Month: January 2018

2017 was an extraordinary year in many ways for the Indian RE sector. The year will be known for record capacity addition, drastic fall in tariffs and start of the new trade investigations by Indian government into imports of cells and modules. We look at 5 charts summarizing key trends for the sector in 2017.

Sector added record new capacity

2017 RE capacity addition is estimated to touch a record 13.3 GW (+61% over 2016) – utility scale solar added 8.2 GW (+110%), rooftop solar 0.8 GW (+60%) and wind 4.0 GW (+11%). This was also the year when solar outpaced all other sources of power for the first time. We believe that 2017 will be a record year for RE capacity addition in India for some years to come.

Chart: Annual capacity addition, MW

Source: BRIDGE TO INDIA researchNote: Thermal capacity addition numbers are ‘net’ of decommissioned plants. Also, these numbers are for financial years from Apr-Mar. 2017 thermal power capacity addition number is for Apr-Dec.

Tariffs continued to go down despite rising costs

SECI’s 750 MW of utility scale auction in Bhadla solar park saw tariffs fall to a new low of INR 2.44 falling below the previous lows seen in Rewa and Kadapa tenders. Intense competition meant that tariffs went up only marginally in subsequent auctions despite significant increases in module costs, GST and import duty. Wind tariffs fell even lower to INR 2.43, beating all market expectations, in December 2017.

Chart: Tariffs hit record low even as cost rise

Source: BRIDGE TO INDIA researchNote: Wind tariff for Q4-2016 is taken as the average of feed-in-tariff for select states.

Tender pipeline remained sluggish because of weak power demand

Weak power demand growth meant that DISCOMs were relatively reluctant to buy new power despite falling tariffs.

Chart: Tender issuance and auction completion, MW

Source: BRIDGE TO INDIA research

Commissioning delays badly affected state tender projects

Commissioning delays affected the sector badly as developers grappled with various issues related to land acquisition, connectivity, completion permits and GST etc. Worst affected tenders include Karnataka’s 1,200 MW tender and Telangana’s 2,000 MW tender. The following chart shows cumulative scheduled and actual commissioning status of Karnataka’s 1,200 MW, 920 MW SECI and 500 MW NTPC tenders, Uttar Pradesh 215 MW tender, Telangana 2,000 MW tender and Madhya Pradesh 300 MW tender.

Source: BRIDGE TO INDIA research

India continued to be heavily reliant on imported modules

Despite DCR and other incentives offered to domestic manufacturers, India remained heavily dependent on imported cells and modules with Chinese suppliers dominating the market because of low prices and huge capacity. That has put pressure on the Indian government to consider trade protection measures to support Indian manufacturing.

Chart: Source of modules procured for the projects commissioned in 2017

Source: BRIDGE TO INDIA researchNote: This data is for 8.2 GW of modules used in utility-scale projects commissioned in 2017.

A mix of policy uncertainty and slowing pipeline is forcing Indian project developers, suppliers and contractors to look for opportunities anew – inorganic expansion, looking at other business segments, new markets outside India or even diversification into other parts of the energy sector.

Private sector players have scaled up hugely in anticipation of rapid year-on-year growth but if the market slows down permanently, there is a risk of many of them turning away to other opportunities;

Many developers, suppliers and contractors are looking to shift focus to the rooftop solar and open access markets;

Larger players are even looking to tap fast-growing emerging markets in the rest of Asia and Africa;

The Indian industry has scaled up significantly in expectation of rapid year-on-year growth based on the government targets. The most obvious way to deal with growth challenges now is to look for inorganic opportunities. Well-capitalized developers like Greenko, ReNew, Hero Future, Sprng, Hinduja and Macquarie have been actively scouting for acquisition opportunities. Valuation expectations of the sellers have soared but we still expect some significant closures for Ostro Energy (1,000 MW including under construction assets), Essel Infra (710 MW), Orange Power (600 MW) and SkyPower (350 MW) assets in the coming months. Some of the larger players are even looking at diversification into transmission and power distribution businesses.

Other recurring theme is to look at allied business opportunities in the private power sale market – both rooftop solar and open access. 2017 was a bumper year for both these markets – rooftop solar capacity addition grew by 44% to about 800 MW and open access by 190% to 644 MW. That is attracting attention from large scale IPPs, contractors and manufacturers including Tata Power, Mahindra, Sterling & Wilson, Hero, Azure, Trina, Shell and Engie. A notable example is Azure, which seems to be laying a lot of emphasis on the government rooftop solar market. It has been participating actively in these tenders and has so far, won more than 110 MW of new capacity. The company is now believed to be also focusing on the off-grid market particularly after launch of the SAUBHAGYA scheme for 100% electrification across India.

