Month: March 2018

Uttar Pradesh (UP) has recently amended the Captive and Renewable Energy Regulations 2014 to provide 50% exemptions from transmission and wheeling charges for intra-state open access sale of solar power. The state agencies have been reluctant to provide OA approvals in the past. There is virtually no OA solar capacity in the state. But this amendment, in line with the state solar policy, indicates the state government’s intent to finally open doors to the open access (OA) market. 

Figure: Electricity consumption by consumer category in UP in 2015-16

Source: All India Electricity Statistics, General Review 2017, CEA

This figure shows that the industrial sector accounts for 34% of total power consumed in the state although almost 38% of their requirement is met from captive sources. The state has a relatively low cross-subsidy surcharge (CSS) of INR 0.60/ kWh for industrial consumers which makes OA solar about 25% cheaper than grid power. Commercial consumers are also eligible for OA power but CSS for them is prohibitively high at INR 4.52/ kWh.

Project developers could avoid CSS by opting for the group captive route but regulators are increasingly challenging this approach.

A comparison of OA solar cost under multiple scenarios (before exemptions, after exemptions and for captive sources) with other sources of power shows that OA can be a very attractive route for industrial and commercial consumers. 

Figure: Cost of power from different sources in UP

Source: BRIDGE TO INDIA analysis Note: We have assumed base cost of solar power and conventional power at INR 4.50/ kWh and INR 3.50/ kWh respectively to calculate total landed cost of OA power.

OA market in other states such as Karnataka and Madhya Pradesh has attracted large IPPs such as ReNew, Avaada, Shapoorji Pallonji, Aditya Birla, Hero and AMP. As these states shut down following withdrawal of incentives, UP could be the next hope for OA market.

MNRE’s proposed quality testing and standards regime is facing a difficult take-off. Policy ambiguity and lack of testing infrastructure have already led to multiple revisions in implementation timetable.

The Indian RE sector has a major quality problem and MNRE intervention, long overdue, is highly welcome;

The policy needs to be backed up with urgent investments in testing infrastructure;

MNRE needs to work actively with the industry to finetune the policy and define a clear, time-bound implementation roadmap to address concerns;

Poor quality is the proverbial ‘elephant in the room’ for the RE sector, more so for solar PV than for wind or any other technology. Project developers, contractors and equipment suppliers are under an increasing amount of pricing pressure because of the extremely competitive nature of this market. The result has been aggressive cost cutting, combined in many instances, with poor design, engineering and equipment selection. Highly fragmented and commoditized nature of the sector has further added to these concerns. There is ample anecdotal evidence about projects underperforming significantly even in early years of operations. But hard data remains impossible to get as both developers and equipment suppliers are worried about negative impact on their future business prospects.

Heeding long standing quality concerns in the industry, MNRE acted belatedly and issued two separate orders last year:

Solar Photovoltaics, Systems, Devices and Components Goods Order in August 2017 mandates all equipment manufacturers, suppliers and distributors to ensure compliance with new local standards specified by Bureau of Indian Standards (BIS) by 30 September 2018. The order applies to all goods both domestically manufactured and imported from other countries. Non-compliant products are proposed to be scrapped immediately.

Lab policy for testing, standardization and certification for RE sector, issued in December 2017, aims to develop and update Indian standards for all RE systems and set up lab testing infrastructure in line with international best practices.

The orders, although well-intentioned, have caused confusion and pain in the industry. There is hardly any accredited lab testing infrastructure in the country at present. The few available labs have waiting list of several months. The requirements are challenging from a cost and timeline perspective, when the industry is already grappling with equipment cost increases, GST and import duties. The applicability of policy to individual components and kits is not clear. Many are also questioning the logic of testing requirements when the proposed BIS standards are almost identical to IEC standards.

Notwithstanding the short-term challenges, there should be no doubt that a quality policy is badly needed for long-term health of the sector. But the standards need to be recalibrated over time to suit Indian operating conditions. Effective implementation requires setting up of modern testing facilities throughout India and will take time. There also needs to be a clearer time-graded implementation pathway with strict penalties for non-compliance.

Share of string inverters in the Indian solar market is increasing rapidly. It went up from only 1% until 2016 to 9% in 2017 for new utility scale solar capacity commissioned. We expect the trend to accelerate even further in the coming years.

