Month: September 2018

Tamil Nadu Energy Development Authority (TEDA) has released a draft solar policy for comments. The draft policy envisions a total installed capacity of 8,884 MW by 2022; 40% (3,553 MW) of this capacity is expected to be added by rooftop solar systems. Key proposed provisions in the policy are:

Gross as well as net metering proposed to be allowed; group metering and virtual net metering have also been proposed;

No cap for rooftop solar systems on electricity exports to the grid;

Connected PV load at distribution transformer level enhanced from 30% to 120%;

Open access charges such as wheeling, banking and cross subsidy surcharges to be exempted for solar power;

Feed-in tariffs for solar energy storage, designed to incentivize injection into grid at peak hours;

Enforcement of Energy Conservation Building Code (ECBC) norms on mandated buildings; solar energy usage targets for public buildings, streetlighting and water supply installations;

10% of government vehicle fleet to be converted to solar powered electric vehicles;

The draft policy contains significant incentives for rooftop solar and open access solar. Rooftop solar has slowed down in Tamil Nadu and the state has lost its leadership position of late. Thus far, only residential and small commercial consumers were allowed to apply for net metering connections. Now, it is proposed to allow all consumer categories to obtain a net metering connection. We have heard many complaints in implementation with regard to timelines. Applications are often rejected or delayed indefinitely. Approvals can take anywhere between three to six months. The new policy proposes to cut down time required for meter installation to three weeks from the date of receipt of application.

The draft policy proposes use of bi-directional meters only for new connections from April 2019 to enable households to be ready for future rooftop solar adoption. It also proposes that municipalities and local urban bodies shall provide property tax waivers to domestic building owners who install rooftop solar plants.

The draft policy is progressive and tries to address many of the issues plaguing the solar power sector in Tamil Nadu. But given Tamil Nadu’s past record, it remains to be seen if execution can be effective. Increasing distribution level penetration would require infrastructure upgrades with significant upfront investment. Unless implementation issues are addressed, the policy is unlikely to translate to positive outcomes for the solar sector in Tamil Nadu.

Hongkong’s CLP Group has agreed to sell 40% equity stake in its Indian subsidiary, CLP India, to CDPQ, a Canadian pension fund. Meanwhile, Engie has also offered a 50% equity stake to STOA, a French institutional investor, in its wind business in India. These are just two recent examples of international strategic investors mitigating their India investment exposure.

International strategic investors are drawn to India by the large market size but find operating environment incompatible with their low-risk approach;

The willingness of financial investors to pay huge premiums for RE assets is aiding (partial) withdrawal of strategic investors;

For India, the waning interest of strategic investors is a huge loss;

CLP India is one of the largest international utility investors in India with operational assets of about 3,000 MW comprising 1,975 MW of coal/ gas, 100 MW solar and balance wind. After initially focusing on thermal power plants, the company has been reorienting itself towards RE by building FIT-based wind projects (pre-2017) and acquiring development phase solar projects from Suzlon. Notably, the company has so far refused to participate in any auctions.

CLP and Engie are not the only international investors to reduce their exposure. Previously, Fortum sold a majority stake in its 185 MW solar portfolio to UK Climate Investments (40%) and Elite Alfred Berg (14%). EdF has entered into a 50:50 JV with SITAC, an Indian developer. Singapore based Sembcorp – with a total operational portfolio of 900 MW – is also looking for a partial exit through listing of its Indian business.

Figure: Leading RE developers in India

Source: BRIDGE TO INDIA research

India is potentially a very attractive market for the deep pocketed utilities from around the world. It is the third biggest RE market in the world and signatory to Paris climate accord. Power demand is increasing at a healthy 5% per annum against a decline in their home markets. Project allocation process is transparent. But unfortunately, the attractions are offset by countless operating and regulatory environment challenges – cumbersome land acquisition, lack of transmission infrastructure, GST and safeguard duty related uncertainty, poor payment record of DISCOMs etc. Tender cancellations are unnerving. Most importantly, despite their lower cost of capital, the strategic investors are unable to compete with more adventurous Indian developers, who often make speculative and aggressive assumptions when bidding. That means it is almost impossible to earn target risk-adjusted returns.

In conclusion, the high-risk market environment is putting off strategic investors. They are pacing cautiously and prudently managing their risk. It helps that the financial investors – pension funds, sovereign wealth funds and PE funds – are willing to pay a handsome premium for (quality) RE assets. For India, their waning interest is a huge loss. It badly needs their patient capital, robust quality approach and superior technology.