Other nascent and emerging international markets in Middle East, Africa and Southeast Asia are also attracting a lot of interest from Indian players. These markets are collectively expected to add over 11 GW of new solar utility scale capacity in 2018, up 67% over 2017. Sterling & Wilson is the pioneer here, having built up substantial EPC presence in countries such as South Africa, Saudi Arabia, UAE, Philippines and Vietnam. Both Amplus and CleanMax Solar have also set up offices abroad. Tata Power, Hero Future, Hindustan Power, Mahindra and Jakson are some of the other names believed to be actively looking at international business opportunities.

Over the last three years, India became a magnet for international investors and utilities as they entered the Indian RE market attracted by strong government commitment and clear growth roadmap. It is unfortunate that businesses are now forced to reconsider their investment plans and go abroad in search of greener pastures. The Indian government would need to act decisively to curb this trend.

In our last few bulletins, we have written extensively upon the recent challenges faced by the RE sector. Here, we take a look at what to expect in 2018. The year has obviously started on a shaky note with the 70% provisional duty recommendation on cell/module imports. The trade investigations are likely to drag on for a few months and we expect an eventful year ahead, dogged by uncertainty, disputes and litigation. We already see many developers and contractors slowing execution as even a marginal duty imposition will make many projects unviable.

Capacity addition is likely to fall sharply

2017 RE capacity addition is estimated to touch record levels of 13.3 GW (+61% over 2016) including utility scale solar (8.5 GW, +110%), rooftop solar (0.8 GW, +60%) and wind (4 GW, +11%). We believe that 2017 will be a record year for RE capacity addition in India for some years to come. Our best-case estimate for total RE capacity addition in 2018 is 6.5 GW, a sharp drop of 51% over previous year. Utility scale solar capacity addition including open access projects is expected at 5.2 GW (–39%). Rooftop solar capacity addition is expected to remain static whereas open access will see a substantial slowdown after Karnataka’s attractive policy expires at the end of March 2018. Wind will see an almost complete collapse in activity with all recently tendered projects not due for completion until end 2019.

Tariffs unlikely to fall further

Despite intense competition in the sector – the recent Karnataka 860 MW state tender has been oversubscribed four times – we believe that both solar and wind tariffs have no more room to fall during the year. Developers remain hungry but risk-reward on auctions has been stretched to the maximum.

Manufacturing will remain high on the news charts but see little real progress 

Trade investigations will ensure that manufacturing will continue to attract a lot of attention. But we do not expect any material progress on the government’s new manufacturing policy or any significant boost to domestic manufacturing in the year. Some Chinese and Indian companies would announce plans but ultimately, only 1-2 Chinese manufacturers would perhaps go ahead with actual investments.

Module prices will decline gradually from Q2 onwards

Last year, we failed miserably in reading the module market as unexpectedly strong demand from China and the US resulted in prices going up significantly. This market remains very difficult to call but our belief for the new year is that prices will stay reasonably firm in H1 with some continued softening beginning from around May/ June. We expect the year to end with imported module prices at around USD 0.30/ Wp, an annual decline of 16%, before taxes and duties.

Central government budget will be a non-event for the sector

The Indian government is set to unveil annual budget for the next financial year on February 1, 2018. This will be the Modi government’s last full budget before general elections in 2019. Anticipation is building up but we don’t expect any significant announcement pertaining to the RE sector. The key thing to look out for is if any budgetary allocations would be made in line with the recent provisional announcements on manufacturing subsidies and financial support to DISCOMs for rooftop solar.

India still has a long way to go to meet the 175 GW target. But as we have maintained for some time, sector growth has been uneven and front loaded. Muddled policy environment and weak power demand mean that rather than building on the successes of 2017, we are headed for a year of disappointments.

Last week, we wrote a special bulletin about safeguard duty and its implications for various ongoing and under tender projects. The Director General of Safeguards’ recommendation for provisional duty of 70% has put the industry on tenterhooks. Investors, developers, contractors and manufacturers anxiously await final decision as they worry about navigating through an extended period of uncertainty.

The government has a difficult decision to make but the longer this investigation drags out, the more harmful it will be for the whole sector. We believe that the final duty decision will take about 8-10 months and activity is bound to slow down across the sector until then. Barring projects where modules have already been ordered/delivered, it will be natural for developers to slow work on their under-construction projects because of the severe impact on their financial viability. Meanwhile, MNRE’s new tender announcement plan is also likely to be hit adversely as issuing new tenders does not make sense in these market circumstances. Already, 4.3 GW of project development tenders are awaiting final bid submission and allocation. But we don’t expect these tenders to make meaningful progress until announcement of the final duty decision.

