Month: June 2018

Q1 2018 saw commissioning of a record 3,766 MW (+100% over Q4 2017) of utility scale solar projects. Cumulative utility scale solar capacity has crossed the 20,000 MW mark and now stands at 21,331 MW.

Figure: Quarterly utility scale solar capacity addition, MW

Source: BRIDGE TO INDIA research

The record capacity addition came despite significant delays faced in many projects under SECI tenders in Maharashtra, Odisha and Andhra Pradesh. Karnataka accounted for more than 72% of the total capacity commissioned in the quarter. Completion of most of the previously delayed projects under SECI 920 MW and Karnataka 1,200 MW tenders was the major reason behind this increase in project commissioning. This coincided with a rush in completion of open access projects because of state’s attractive open access policy – offering exemptions from cross subsidy surcharge, transmission, wheeling and banking charges – expiring at the end of March 2018. An unprecedented 1,250 MW of open access projects, 92% of total open access capacity commissioned in Q1 2018, were commissioned in Karnataka.

We expect commissioning activity to slow down considerably over the next few quarters. This is due to a slowdown in new tender issuances during late 2016 and early 2017. As per our estimates, total utility scale capacity addition in 2018 would be only 6.3 GW (-25% over 2017). Activity should pick up again in 2019 with about 8 GW of new capacity expected to come online in the year.

There have been some bold announcements coming out of MNRE in the last few weeks. It has claimed that India aims to achieve total RE capacity (excluding large hydro) of 227 GW by March 2022. It has also announced that the government plans to launch a single 100 GW solar manufacturing-cum-storage-cum project development tender to accelerate progress in the sector. Other new initiatives recently announced include 5-10 GW of integrated module manufacturing capacity, 10 GW floating solar capacity, 10 GW hybrid wind-solar capacity, 30 GW offshore wind (by 2030) and a USD 20 billion solar pump scheme.

The new plan warrants annual RE capacity addition to go up to a mind-boggling 40 GW and is completely detached from reality;

Our balanced case forecast for total RE capacity by Mach 2022 is only 125 GW;

By announcing such radical schemes, MNRE may be trying to deflect attention from recent problems and shore up confidence in the sector;

India’s total installed RE capacity as of March 31, 2018 was only 69 GW – the new plan therefore warrants annual capacity addition to go up from 10-12 GW in the last few years to a mind-boggling 40 GW. We believe that the new MNRE plans are completely detached from reality. Amongst other things, India simply doesn’t need so much new power. Power demand growth is fairly benign at about 4.5-5.0%, equivalent to incremental demand of about 8-10 GW per annum. There is excess capacity in the country with more than 75 GW of thermal power plants running at load factors between 20-50%. Moreover, NTPC and other state generators continue to add 5-7 GW of new coal-fired capacity every year.

Second, there are huge challenges in availability of land, transmission and even financing for the revised scale of capacity addition. Many tenders are already being delayed and timelines extended for project implementation because of transmission system constraints. The solar park scheme is facing major delays. DISCOM finances also remain stretched despite UDAY scheme.

Our forecast for total RE capacity, taking into account overall power demand-supply situation as well as various supply side constraints, is only 125 GW by March 2022. This forecast is also consistent with the findings of our recent RE CEO survey.

So what explains the new plans? We believe that upcoming state and central government elections and wider macro-economic challenges are leading the government to announce ever ambitious plans. In particular, MNRE has been under persistent pressure over the last year due to a series of issues including tender slowdown, GST, customs duties and safeguard duties. We can only speculate that the new MNRE administration is trying to deflect attention from these problems to shore up confidence and raise optimism in the sector.

Deadline for project completion under SECI’s 1,000 MW rooftop solar tender for installation on public sector sites is coming up at the end of June 2018. The tender was issued back in December 2016. Because of various problems in the tendering process, final allocation was made for 410 MW only in December 2017. We understand that no capacity has been actually commissioned yet. Similarly, in the Central Electronics Limited (CEL) rooftop solar tender issued in January 2017, only 32 MW has been allocated so far. Other public sector specific rooftop solar tenders issued by Rajasthan Electronics and Instruments Limited (REIL) and PEC have also been similarly delayed and/or cancelled.

