Month: May 2018

Earlier this month, Karnataka Electricity Regulatory Commission (KERC), the state power regulator, issued an order notifying various open access charges for renewable projects. The regulator has withdrawn all open access incentives for solar projects. But some incentives would continue to be available for other renewable projects. Controversially, the order seeks to levy some open access charges with retrospective effect on solar projects commissioned in FY2017-18.

Karnataka has added an unprecedented 1,255 MW of open access solar capacity in Q1 2018, 93% higher than capacity addition across all of India in 2017;

Open access is facing increasing resistance from DISCOMs and regulators;

We are hopeful that the courts will revoke retrospective charges but policy challenges in open access market are not going to disappear any time soon;

The KERC order comes after expiry of the state’s attractive solar policy offering ten-year exemption from transmission, wheeling, banking and cross subsidy surcharge (CSS) to solar projects commissioned by March 2018. Lapsing of the policy led to an unprecedented rush in project activity in the March quarter with 1,255 MW of new projects getting completed in the state. Karnataka is now by far the biggest open access solar state with total installed capacity of 1,592 MW, 56% of total open access solar capacity in the country. Notable players to have added capacity in the state include CleanMax (224 MW), Amplus (218 MW), ReNew (200 MW), Avaada (145 MW), Shapoorji Pallonji (145 MW), Embassy Group (100 MW) and Prestige Group (90 MW).

Reinstatement of all open access charges including CSS means that new solar projects shall face additional cost of INR 2.85/ kWh. That would kill the open access solar market overnight other than for captive projects. KERC may have a reasonable justification for reinstatement of charges – “renewable energy sources can now compete with conventional sources of energy,” whereas the DISCOMs are hurting financially because of these exemptions.

But there is absolutely no justification for the retrospective levy of 25% of transmission and/or wheeling charges, applicable line losses and banking charges. KERC estimates net impact of these charges to be INR 0.51/ kWh but developers claim the actual impact can be up to three times higher depending upon connectivity voltage. Irrespective, the industry is furious as retrospective charges threaten to undermine financial viability of 1.5 GW of projects commissioned in the last year. Some developers have already approached Karnataka High Court and obtained a stay on the new KERC order. We are hopeful that the courts will revoke retrospective charges.

The Karnataka move is a sign of growing friction between private developers on one side and DISCOMs, regulators and state nodal agencies on the other side. It adds to policy chaos in the open access market and once again shows that this market is not for the faint-hearted.

NTPC, SECI and Maharashtra State Electricity Distribution Company Limited (MSEDCL) completed auctions for their 750 MW, 200 MW and 1,000 MW tenders respectively in last two weeks. The NTPC and SECI projects would be located in Anantapur solar park, Andhra Pradesh and Pavagada solar park, Karnataka respectively. There is no solar park availability for the MSEDCL tender.

Capacity has been won by following developers:

– NTPC tender: Sprng (250 MW, INR 2.72), Ayana Renewables (250 MW, INR 2.73) and SoftBank (250 MW, INR 2.73);

– SECI tender: SoftBank (200 MW, INR 2.82);

– MSEDCL tender: Technique solar (20 MW, INR 2.71), Adani (200 MW, INR 2.71), ReNew and ACME (250 MW each, INR 2.72), Tata (150 MW, INR 2.71) and Azure (130 MW, INR 2.72);

The difference between profiles of winning bidders in the three tenders is pretty stark. Successful winners in the NTPC and SECI tenders are large international developers, who tend to be more risk averse particularly on offtake and land acquisition aspects. In contrast, winners in the MSEDCL auction are predominantly Indian developers.

After factoring in solar park costs (NPV of INR 9.8 million and 8.8 million/ MW for Andhra Pradesh and Karnataka solar parks respectively), bids under NTPC and SECI tenders are extremely aggressive as per our calculations. It is clear that the international bidders are paying a substantial premium for their risk aversion.