Even the proposed beneficiaries of duties, the domestic manufacturers would be unwilling to firm any investment plans until there is sufficient long-term clarity about government policy. That means completion of all ongoing investigations, announcement of a final duty regime as well as the new manufacturing policy for the sector. Unfortunately, that could easily take up to 12 months.

The government needs to move swiftly to mitigate adverse impact of the duty investigations. First, it should accelerate the investigation time-table and issue final decision as soon as possible. Second, it should provide clarity on applicability of duties to different projects, depending on their bid status, to ensure continued progress on the tender pipeline. MNRE has stated informally on various occasions that allocated projects would not be subjected to any duties, but this stance should be formalized with consent from the Ministry of Finance. Finally, if indeed a duty is to be imposed, the duty structure should be designed to minimize an immediate shock. Duties could be scaled up over time allowing both manufacturers and developers to prepare and adjust to the new regime.

Weak power demand growth to further dent RE prospectsMeanwhile, as per the latest numbers released by the Central Electricity Authority (CEA), total power generation (proxy for power demand) during April-December 2017 was up by a disappointing 3.8% over last year. That does not bode well for growth of the renewable sector when coal (capacity – 193 GW) and gas (25 GW) projects are struggling with average PLFs of about 60% and 21% respectively. The government initiatives to improve operational performance of thermal projects would have a further negative impact on RE growth prospects.

India’s Director General of Safeguards (DGS) has proposed a provisional duty of 70% for a period of 200 days on solar cells and modules. It has issued its recommendations in a preliminary report, completed within just a month of submission of the petition by five Indian manufacturers including Mundra Solar, Indosolar, Jupiter Solar, Websol Energy and Helios (formerly, Moser Baer). The duty is proposed to be levied on imports from all countries except developing countries other than China and Malaysia. In effect, that covers around 90% of cells and modules used in India. The decision has come as a major shock and risks causing major ructions in the sector besides upsetting the government’s 100 GW solar target for March 2022. Coming after the moves to levy 7.5% import duty on modules and GST ranging between 5-18% on various input costs, the recommendation also betrays lack of policy consistency and clarity in various government departments.

The decision process and rationale seem fundamentally flawed to us

The DGS recommendation is based on a very weak premise that rising cell and module imports have caused an injury to the domestic manufacturers. That is self-evident but not, in itself, a reason to protect the domestic industry. More important issues to consider, in our view, are why have the Indian manufacturers failed to scale up, upgrade plants or integrate backwards? Do they have the technical and financial capacity to meet growing demand in the sector? Why is their cost of production higher than the cost of imports? It is a policy failure that rather than addressing these substantive issues, the Indian government is proposing to create trade barriers to support domestic manufacturers. Moreover, DGS report expresses concern about loss of jobs in the manufacturing sector. But it fails to take into account the tens of thousands of jobs created in the downstream design, construction and operation of solar plants because of cheap imports. It is very clear that the sector growth – about 900% in last three years – has been largely underpinned by sharp fall in costs. A trade duty of 70%, or even, say 30%, would result in a substantial slowdown in the sector and lead to loss of many more jobs than potentially to be created on the manufacturing side.

RE is moving down policy priority list

The Indian government is grappling with various challenges, many of them inter-connected and conflicting in nature – a bid to revive economic growth and shore up manufacturing sector under its signature Make in India campaign; improve employment opportunities for more than 15 million people entering workforce every year; pressure to contain fiscal deficit in the face of falling tax revenues; and provide reliable 24×7 power across the country. Upcoming general elections, due in 2019, mean that the political stakes are high. Clearly, MNRE and the 100 GW solar target are struggling to get the desired attention in this complex set of circumstances. MNRE has been making soothing noises but the events of last six months are not reassuring.

Best case scenario for the developers is to get relief for pipeline projects

There has been a strong sense in the industry that some form of duty protection is imminent for domestic manufacturers. After speaking to various public and private sector stakeholders, we feel that a duty decision could be announced as early as in four-six weeks. Developers seem resigned to the decision and their best bet seems to be to: i) delay the final decision as long as possible so that under construction projects are not affected; and/or ii) to get relief for projects already auctioned and awarded. But as we commented in our report on anti-dumping duty, the likelihood of government granting a simple waiver of duties on projects in pipeline seems slim. If such relief is not available, up to 4,500 MW of projects risk becoming unviable and/or abandoned.

