluk can have a maximum capacity of 20 MW. Tender documents are expected to be released shortly.

BRIDGE TO INDIA has released the latest edition of its India Solar Rooftop Map report. As per the report, India added new rooftop solar capacity of 840 MW in the 12 months ending September 2017. Total installed capacity as of September 2017 stood at 1,861 MW. The sector has grown at a CAGR of 83% from 2013 to 2017 but growth in 2017 is expected to slow down to 60%.

OPEX market share has risen to 30% from 19% in 2016 driven by higher capital availability and rapid scaling up by new players;

Maharashtra has overtaken Tamil Nadu to emerge as the biggest solar rooftop state with an 18% annual market share;

We are revising downwards our projection for total rooftop solar capacity addition by 2021 to 10.8 GW (-18%);

Our revised estimate for expected capacity addition in 2017 is 887 MW, 28% lower than our previous estimate. We attribute slower than expected growth to multiple factors – the anticipated boom in public sector segment has failed to materialize, sharp increase in module prices has slowed down pipeline with customers postponing investment decisions and net metering implementation is still a challenge in many states. We have revised our projections for the next five years with total estimated capacity addition of 10.8 GW by 2021 (down 18% over our previous estimate).

Commercial and industrial (C&I) consumers remain the biggest market segment accounting for 63% of total capacity and 66% of new capacity added in the last 12 months. Capacity addition in this segment grew at 86% in the 12 months. These consumers are driven by attractive savings of 20-50% offered by power from rooftop solar in comparison to grid power as well as growing capacity of OPEX providers such as CleanMax, Amplus and Cleantech Solar. Private capital is flowing more easily to this market – CleanMax raised equity capital of USD 70 million from Warburg Pincus and IFC and many more international utilities and PE investors are looking actively at entering this market. Rapid growth in the C&I segment has also helped in Maharashtra becoming the biggest rooftop solar state, leapfrogging Tamil Nadu, by adding new capacity of 148 MW (18% market share) in the last year.

Residential rooftop solar grew at a more sedate pace of 45%. But the major disappointment is low uptake in the public sector, which added only 173 MW in the last 12 months against our estimate of 200 MW. The Government of India is providing capital subsidies of up to 25% for building rooftop solar systems across all government facilities and identified total potential of over 7 GW. But progress has been slow because of complicated tender based allocation process and execution challenges. It is noteworthy that SECI’s 1,000 MW public sector rooftop tender, launched in December 2016, was subsequently scaled back to 500 MW and the final allocation, made one year after tender issue date, is only 226 MW.

In terms of market performance, CleanMax (15.8%), Cleantech Solar (15.0%), Amplus (9.5%), ReNew (8.9%) and Azure (6.6%) are the clear leaders in OPEX category. Delta (30.6%) and SMA (20.6%) have maintained their dominance in the inverter market but we expect SunGrow, Huawei, SolarEdge and Fronius to compete aggressively in future. The EPC sector, on the other hand, is getting ever more fragmented. Tata Power Solar is the clear market leader (6.2%) but it has lost market share. Combined market share of top ten EPC players is only 20%.

It is heartening to see rooftop solar market growing briskly but we believe that it is still performing below its potential. The government policy stance, apart from providing capital subsidies, has been lacklustre and much more needs to be done to improve net metering, support DISCOMs and launch customer awareness and quality assurance initiatives.