MSEDCL is one of the healthier DISCOMs (A rated) in the country but its record on renewable energy has been mixed with multiple incidents of payment delays and PPA execution delays. Despite that, the tender was oversubscribed by 45% and the winning tariffs are also fairly aggressive in our view. It is notable that the Maharashtra tender had to be re-issued for the fifth time. It failed to attract sufficient interest previously due to missing change in law protection from safeguard/ anti-dumping duty risk. But after the clause was added, the tender saw strong bidder interest.

By our calculations, risk-adjusted equity IRR for all these tenders is barely in double digits, way below the return hurdle for the sector. More than 10 GW of tenders are pending allocation but 7 GW of this capacity is stuck due to intra-state transmission system connectivity concerns. Developers, keen to add to their business pipeline now, appear willing to accept growing execution challenges and ignore soaring tender promises of MNRE.

Wind-solar hybrid policy has little substance

MNRE released the final version of National Wind-Solar Hybrid Policy last week. The policy aims to “provide a framework for promotion of large grid connected wind-solar PV hybrid systems for optimal and efficient utilization of transmission infrastructure and land, reducing the variability in renewable power generation and achieving better grid stability.” A major change from the draft policy is removal of the 10 GW capacity addition target by 2022. The final policy has no specific target. Indeed, it is remarkable for having no numbers at all.

The two touted advantages of hybrid plants – reduction in power cost and improvement in grid stability – are debatable in our opinion;

The policy offers no incentive or other tangible mechanism to promote hybrid technology;

Prospects of hybrid plants are limited in our view to select opportunistic cases depending on project location, transmission availability and open access policy;

There are supposedly two main advantages of hybrid plants and both of these are debatable in our opinion. One, by exploiting common transmission and evacuation infrastructure, such plants can use capital more efficiently and bring down tariffs even further. But transmission and evacuation infrastructure costs usually account for only about 3-5% of total capital cost of solar and wind power plants. Savings of this scale are likely to be easily eroded by sub-optimal wind or solar resource available at the location and/or higher curtailment risk. The other claimed advantage is that hybrid plants can reduce variability in power output and improve grid stability as wind and solar resources are somewhat complementary to each other. This is statistically correct although the benefit is hard to quantify. There are other easier and cheaper ways to achieve the same result including better forecasting techniques, ancillary services market, demand side management etc.

The policy is silent on how it will promote hybrid technology. There is no financial incentive on offer. If developers proactively add hybrid capacity, they would have to find private open-access customers as DISCOMs are unlikely to sign bilateral long-term PPAs in the current environment. Conversion of existing wind and solar plants into hybrid plants is allowed but that is technically untenable. It is almost impossible to overlay wind turbines on an operational solar site or vice-versa. These constraints are illustrated well by how Hero Future Energies recently added a 28 MW solar project, next-door to an existing 50 MW wind project in Karnataka. Power from the new solar plant would be sold entirely to private customers.

So far, no hybrid tenders have been issued by any procurement agencies in India. SECI has issued an expression of interest for a 160 MW wind-solar hybrid-cum-storage plant in Andhra Pradesh. Overall, we believe that the potential of hybrid plants is rather limited. The concept has found limited relevance elsewhere. It seems attractive in theory but technical and financial viability constraints mean that hybrid plants will remain a one-off opportunistic choice for developers rather than a mainstream option.

India’s largest RE developer, ReNew Power, recently completed acquisition of Ostro Energy, a wind and solar project developer with a total portfolio of 1,108 MW. The acquisition, the largest in the sector so far, makes ReNew Power by far the biggest renewable developer in the country with a total portfolio of just over 5,900 MW including capacity under construction. The company is now in the process of launching its IPO in the domestic market.