The Ministry of Power has proposed a number of progressive ideas for the electricity sector in the form of draft amendments to the National Electricity Act and National Tariff Policy. Proposed amendments include obligating DISCOMs to supply 24X7 power, a new penalty mechanism for non-compliance with renewable purchase obligations (RPOs), penalties for PPA violations, tariff rationalization and elimination of tariff cross-subsidies in three years. The new proposed amendments follow several rounds of earlier drafts which included other fundamental reform measures including separation of content and carriage, elimination of tariff subsidies and renewable generation obligations for all thermal power generators.

The proposed amendments are highly desirable but simplistic – they do not address key reasons for many of the underlying failures;

The reform timetable is unclear because of impending general elections;

India needs urgent power sector reform but it remains an elusive goal for the foreseeable future;

The proposed amendments are radical in many respects and conceptually sensible for the most part. However, the proposed mechanics are highly dubious and almost impossible to implement. For example, the proposal to obligate DISCOMs to ensure 24X7 power supply is planned to be implemented through annual assessment of adequacy of their future long-term power procurement arrangements against expected annual demand. Forcing DISCOMs to enter into long-term PPAs is highly undesirable in our view. Instead, the thrust should be on creating a vibrant and liquid short-term trading market.

The other fundamental shortcoming in some of the new plans is that it is not clear how they would be implemented. For example, the underlying problem with RPOs is that they have not been enforced by regulators because of DISCOMs’ poor financial condition, and as a result, the renewable energy certificate (REC) market has never really taken off. If there is no enforcement, the proposal to levy fixed penalties of INR 1-5/ kWh, instead of relying on REC mechanism, would suffer the same fate.

The pathway to implementation also remains uncertain. The electricity act amendments need to be approved by the Parliament and individual states. But there is little likelihood of any progress in the coming winter session or even next year due to general elections due in May 2019. The tariff policy is, in any case, non-binding and hence unlikely to be adopted by states.

We agree that there is an urgent need for Electricity Act amendments. The Indian power sector is undergoing a major transformation and needs a completely new framework. The government has shown good intent but actual reform remains elusive for the foreseeable future.

Haryana Electricity Regulatory Commission (HERC) has recently issued regulations that  exempt solar power plants from transmission/wheeling charges, CSS and additional surcharge for 10 years from date of commissioning. The waivers are applicable for an aggregate capacity of 500 MW. The state’s current installed capacity stands at merely 68 MW.

As open access (OA)-friendly states like Karnataka and Madhya Pradesh have reversed favorable policies over the last year, Haryana is likely to be the next stop for developers active in the OA market. The state is a win-win proposition both in terms of financial attractiveness. We expect that the cost of OA solar power in the state will work out to around INR 2.60-2.80/ kWh cheaper than grid power. 

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Figure: Landed cost of power from different sources for industrial consumers, INR/ kWh

Notes:

Grid tariff includes variable energy charges, fuel surcharges and electricity duty. It does not include fixed (demand) charges.

Tariff for OA solar power is assumed at INR 4.00/ kWh and tariff for OA conventional power is assumed at INR 3.50/ kWh.

OA power accounts for 17% of total C&I power consumption (19 billion kWh) in the state.

Figure: Power supply for C&I consumers in Haryana

Setting a 500 MW limit for policy incentives is a desirable move. While driving capacity installation in the short-term, it will avoid burdening the state DISCOMs with unreasonably large capacity additions (as seen in Karnataka).

Developers and some aggregators have bought/leased land close to sub-stations in anticipation of upcoming demand.  We understand that applications for evacuation permits have been made for more than 2,000 MW so far. HAREDA is in the process of formulating a guideline to shortlist applications. It is expected that preference will be given to developers with proof of land availability and financial strength.

BRIDGE TO INDIA has prepared the India Solar Open Access Market 2018. This report provides an in-depth analysis of the market, historic growth and future projections, drivers and challenges, segmentation by location and business models, policy framework along with detailed state profiles. To know more, click here.

MNRE recently advised SECI to revise ceiling tariff downwards in new utility scale solar tenders to INR 2.68 (2.50 without any safeguard duty), a reduction of over 8% on the prevailing level of INR 2.93. The recent 10,000 MW integrated manufacturing tender also has a lower ceiling tariff of INR 2.75 (without any safeguard duty). We also understand that SECI has been writing to the DISCOMs promising supply of solar power to them at a price of INR 2.50.