Project tariffs would need to increase by about 35% at 70% duty level

There are currently about 4,800 MW of tenders awaiting allocation and MNRE wants to bring out several new tenders in the coming months. A final duty of between 30-70% would mean that tariffs would need to go up by between 17-35%, or about INR 0.45-0.90/ kWh, to maintain financial returns. But some of these tenders have a prescribed tariff ceiling of as low as INR 2.93/ kWh. The DISCOMs are obviously not keen on tariffs going up substantially from current levels creating uncertainty for all new tenders.

Private rooftop solar and open access market would be hit badly by duties

Private market, both rooftop and open access solar, is likely to be the worst affected in our view. Most end consumers are in no hurry to build projects and would prefer to wait until there is complete clarity on duty decision and final costs are acceptable. We believe that this segment could see volumes declining by as much as 50% if a duty exceeding 20% is imposed.

In conclusion, a knee-jerk response to duty petitions risks damaging investor confidence and undermining achievements of the last three years. The government needs to act in concert across different departments and provide long-term policy visibility to ensure continued growth in the sector.

Last few weeks have seen feverish activity in the RE sector with several bold announcements from the new MNRE leadership, keen to address the multiple complex issues facing the industry. After announcing a new RE rollout plan entailing tenders of 91 GW of new solar and wind projects by March 2020, MNRE has issued a new concept note on rooftop solar envisaging capital subsidies for residential customers and financial support to DISCOMs – aggregating to INR 235 billion (USD 3.7 billion) – for encouraging growth of this market. It has also issued a concept note for building 10,000 MW of integrated module manufacturing capacity in the country with an incentive package of INR 110 billion (USD 1.7 billion). Lastly, it has issued two expressions of interest for development of 20,000 MW of projects using domestic modules and another 10,000 MW of floating solar projects, both for completion by March 2022.

The move to make DISCOMs the primary nodal agency for rooftop solar and providing them with milestone-linked financial support is highly desirable;

Other initiatives for promoting domestic manufacturing and floating solar plants are poorly conceived and unlikely to take off in our view;

Priority should be to improve policy enforcement and improving execution rather than coming out with newer, more radical ideas;

The most critical aspect of the concept note on rooftop solar is to make DISCOMs the primary nodal agency for this sub-sector. It has two main components – first, it seeks to provide financial support of between 5-15% of capital cost (estimated at INR 5.50 million/ MW) to DISCOMs for up to 35,000 MW of new rooftop solar capacity commissioned across non-residential consumer segments in their respective regions after March 2018. In turn, they are expected to undertake various initiatives for demand aggregation, data compilation and consumer awareness etc. to facilitate growth of rooftop solar. Second, the concept note aims to expand the budget for 30% capital subsidy for residential customers to INR 90 billion. The target is to build 5,000 MW of residential rooftop solar capacity by March 2022. To put that in perspective, we estimate current residential rooftop solar capacity at only about 390 MW.

DISCOMs are indeed best suited to play the central implementation and facilitation role for rooftop solar. Positioning them as a key stakeholder and supporting them financially is a sensible move and addresses one of the biggest challenges facing this market. BRIDGE TO INDIA had recommended this move in a study on rooftop solar about two years ago. But the scheme needs much more work to make it effective and the 40,000 MW target for March 2022 is still highly unconvincing.

The concept note on manufacturing contains a patchwork of old ideas to support domestic manufacturing – assured demand of 12,000 MW for public sector projects, 30% capital subsidy or 3% interest rate grant, tougher quality standards and greater role for public sector.

The sector is facing harsh times as we had commented in our last weekly. It is promising to see MNRE showing signs of earnestness. But apart from the move to incentivize DISCOMs for growth of rooftop solar, most of the new plans including integrated manufacturing and development of floating solar projects are poorly conceived and unlikely to take off in our view. Unfortunately, the sector’s problems are far from over.

Domestic module manufacturers want further protection

After submitting a petition for imposition of anti-dumping duty (ADD) in July 2017, the Indian manufacturers have submitted a new petition for imposition of safeguard duties on all cell and module imports into the country for four years. The Director General of Safeguard (DGS), Ministry of Finance, has already commenced an investigation and sought responses from all stakeholders by January 18, 2018. The safeguard duty petition is a new twist to the ongoing ADD investigation and interestingly, Mundra Solar (Adani), the largest domestic manufacturer, is one of the applicants unlike in the ADD petition. We believe that it is a sign of growing confidence in the domestic manufacturers, who have been encouraged by the government’s response to import duty on solar cells and modules and progress in the ongoing ADD investigation. Solar project developers should brace for more problems.