Month: April 2018

National Institute of Wind Energy (NIWE), an autonomous technical institution set up by MNRE, has invited Expressions of Interest (EOI) for India’s first offshore wind project. The 1,000 MW project is proposed to be located about 25 km from Pipavav port off the coast of Gujarat. Transmission infrastructure for sub-sea connectivity shall be the responsibility of project developer(s). Due date for submission of EOI is 25 May 2018.

Little progress has been made in offshore wind since announcement of the offshore wind policy in 2015;

MNRE would need to offer substantial subsidy support to the project to make price of power financially acceptable to DISCOMs;

Offshore wind remains a marginal technology because of high costs and execution challenges;

MNRE announced the offshore wind policy in 2015, wherein NIWE was appointed as nodal agency for the sector. But there has been little progress since then. The pilot project has been in development for over 2 years with assistance from the European Union, which is providing technical assistance for completing preliminary wind resource assessment, environmental impact assessment, ground investigations, geophysical and geotechnical studies. As it is the first project of its kind in India, it is fair to assume that project completion would take longer than usual at about 5 years.

MNRE is proposing to allocate the project through an open international competitive bidding process. Offshore wind has potentially higher PLF (up to 45%) but capital and operating costs are proportionately higher still. Factoring these in together with higher execution risks, final tariff is expected to be more than 2x current onshore wind tariffs. It is not clear if any capital subsidy or viability gap funding shall be made available for this project. We believe that DISCOMs would be unwilling to buy the power unless MNRE offers capital subsidies to reduce the final tariff to below INR 3.00/ kWh.The Gujarat DISCOMs recently cancelled two different tenders deeming tariffs of INR 2.98 – 3.06 to be too high.

Although offshore wind technology has been technically proven for about ten years now, high costs and operational challenges mean that it remains a marginal power source. International capacity addition has remained static at about 2-3 GW annually (about 5% of total wind capacity) with cumulative global capacity of only 18,814 MW as of December 2017. More than 90% of this capacity is concentrated in a few countries in north Europe and China.

The launch of India’s first offshore wind project is an exciting development and an inevitable step in onward march of the RE sector. Diversifying energy sources and piloting new technologies is highly desirable. But the government should move with caution. Its plans to hold auctions for 5 GW of offshore wind energy capacity in 2018-19 are highly unrealistic.

Gujarat government has cancelled the 500-MW state tender, for which an auction was held just four weeks ago. Capacity was won in this tender by Kalthia Engineering (50 MW), Gujarat State Electricity Corporation (150 MW), Acme (100 MW) and Azure Power (200 MW). Reason for cancellation has been cited as winning tariffs, between INR 2.98 – 3.06/kWh, being “on the higher side”. In the same week, the state cancelled another tender for short-term purchase of 2,000 MW of conventional power again because the prices (INR 4.97/kWh-INR 8.00/kWh) were deemed to be too high.

The cancellation shows a huge disconnect in the expectations of DISCOMs and power generators;

Developers need higher tariffs to compensate for growing risks but government authorities do not seem to appreciate viability challenges facing the sector;

Gujarat move raises the risk of more tender cancellations and legal disputes in future;

The 500 MW solar tender was issued in February 2017 and offered no relief from safeguard duty to developers. Given that the impact of 30% duty is estimated at about INR 0.40/ kWh, the final winning tariffs were actually rather attractive for the DISCOMs. The cancellation shows a huge disconnect in the expectations of DISCOMs and power generators. We believe that tariffs had fallen too far in the last year despite an increasing number of cost challenges and risks (GST, increase in module costs, steel and aluminium prices, import duties etc) faced by developers.

Projects with sub-INR 3.00 tariffs face serious viability challenges and a real risk of abandonment. It was to be hoped that increase in tender issuance would ease competitive pressure on developers and offer financial respite for long-term health of the sector. But the state authorities including DISCOMs seem to be detached from financial reality. Indeed, MNRE and other authorities have informally indicated multiple times that any increase in tariffs will not be tolerated.

The heavy-handed attitude of DISCOMs and arbitrary cancellation of tenders is a very negative development. It raises the risk of more tender cancellations by other DISCOMs and would potentially slow down project allocations even further. The developers, on their part, face increases in bidding cost, which would in the end need to be passed back to the DISCOMs. The cancellation is also a reminder of how MNRE’s proposed change in law relief for duties may come unstuck because of uncooperative DISCOMs and protracted legal disputes.

Gujarat’s move to cancel the two tenders is all the more surprising as the state is dealing with a power crisis. Because of a commercial dispute, two thermal IPPs have suspended 3,000 MW of power supply to the state. But the DISCOMs are not willing to listen and learn. The state has a renewable purchase obligation (RPO) target of 15.65% by 2020-21 and plans to buy 7,000 MW of new renewable capacity in the coming years. It would need to soften its attitude towards private developers to achieve its targets

A solar power plant rarely produces nameplate capacity power as solar modules operate at their maximum efficiency only during limited peak hours. It has therefore become routine industry practice to over-size DC module capacity, a concept commonly known as DC overloading. It allows solar plants to increase generation during non-peak hours and optimizes overall performance. In 2017, 45% of the projects installed in India used DC overloading of over 20%.