The Ostro acquisition is likely to be a high watermark for sector M&A for many years due to lack of similar opportunities in the market;
Actis has benefited from attractive wind feed-in-tariffs and excellent market timing to make an estimated 25% annualized return on its investment;
ReNew Power is breaking away from rest of the market through aggressive expansion and fund raising;

7099
Figure: Commissioned and pipeline capacity of top RE developers as of March 2018, MW
Source: BRIDGE TO INDIA research
We believe that the Ostro acquisition would be a high watermark for sector M&A for some time to come. Very simply, there are few opportunities of this size and quality. Deal closures also remain slow because of wide gulf in valuation expectations and nasty due diligence surprises. Moreover, we believe that interest of the buyers is likely to wane over time – primary project pipeline is looking bountiful and interest rates are beginning to rise.
Ostro Energy was set up by Actis, a UK based PE fund, just 4 years ago. It has been valued at INR 108 billion (USD 1.6 billion), or about INR 97.5 million/ MW of capacity. We consider the gross valuation steep at about 7.5x EBITDA and estimate Actis’ exit IRR at about 25%. That is in large part due to its excellent market timing – it quickly built up a juicy portfolio of feed-in-tariff based wind projects (90%) and has sold out possibly at the market peak.
The Ostro deal caps 2 years of exceptional deal making and fund raising for ReNew Power. It is financing the deal through 100% cash, in part by raising USD 247 million in equity funds from Canada Pension Plan Investment Board (CPPIB). In the last two years, it has completed five acquisitions and raised USD 1.5 billion in overseas debt and equity funding. It is believed to be considering several further bolt-on acquisitions and has won 1,200 MW of new capacity in auctions in the last six months alone. The background to such aggressive deal making lies in the company’s imminent IPO plans. We understand that the company is hoping to get a valuation of around 8.5-9.0x EBITDA.
First domestic IPO of a renewable IPP in many years – Orient Power launched an IPO in 2010 – would be an exciting and much anticipated development. But time will tell whether the company delivers on its bold plans or fails to live up to expectations.
https://bridgetoindia.com/backend/wp-content/uploads/2018/05/26.jpg||https://bridgetoindia.com/backend/wp-content/uploads/2018/05/Graph16-5-18.gif

Central Electricity Regulatory Commission (CERC), India’s chief power sector regulator, recently issued a draft procedure for applying for connectivity to the inter-state transmission system (ISTS). The draft procedure comes in the wake of last year’s CERC order on transmission connectivity ‘squatting’ and seeks to provide much needed clarity for ISTS connectivity for RE projects. It is applicable to all new projects greater than 50 MW and incorporates a two-stage approval process.

Stage I connectivity can be sought by developers at any time irrespective of their project status. Approvals are proposed to be granted within 60 days of application but would lapse after 2 years unless Stage II application is submitted within 24 months of the approval date. This stage is essentially meant to serve as an advance planning guide for all relevant parties;

Stage II approvals are to be provided on a first-come, first-serve basis to developers once there is demonstrable progress on the projects – respective PPAs are signed and the developers have acquired rights to over 50% of total land required for the projects or if they have achieved financial closure or can show access to 10% of total estimated capital expenditure. Approvals are proposed to be provided within a month but shall lapse if the applicants fail to sign binding agreements and submit necessary bank guarantee (INR 50 million for every 300 MW project capacity) within a month. Similarly, if the developers fail to meet agreed technical milestones for the projects, the agreement and bank guarantee shall be forfeited;

Developers can apply for Stage I and II approvals at the same time. Crucially, the procedure includes ongoing interchange of information between various parties and regular monitoring of project progress. There are some intricate issues at stake here and the developers want a number of amendments to the draft procedure. Final procedure approval may yet take many months after consultation with all public and private sector stakeholders.

Transmission connectivity has become an increasingly thorny issue for RE projects over the last few years due to lack of coordination between various government agencies. Crux of the problem is that creation of transmission capacity – pooling substations and/or transmission line – usually takes 3-4 years. But the projects, once allocated, have a timeline of only 1-1.5 years for implementation. Developers are rightly concerned that there is simply not enough transmission capacity in resource rich states of Rajasthan, Gujarat and Tamil Nadu to match MNRE’s RE procurement plans. Currently, there are 9,000 MW of wind and solar ISTS tenders pending allocation.

ISTS tenders form the cornerstone of MNRE’s new tendering plan to meet 175 GW target by March 2022 and supplying RE power to deficit states in north and east including Uttar Pradesh, Bihar, Punjab, Haryana, Chhattisgarh and West Bengal. But transmission bottlenecks mean that actual progress is likely to be much slower than usual