Public sector offers tremendous opportunity for rooftop solar with very high potential and scalability, willing consumers and better credit risk. In early 2016, MNRE had announced an ambitious target of 6 GW of rooftop solar capacity on various central government buildings in conjunction with an attractive capital subsidy scheme (equivalent to 25% of capital cost) for all public sector consumers. It subsequently appointed five public sector units to aggregate demand and procure rooftop solar systems on behalf of various end consumers. Standard PPA and EPC agreements were prepared and vetted by Ministry of Law to fast track the deployment process.

Figure: Rooftop capacity target and tendered capacity, MW

Source: BRIDGE TO INDIA research

SECI’s 1,000 MW tender is symptomatic of the various problems faced in this segment. After initial site visits by prospective bidders and further consultations with different stakeholders, tender size was reduced to 500 MW. Final allocation was further scaled down to 410 MW because of lack of private sector interest in some locations. Out of the 206 MW of capacity awarded under OPEX model, PPAs were ultimately signed for only about 95 MW by the end of May 2018.

There have been multiple problems in rooftop solar deployment on public sector buildings:

a)    Actual site capacity in most cases is significantly less than estimates as site owners are reluctant to allow use of full space for various reasons;b)    Even though project sites are supposed to be already identified and screened, winning bidders are required to liaise with the respective government departments and obtain their agreement on final system size, area of deployment, business model, tariff and cost leading to delays;c)    Many government departments require the bidders to undergo further technical and financial vetting process delaying installation;d)    Some consumers are reluctant to pay capital cost upfront for budgetary reasons despite originally indicating their preference for CAPEX model;e)    Despite adverse changes in individual project sizes and/or types of roofs available, the consumers often require bidders to match lowest rates (L1) in violation of tender conditions;f)    The tenders stipulate tough conditions – minimum annual CUF, stiff completion deadlines, delay penalties, lack of payment security – forcing some leading industry players to scale back their interest. At the same time, eligibility criteria are fairly lenient resulting in a significant capacity being awarded to small local contractors with little prior experience;

Consequently, installation delays, capacity scale back and even tender cancellations have become common in this market. Tender issuance has also failed to live up to expectations as seen in the chart below.

Figure: Rooftop solar tender issuance by public sector consumers, MW

By our estimates, public sector consumers account for only about 400 MW of total rooftop solar capacity (16% share) in the country. Many established IPPs and EPCs have aggressively targeted the public sector market but there have been few success stories (Azure financing). Unless MNRE and SECI are willing to identify and fix problems quickly, this market will fail to live up to its promise.

Telangana is the third largest open access (OA) state in the country with an installed capacity 322 MW. The state has an attractive OA policy and added 145 MW capacity in 2015. But since then, activity has slowed down significantly. Last two years saw new capacity addition of only 22 MW and 64 MW respectively. 

Figure: OA solar capacity addition in Telangana, MW

Source: BRIDGE TO INDIA research

There are two key reasons for this slow down.

DISCOM reluctance to lose high paying consumers: NOCs for OA approvals have become increasingly difficult to obtain. We understand that NOCs are being declined on tenuous grounds including upstream/operational constraints, non-feasibility of OA on mixed feeders etc. Delays in installation of ABT (availability-based tariff) compliant meters and inadequacy of transmission/ distribution networks are also seen as major problems.

Regulatory uncertainty: While the state’s solar power policy exempts cross subsidy surcharge (CSS), Telangana State Electricity Regulatory Commission has dictated that exemption shall be permitted only if the state government reimburses DISCOMs for lost revenue. This has led to DISCOMs arbitrarily charging CSS even in instances of delay in disbursement by the state government (example – Sep-Nov 2017). Even though this amount has since been refunded back to the customers, the move creates a huge risk for both project developers and customers.

We believe that resistance from DISCOMs and regulatory uncertainty is likely to keep the state OA market subdued for the foreseeable future.

Chinese authorities have announced a major pull back in the country’s solar programme. Their new plan, titled 2018 Solar PV Power Generation Notice, proposes many radical and largely unexpected changes – utility scale target of 13.9 GW has been dropped altogether (2017 actual installation – 34 GW), annual distributed solar generation capacity addition has been capped at 10 GW (19 GW) and feed-in-tariffs (FITs) are to be abolished entirely for utility scale projects.