Increased adoption of string inverters for utility scale projects is in line with experience in other international markets including USA and China. About 50% of utility scale capacity installed in China in 2016 used string inverters. In the USA, string inverter share is expected to grow up to 28% in 2020. Key reasons for increasing share of string inverters are as follows:

Flexibility and yield: Although efficiency of central inverters is usually higher in comparison to string inverters (about 99% vs 98.5%), string level optimization can deliver better power output with string inverters due to increased reliability and redundancy;

Installation time: String inverters can be installed much faster than central inverters as they do not need special containers or civil structures for housing – useful for projects with tight deadlines;

System availability and maintenance: String inverters can be easily replaced in case of any issue reducing the plant downtime whereas, owing to their large size, central inverters require dedicated on-site technical support;

Huawei and Sungrow, both Chinese companies, are the biggest proponents of usage of string inverters for utility scale segment. But we believe that with growing acceptance of string inverters, a few leading European companies are also looking to offer string inverters.

The main advantage for central inverters is their low upfront cost and maintenance cost. However, string inverters provide savings in BOS costs due to no requirement of string combiner boxes, container or civil structures etc. Further, falling capital and maintenance costs of string inverters means that cost advantage of central inverters has narrowed significantly in the last few years. Ultimately, the decision of string vs central inverters depends on individual project factors such as location, size, site contours and uniformity, site accessibility and installation time available.

For more details of Indian inverter market and various design and operation issues related to inverters, download our report, Inverter Design and Selection.

As the Indian rooftop solar market grows, it is attracting more attention from investors and financiers. Shell is rumoured to be entering the market in partnership with Fourth Partner, a leading rooftop solar EPC. Several other prominent IPPs, international developers, contractors and PE investors seem to be actively interested. Access to both equity and debt capital has improved significantly addressing one of the key market constraints.

Rooftop solar is growing steadily and expected to become a 3 GW market annually by 2021 as per our projections;

Growing market size and intense competition in utility scale solar are drawing new players to the market;

More favourable policy environment is needed to reduce risks and sustain financing interest;

Despite its 40% share in the national solar target of 100 GW, rooftop solar share has been stuck at a lowly 10% of total solar capacity addition. In 2017, it grew by an estimated 924 MW as against total solar capacity addition of 9,225 MW. But changing fortunes of utility scale solar – set to register negative growth in 2018 (-27%) – are proving beneficial for rooftop solar. We expect rooftop solar to grow by 45% in 2018 with its share in total solar installations rising to 18%.

Lack of equity capital has been a major constraint for the OPEX market, which has been a cozy club between CleanMax, Cleantech Solar and Amplus. Other investors have shied away from the market or failed to raise sufficient capital. They have been put off by small market size, formidable execution challenges and high default risk of private C&I customers – falling cost profile creates a strong possibility that they may stop honouring higher priced PPAs at some point in future. Poor legal rights of developers offer little mitigation against this risk. But growing market size and intense competition in utility scale solar are drawing new players to the market. ReNew has been investing heavily in the business. Tata Power, Mahindra, Sterling & Wilson, Sembcorp, Engie, Statkraft and Mytrah are also increasingly interested in this market as are some PE investors.

Debt financing remains tighter in contrast although availability has improved over the last year. The Indian government has arranged concessional lines of credit aggregating INR 88 billion (USD 1,375 million) from the World Bank, ADB and the New Development Bank. State Bank of India has been quick to operationalize the World Bank line with sanctions of INR 23 billion (USD 362 million). Other facilities are also expected to ramp up shortly. We also expect some private non-banking finance companies (NBFCs) to enter the market with standardized financing solutions for residential and SME customers.

Improved funds availability is a big boost for rooftop solar. But there should be no doubt that this market remains challenging. There has been no underlying improvement in risk profile or execution challenges. Growing competition for blue-chip customers is driving margins down. The weak policy framework has failed to support the 40 GW ambition. It remains to be seen how many of the new entrants can sustain their interest and build up scalable rooftop solar businesses.

International Solar Alliance (ISA) conducted a founding summit in Delhi over the last two days. The event was organized with great pomp with 21 heads of state attending besides Indian Prime Minister, Narendra Modi and the French President, Emmanuel Macron. There were several new announcements on financing, project schemes and partnerships although most of these appear vague. That makes it difficult to assess real progress.

