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Floating solar needs new technical standards

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SECI recently completed auction for India’s first large-scale floating solar plant. The 50 MW project at Rihand dam in Uttar Pradesh was won by Shapoorji Pallonji with a bid of INR 3.29/ kWh. The winning tariff is about 10% higher than observed in respective ground-mounted auctions.

Floating solar is still in nascent stages of development in India with installed capacity of just 2.7 MW at present. However, MNRE has ambitious plans and intends to add 10 GW of floating solar as part of its 227 GW renewable energy target by 2022. Capacity under development has already reached 1,639 MW.

Like any new technology in its early stages of deployment, floating solar faces some unique challenges and risks. Main challenges include higher capital cost, absence of bathymetric and hydrographic data on water bodies and exposure to moisture and Ultraviolet (UV) radiation. Similarly, lack of quality standards for systems installed on water surface poses unusual performance and environmental risks. High ambient moisture content combined with long-term UV exposure makes floating solar plants susceptible to higher degradation. Use of high-quality modules with appropriate water vapour transmission rate and floats which provide necessary protection against harsh aquatic environment can substantially mitigate this risk.

Moreover, as floating solar systems are usually deployed in ecologically sensitive areas, inadequate design and/ or poor quality can pose water contamination risk during plant construction and operation. Potential leaching out of hazardous materials used in making these components could have a negative impact on both human and marine life.

As deployment of floating solar is gathering pace, it is pertinent that formulation of adequate specifications, quality and safeguard standards is taken up urgently by policy makers and procurement agencies to support healthy market development. This would go a long way in providing quality assurance to the various stakeholders and pave way for accelerated growth in a sustainable way.

To access our recent floating solar report, click here

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Chinese companies boost their presence in the Indian inverter market

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After occupying a dominant position in module supply, the Chinese companies are aggressively expanding their presence in the Indian solar inverter market. Their combined market share in utility scale projects in the latest available 12-month period has gone up to 46% from 1% just three years ago. 3 of the top 5 players are from China. There is a similar story in rooftop solar with aggregate Chinese market share jumping to 43% from nil just three years ago.

In the hyper price-sensitive Indian market, the Chinese players have been able to gain market share by offering lower prices;

Growing Indian volumes have led the larger Chinese inverter companies to look at India as a key strategic market and an export hub for other markets;

The European and Japanese players are pushing back with more local sourcing and innovative technology, and won’t be pushovers unlike their module manufacturing counterparts;

In 2015, Huawei became the first Chinese inverter company to enter India. It successfully offered a unique concept – string inverters in utility scale projects – at an aggressive price point and grew rapidly. That has drawn in Sungrow, TBEA and many other smaller players including Growatt, Solis, GoodWe, K-Star and Sineng.

Figure: Market share for solar inverters in India

Source: BRIDGE TO INDIA researchNote: Data is shown for a 12-month period from October 2017-September 2018.

The Chinese are formidable competitors with extensive product ranges, nationwide sales and service networks and, of course, aggressive price points. In the hyper-competitive Indian market, where reducing cost remains number one priority for most developers and customers, the Chinese players have been able to offer the right product at the right price. Partly as a result of that, inverter prices in India have fallen steadily in the last 18 months despite large Rupee depreciation – from about INR 1.80/W to 1.60/W at present for central inverters and from about INR 2.75/W to 2.40/W at present for string inverters (prices given are on CIF basis).

We believe that the Chinese companies will likely make further gains in the market particularly in rooftop solar. Sungrow has already set up an Indian assembly plant. TBEA, Huawei and some others are also looking at India as a key strategic market and looking to set up local manufacturing facilities.

But the European and Japanese players won’t be pushovers unlike their module manufacturing counterparts. They are also expanding their product offerings and most of them (ABB, Hitachi, TMEIC, Siemens) have established supply chains in India. They should be able to compete evenly both on technical and commercial aspects.

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Module industry going through step changes

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Global solar demand is expected to fall for the first time ever this year – to about 85-90 GW from 103 GW last year. Most of the leading countries including China, India, US and Japan are reporting significant declines in capacity addition. Result – multi-crystalline module prices have fallen to USD 0.22/ W, down nearly 40% in the last nine months and are predicted widely to fall further to USD 0.18-0.19/ W by Q2 next year. This price crash is having a profound impact on the entire sector value chain.

Bigger module manufacturing players are breaking away from the industry by expanding aggressively and investing in new technologies;

There are question marks over long-term survival prospects of smaller players;

In a fast-moving industry subject to fierce pressure, the project developers need to be extra cautious in choosing equipment suppliers;

It is difficult to know how the module manufacturers will ride out these tough conditions. On one hand, the industry is getting consolidated with a new ‘super league’ of players with 5-10 GW of global capacity. At the same time, aided in part by China’s Top Runner programme, some players (LONGi, GCL, Tongwei) are making aggressive investments in new technologies and expanding their footprint. The module technology landscape, dominated by plain multi-crystalline modules for long, is suddenly looking like a rainbow. Development of new technologies and form factors – n-type, mono and mono-PERC, half-cut cells, IBC, HJT, bifacial, frameless and glass-glass modules – is adding complexity to the business. And even though the module players have benefited from large price falls in upstream polysilicon industry (see chart below), it is feared that many of the smaller tier-2 and tier-3 players in China may undergo a financial collapse. But that is dependent on Chinese government policy and plans for the sector (there are some talks that China may increase its 2020 solar target by as much as 60 GW).