China’s revised plan would result in major surplus in global module supply over next few years;

Sharp fall in module prices would be a huge relief to the Indian developers and ease viability challenges for almost all projects;

The development is a major setback for the Indian manufacturers and for Indian government’s latest plans to support manufacturing;

The changes have been announced after the country added 53 GW of solar capacity last year (plus 53% over 2016), way ahead of all market expectations and far in excess of what China needs to add to achieve its target of 200 GW cumulative capacity by 2020. Unchecked expansion has led to a surge in subsidy and FIT bill with up to EUR 15 billion believed to be owed in past payments to developers. The government appears to be motivated by the desire to reduce financial burden of solar as well as to cut back on new generation capacity.

The new plan is expected to significantly reduce capacity addition in China – revised estimates for 2018 vary from 30-35 GW, a fall equivalent to about 20% of global demand. And there are concerns that the slowdown could last a few years with annual demand going down to as low as 20 GW over next few years. Downside impact on the manufacturing sector is expected to be severe. As other three major markets including US, India and Japan are also set to slow down this year, module manufacturers are faced with a vast oversupply situation. Prices have been coming down anyway for the past six months as seen in the chart below. But unlike some other analysts, we expect prices to bottom out at about USD 0.26-0.27/ W because the supply chain simply can’t endure any lower prices.

Source: BRIDGE TO INDIA research

Note: These are CIF prices for imported modules before GST and any other local taxes and duties.

The depressed module price outlook is an absolute positive for the Indian downstream industry. If module prices fall as far as expected, viability concerns of most projects would be addressed. Developers with significant pipeline – Acme, Azure, ReNew, SoftBank, Hero, Avaada, Mahindra and Engie – would benefit immensely. Tariffs for new auctions are expected to start falling again and may touch INR 2.40 levels in H2-2018 notwithstanding the ongoing safeguard duty uncertainty.

Of course, the news is a major setback for the Indian manufacturers and for Indian government’s latest plans to support manufacturing. SECI has already indicated informally that the 5 GW manufacturing tender may be delayed as a result.

SECI has issued a new request for selection (RFS) for creating integrated module manufacturing capacity of 5 GW. Interested parties can bid for setting up manufacturing capacity in blocks of 1 GW each. The only financial incentive available to them – assured aggregate project development capacity of twice the manufacturing capacity over four years! These projects can be set up anywhere in India and connect to the inter-state transmission system (ISTS). Combined manufacturing and project development capacity shall be allocated through a single auction process with a ceiling tariff of INR 2.93/ kWh for power generation. Winning bidders would therefore be allocated manufacturing and project development capacity of 1 GW and 2 GW respectively or multiples thereof.

The new scheme design is challenging with many curious features;

Few players have the willingness and capacity to participate in a tender of this scale/ complexity;

Weak module pricing outlook and poor competitiveness continue to hurt the prospects of local manufacturing;

The RFS comes after MNRE issued a concept note and an EOI on domestic manufacturing back in December 2017. The note proposed 30% capital subsidy for an aggregate integrated manufacturing capacity of 10 GW. We understand that 45 responses were received from a diversified mix of project developers and manufacturers.

The new scheme design is challenging with many curious features. All major raw materials, other than polysilicon, for manufacturing have to be sourced locally. Manufacturing capacity needs to come online within a period of three years and there are stiff penalties for not meeting even the intermediate milestones. The project development business would be free to use any modules irrespective of source or place of manufacturing – possibly to ensure scheme compliance with WTO agreements. Project development needs to be phased out evenly over four years with projects commissioned in last two years getting only 90% of the bid tariffs.

Our simplistic back-of-the-paper calculations suggest that 10% extra tariff on generation side would be equivalent to about 30% of capital cost for the manufacturing line. The government is essentially creating a subsidy pool out of extra revenues offered to project developers. But we believe that few players have the willingness and capacity to participate in a tender of this scale/ complexity. Combined capital cost of a 1 GW manufacturing line and 2 GW projects is estimated in excess of INR 110 billion (USD 1.6 billion). Minimum net worth requirement for bidders is INR 20.4 billion (USD 300 million). Our list of potential candidates is limited to ReNew, Adani, Softbank and Tata Power.

The scheme timing is also unhelpful because of the weak outlook on module pricing through most of 2018 and early 2019. Chinese and other international module suppliers are aggressively expanding capacity whereas, demand is set to weaken in most large markets. There is also no clarity as yet on safeguard duty decision. Lack of progress is baffling as the prolonged uncertainty is very damaging for the industry. It appears that MNRE may be trying to reach a consensus on the duty level together with Director General of Safeguards (DGS), local manufacturers and project developers.