India and France have announced lines of credit worth USD 1.4 billion and EUR 700 million respectively for member nations;

ISA has signed new partnership agreements with the African Development Bank, Asian Development Bank, Asian Infrastructure Investment Bank, Green Climate Fund and New Development Bank, having previously executed such agreements with the World Bank, EIB and EBRD;

India has proposed a generic action plan for increasing solar penetration, encouraging innovation, ensuring concessional funding and developing new regulatory norms;

The various initiatives announced so far fall broadly in three categories – augmenting low cost finance, scaling up solar applications such as solar water pumps, lighting systems and mini grids, and cross-border knowledge sharing. Little financial commitments have been made so far, although we continue to believe that mobilizing international capital is the lowest hanging fruit for ISA. Its highly visible profile and global partnerships should allow it to attract capital from international investors, philanthropic entities and utilities, keen to attach themselves to climate friendly causes. The proposal to procure equipment on a global scale to bring down costs seems a little far-fetched because of the vast differences in technical standards, operating and policy environment across countries.

Unfortunately, India is unlikely to benefit materially from any of the ISA initiatives. The domestic solar industry is reasonably mature with plenty of financial interest from local and overseas players. Some local contractors and equipment suppliers may be able to target new business opportunities in other countries. And it is to be hoped that India’s leadership role would focus the minds of the Indian government in addressing vexing policy and operational issues at home.

Given the nature of the alliance, it is not surprising that ISA is still a work in progress. But it appears to have more style than substance. The grand vision is still fuzzy. The target of installing 1,000 GW of solar capacity and mobilizing USD 1,000 billion in investments by 2030 seems improbable. Also, India and France are unlikely allies in this venture. Neither can stake a claim to genuine leadership in the solar sector. Both countries are keen to showcase themselves in a global leadership position and seem to be using ISA as a platform for individual gains. By denying entry to other leading nations such as Germany and China, they run the risk of holding ISA back from achieving its potential

Karnataka’s attractive open access policy for solar projects is set to expire at the end of this month. That is leading to a rush in project development activity in the state, which already leads other states with a total installed open access based solar capacity of 334 MW. As much as 1,000 MW of new capacity is expected to be commissioned over February and March.

Many large developers have entered the Karnataka open access market to capitalize on the short window of cost exemptions;

Fierce resistance from DISCOMs, transmission companies and even regulators makes open access an unpredictable and challenging market;

We expect the market to muddle along at about 500 MW per annum driven by sporadic opportunities across select states;

In 2014, Karnataka offered complete exemption from transmission, wheeling, banking and cross subsidy surcharge (CSS) to solar projects commissioned before March 2018. Unlike other states offering similar incentives, it was the first state to offer long-term certainty by offering an exemption window of 10 years. But real progress started only from 2017 onwards when falling costs made open access solar financially viable.

Many large developers have been drawn to open access market in Karnataka. They include large IPPs such as ReNew (commissioned 120 MW), Avaada, Shapoorji Pallonji, Aditya Birla, Hero Future and AMP as well as real estate developers such as Embassy Group, Soham Infrastructure and Sagitaur. Specialist rooftop companies including Amplus and CleanMax are also targeting capacity addition close to 150 MW each before the deadline.

Other states providing similar incentives have also attracted market interest. Telangana and Andhra Pradesh, both offering a 5-year cost exemption window for some charges, have installed solar capacity of 284 MW and 187 MW respectively under open access model.

But these are rare bright spots in the open access market, which continues to face policy and regulatory volatility. There is strong resistance from DISCOMs and other state agencies, who are reluctant to see their premium customers go away. Haryana and Gujarat are the best examples, where open access solar remains non-existent despite several incentives available on paper. Madhya Pradesh, with the second highest open access solar capacity in the country (318 MW), withdrew CSS and additional surcharge waiver from December 2017 onwards. The move, introduced mid-year, resulted in increase in cost of open access solar by around INR 2.20/ kWh making it unviable overnight. Gujarat and Maharashtra have also introduced some charges after waiving them off for a limited period. Even Karnataka is proposing re-introduction of wheeling, banking and transmission charges/ losses.

Meanwhile, the Ministry of Power also appears to be tightening screws on the open access market. In addition to recommending more stringent scheduling restrictions and hiking CSS,additional surcharge and standby charges, it is gradually tightening definition of group captive structure, a common ruse used to avoid payment of CSS.

Overall policy and regulatory regime for open access solar continues to be erratic and unpredictable. Falling costs should mean strong growth prospects but we expect the market to muddle along at about 500 MW per annum in the next few years.