MNRE’s price expectations are in conflict with market reality;

Because of the wrong pricing signal, the DISCOMS are not prepared to buy power at higher prices, leading to the risk of more tender cancellations;

Falling price expectations are discouraging technological innovation in the sector as well as delaying attempts to integrate variable RE power into the grid;

MNRE is trying to mistakenly force prices down in a bid to boost demand. In the last three pan India auctions conducted by SECI and NTPC, aggregating to 7,000 MW, weighted average tariff came out at INR 2.59. These auctions allowed full pass through of safeguard duty and hence provide a useful benchmark. MNRE is not only ignoring market forces but also seems unmindful of rising costs facing project developers.

Figure: Solar auction results in 2017 and YTD 2018, INR/ kWh

Module prices have fallen by more than 25% recently but this fall was already factored in the recent bids. On the other hand, many of the other adverse movements have not possibly been factored in these tariffs – INR has depreciated against USD by more than 10% over last year, interest rates have climbed up, transmission challenges are rising and commodity price volatility is also up.

The government’s intense focus on pushing prices down is potentially very harmful for many reasons. It is sending a wrong pricing signal to power purchasers (DISCOMS). They are not prepared to buy power at higher prices and it is not a surprise that an increasing number of tenders are being cancelled after auctions are completed. Second, we fear that risk-reward equation for project developers, already unfavourable, is getting more precarious. Bidding remains extremely competitive with developers prepared to make speculative assumptions to win projects. Forcing prices lower in such a market leads to a higher risk of unviable projects, implementation delays and poor quality – already formidable challenges in the sector.

Finally, and most importantly, the price emphasis is not only discouraging technological innovation in the sector but is also delaying attempts to integrate variable RE power into the grid. It is the main reason why, for example, storage has failed to take off in India. As tenders are evaluated only and only on price, the developers understandably prioritise producing maximum power at the lowest possible price, even if it is produced at the wrong time of the day. There is little attempt to vary the power generation profile through the day by altering project design or by using trackers, for example.

SECI has made several amendments to its RFS for the integrated project development and module manufacturing tender. The big change is reduction in manufacturing capacity from 5 GW to 3 GW. MNRE received strong representations from the private sector with most companies not happy with the integrated tender design or with the ratio of project development and manufacturing capacity. Accordingly, focus on manufacturing has been reduced – revised minimum bid size is 2 GW of project development capacity combined with 600 MW of module manufacturing capacity.

The tender conditions are highly restrictive and complex;

Although there is no operational links between manufacturing and project development aspects, there are cross-penalties for delays and/ or underperformance;

We believe that this is the wrong formula for supporting domestic manufacturing;

Unfortunately, not all changes are positive. Ceiling tariff has been revised downwards to INR 2.75 (US 3.9 cents). The manufacturing capacity still needs to be fully integrated from polysilicon onwards but is required to be fully operational within 2 years as against 3 years under the original RFS. The requirement to locally source all major raw materials, other than polysilicon, has been relaxed but new restrictions have been included for capacity utilisation (50-60% in the first two years) and technology (module efficiency must be minimum 19-20%). Time period for development of project capacity has also been reduced from 4 years to 3 years – 40% capacity should be operational within 21 months and balance 60% should be operational in another 15 months.

Overall, it remains a peculiarly designed tender with a very complex structure. Although there is no operational connection between manufacturing and project development, there are cross-penalties for delays and/or underperformance.

The rationale for the peculiar tender design is that developers can, in theory, bid extra tariff on generation to subsidise their investment in the relatively unattractive manufacturing business. But that logic is defeated by the government’s general unwillingness to accept higher tariffs.

Moreover, few players have the willingness and capacity to participate in a tender of this scale/ complexity. Other concerns for potential bidders include large minimum investment of about INR 90 billion (USD 1.3 billion), aggressive time scale for implementation and weak market outlook for module manufacturing business. Several developers and module manufacturers are exploring joint-venture possibilities but the challenges are still formidable.

It is difficult to see how proposed revisions would attract enough bidding interest. We believe that the government is tying itself into knots and a solution to promote domestic manufacturing remains way off. Another pre-bid meeting is scheduled for September and we suspect more revisions are in store.