However, DC overloading may create a situation where peak-hour generation crosses capacity constraints of the inverter forcing it to ‘clip off’ extra generation. Optimal DC overloading requires balancing the trade-off between clipping losses during peak hours and extra generation during off-peak hours through the year. This trade-off is complicated by the fact that solar modules degrade over time causing reduction in clipping losses in later years. 

Figure: Benefits and losses of higher DC overloading

Figure: DC overloading in India in 2017

Increasing DC capacity reduces effective cost of transmission lines, AC side equipment and soft costs. Choosing optimal DC:AC ratio depends on multiple parameters:  

Irradiation: Higher irradiation results in higher clipping losses and hence, lower DC overloading is suggested for such projects.

Site temperature: High site temperatures adversely affect power output from the modules. Most utility scale project sites in India have high temperatures (over 40 deg C) during peak-hours, resulting in underperformance of the system and lower clipping losses. Hence, higher overloading may be desirable for such sites.

Land availability: Increasing DC overloading requires more land. Land availability constraints, in solar parks or other projects, may dictate the amount of overloading.

New project tenders in India in recent years have not prescribed any cap on DC overloading. The trend to use higher DC overloading has increased in India. A few projects have even used overloading of over 50%.  

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

SECI conducted another e-auction for 2,000 MW of wind power projects on 6 April 2018. Winning bids were INR 2.51 – 2.52/kWh, just marginally higher than the tariffs discovered in the previous 2,000 MW SECI auction (2.44 – 2.45) held in February 2018. Winning bidders include an even spread of international and Indian names. International winners include Continuum (250 MW), Sprng (300 MW), BLP (285 MW) and Engie (200 MW). Indian winners include Inox (100 MW), Adani (300 MW), Mytrah (300 MW) and ReNew (265 MW).

These projects will be connected to national grid. SECI will sign 25-year PPAs with developers and back to back Power Sale Agreements (PSAs) with DISCOMs across non-windy states. The project commissioning timeline is 18 months from the date of signing PPA.

So far, 6,000 MW of wind capacity has been auctioned by SECI alone in the past one year. All these projects will have Inter-State Transmission System (ISTS) connectivity. NTPC has also issued a similar 2,000 MW tender, for which bid submission is expected by 25 April 2018.

With 7,500 MW of wind capacity tendered (by SECI, Tamil Nadu, Gujarat and Maharashtra) and 4,000 MW capacity tenders in pipeline, wind sector is expected to pick up pace in 2018 and 2019. MNRE has planned to auction a further 20 GW of wind projects by March 2020. Wind tariffs have gradually settled down around INR 2.50/kWh (40-60% lower than state feed-in tariffs) and are expected to remain stable in the upcoming auctions.

About two weeks ago, the Central Electricity Authority (CEA), a statutory agency constituted under the Ministry of Power, released final National Electricity Plan for the five-year period beginning April 2017. The Plan is an important document – it should provide a roadmap for power sector development and serve as a planning guide for all government agencies. Unfortunately, unrealistic assumptions about power demand growth and RE capacity addition as well as some fundamental exclusions render the exercise futile in our opinion.

Despite annual demand growth of only 4.5% in the recent years, the Plan uses much more optimistic growth projections (6-7%) as per findings of the 19th Electric Power Survey.

Table: Power demand projections

Source: Electric Power Survey, National Electricity Plan

Generation capacity requirement is subsequently estimated so as to meet 24×7 demand in line with recent government initiatives. The snag is that the Plan considers 175 GW of RE capacity addition target as a given even though only about 110 GW of it seems likely. That makes the entire exercise questionable. The Plan considers variability constraints of RE power as well as retirement of 23 GW of old thermal plants over 2017-22 (plus another 26 GW between 2022-27) to come up with incremental capacity requirement from other sources.

Table: Power capacity projections

Source: National Electricity PlanNote: CAGR is calculated for previous five years. MU – million kWh

As per the Plan, thermal capacity should actually fall in the next five years net of retirals. But an extra 42 GW of thermal capacity is believed to be already under construction. The Plan projects thermal PLF at 56% in the next five years but the actual number could be materially different because of lower RE capacity addition (positive), lower demand growth (negative) and lower than expected thermal capacity addition because of concerns about overcapacity (positive).

The Plan duly notes that high variable RE generation would have an adverse impact on the grid. But it refrains from any meaningful discussion of remedial measures such as creation of an ancillary services market, making thermal plants more flexible, strengthening of the transmission grid and improvement in forecasting ability. There are no details on timelines, policy or procedures on these critical aspects. There is also surprisingly little depth on storage or any other new technologies.

Because of all these limitations, the Plan is a wasted exercise. Much like the recently released Ministry of Power report on optimal energy mix and Niti Aayog’s long-term National Energy Plan, it is another missed opportunity to take stock of challenges facing the sector and come up with pragmatic solutions. That the final Plan document is issued more than year after the start of the relevant period, only betrays the lack of rigor to this exercise.

Last week, MNRE issued a clarification to its guidelines for competitive bidding of solar PV projects. The clarification allows inclusion of changes in duties and other cesses in Change in Law provisions in power purchase agreements. It effectively means that risk of any new duties or changes in duties including safeguard and/or anti-dumping duties arising after the “last date of bid submission” would be borne by the power purchasers ie DISCOMs.

The protection offered to developers is highly welcome even if it poses some operational challenges and doesn’t eliminate the risk entirely;

It paves way for the tender pipeline, stuck for many months, to start moving forward;

The status of projects auctioned without any explicit protection remains unclear;

The MNRE move was much needed as duty uncertainty is highly damaging to the industry and is not expected to go away anytime soon. The safeguard duty announcement is pending a High Court decision in response to an appeal by Shapoorji Pallonji. Meanwhile, the Indian Solar Manufacturers Association have withdrawn the anti-dumping duty petition but plan to refile it in the coming weeks. The tender pipeline is getting clogged as a result with 10,145 MW of aggregate capacity awaiting allocation.

Table: Project development tenders awaiting allocation

Source: BRIDGE TO INDIA researchNote: In addition to these tenders, there is a 100 MW EPC tender by THDCIL pending allocation.

Unfortunately, the MNRE clarification is not the end of this matter. For one, some states/ DISCOMs may decide that the duty risk is too high for them to bear and hence, choose not to incorporate the revised provision and/or hold off on their tender programs. Two, protection is provided only to projects where the revised change in law provision is incorporated in the tender documents. There is still no clarity on who will bear duty risk in projects auctioned without formal protection. Moreover, change in law provisions by nature are fractious. The process for determination of compensation is usually messy and protracted. Final decision by the respective central/ state regulator can easily take months or even years.

That may explain why Karnataka, despite offering full change in law protection in its last two tenders, got a weak response from the market. NTPC has already accepted the change for its latest Andhra Pradesh tender. We expect SECI also to do so shortly although DISCOMs, the ultimate offtakers, may not be so keen on the move.

Despite all the ongoing uncertainties and challenges, the MNRE clarification is positive news. Together with the latest clarification from the Ministry of Finance that customs duty of 7.5% is not applicable to most solar module imports, it offers welcome relief for the industry.

Gujarat conducted e-auction for a 500 MW utility scale PV solar tender last week. Capacity has been won by four developers at tariffs between INR 2.98 – 3.06/ kWh – Kalthia Engineering (50 MW, INR 2.98), Gujarat State Electricity Corporation (GSEC) (150 MW, INR 3.00), Acme (100 MW, INR 3.06) and Azure (200 MW, INR 3.06). Losing bidders include Hero, Adani, Shapoorji Pallonji, Mahindra, Mytrah and Fortum.

Tariffs have gone up by 22% in 3 months because of the threat of safeguard duty;

Ministry of Power statement that developers would be expected to bear duties only as applicable on the date of auctions is being disregarded by them;

We expect little progress on over 11,700 MW of tenders stuck in pipeline until there is clarity on duty decision;

Gujarat has the highest rated DISCOMs in the country. It also enjoys the reputation of a highly efficient and well-managed power sector. State tenders have always been extremely competitive as a result. But tariffs in the latest tender are relatively much higher, up by INR 0.55 or about 22% over the recent Bhadla auctions by SECI. Main reason is the threat of safeguard duty – 30% duty would mean tariff going up by about 16-18%. The Power Minister has made comforting noises on pass-through of duties but the industry clearly remains cautious. The state did not offer any concession on change in law provision unlike Karnataka. International players, usually much more risk sensitive, stayed out with the exception of Fortum, which was also very conservative.

With the benefit of hindsight, Gujarat may not have actually gone ahead with this auction although recent news articles suggest that power situation in the state is getting worrisome. With tariffs coming at higher than expected levels, it remains to be seen if the state will exercise any part of the 100% green-shoe option.

The role of state public sector companies in Gujarat tenders is intriguing. It makes no sense that state government owned companies are participating in government tenders and crowding out private sector competition. We saw the same trend in the last 500 MW auction in the state in September 2017 when GSEC and Gujarat Industries Power Company (GIPC) together won a total capacity of 150 MW.

The auction sends a clear message for MNRE and power procurement agencies including NTPC, SECI and DISCOMs. Uncertainty is undesirable for all stakeholders and the duty decision should be expedited. By the same logic, auctions should be held back until the status of duty investigation is clear. It may be a while before we see any further auctions in the sector.