Figure: Module manufacturing value chain, USD/ W

For the project developers, changes in the module industry pose all kinds of challenges. At a recent conference, some developers seemed confused – they were unhappy that the module manufacturers are pushing new technologies and products without proven track record. Some even complained that project design process is becoming too cumbersome as they have to run multiple design configurations. More pressing concerns relate to quality, bankability and after-sales service in a fast-moving industry subject to fierce price pressure.

Nonetheless, the Indian developers, facing their own viability challenges, are increasingly buying (cheaper) modules from relatively smaller and/ or unknown players. The short-term price focus may not be a wise move in these times.

Figure: Market share of module suppliers in Q3 2018

Source: India Solar Compass Q3, 2018, BRIDGE TO INDIANote: This data is for utility scale projects commissioned in the quarter.

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Gujarat aims for the sky

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In June 2018, the state government of Gujarat launched a new scheme – Suryashakti Kisan Yojna (SKY) – for developing distributed solar plants in rural areas. Under the scheme, farmers can set up solar PV plants up to a capacity of 1.25 kW per horsepower of contracted load. The pilot phase envisions a total capacity of 175 MW with a total capital cost of INR 9 billion (USD 0.13 billion). Participating farmers are required to contribute only 5% of the capital cost. 60% of the cost would be funded by central/ state government and balance by loans secured by state government from NABARD or other financial institutions on behalf of the farmers.

Power generated from the solar plants is proposed to be used for captive consumption. Any excess power can be sold to DISCOM at a fixed tariff of INR 3.50/ kWh under a 25-year PPA. The state government would further offer a top-up tariff of INR 3.50/ kWh for the first 7 years. The scheme is structured such that these top-up payments can be used to pay back the loan. In effect, if the scheme works as expected, the farmer is expected to bear only 5% of the capital cost and get PPA revenues to the extent of surplus power generation.

The scheme is intended to provide financial benefit to DISCOMs by cutting loss-making agricultural power consumption from the grid. At present, power supply to agriculture connections for irrigation is heavily subsidized – it is sold at only INR 0.60/ kWh against actual cost of supply of INR 6.00/ kWh. Farmers participating in the scheme would be required to forego future tariff subsidies. 12% of total electricity consumption in Gujarat is estimated to be utilized in irrigation – equivalent to 1,449 million units. That works out to a hefty annual subsidy bill of approximately INR 7 billion for irrigation alone.

The scheme offers other advantages on paper – it proposes to generate solar power without requirement of any additional transmission and evacuation infrastructure. It is also meant to curb overdrawing of underground water as the farmers are incentivised to sell surplus power to the grid for additional income.

Similar previous subsidy-based farm schemes have been blighted by delay in subsidy disbursements, poor physical execution on-the-ground and lack of interest from farmers. It seems they prefer the surety of tariff subsidies over the hassle of installing solar equipment. We also feel that the scheme arithmetic is not all that favourable for the government once all the operational costs and inefficiencies are factored in.

It remains to be seen if the SKY scheme would be any more successful than past initiatives.

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RE market forced to consolidate through the primary route

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In the first nine months of this year, 10,081 MW of utility scale solar capacity has been auctioned, up nearly 70% over the entire year 2016. A close look at the auction results shows some very interesting trends – despite the sharp increase in auctioned capacity, number of winning bidders has fallen to 26 from 49 two years ago. Average winning bid size has increased to 124 MW from 63 MW. And market share of top five developers has increased to 65% from 47% in 2016.

Smaller players are being squeezed out by adverse risk profile, increasing volatility in the sector and stagnation in secondary market activity;

With M&A activity being relatively slow, consolidation is being dictated by the primary market;

As much as 50% of total wind and solar capacity may be stranded if current owners are not able to find successful exits;

Figure: Top winning developers in utility scale solar auctions

Source: BRIDGE TO INDIA research

Market consolidation is a sign of evolving maturity of the Indian solar sector. Competitive bidding and capital-intensive nature of the sector mean that scale is becoming increasingly more important. Larger players benefit not only from procurement and execution efficiencies but also greater access to financing and better ability to absorb risks. The smaller players are unable to cope with adverse risk profile and increasing volatility in the sector.

An especially interesting aspect of this consolidation is that it is being dictated by primary market. The secondary route ie, M&A has failed to take off, unlike in most other countries. Deals have been held back by mismatch in valuation expectations, poor corporate governance norms and sub-standard construction quality. That scenario is unlikely to improve anytime in the near future particularly as interest rates are on the way up. In a declining rate environment, refinancing provided a sweet upside to the sellers and acted as a deal catalyst. But the trend has reversed. We estimate that a 2% increase in senior debt cost can depress equity valuation by as much as 15%.

Our research shows that successfully completed M&A deals in the last

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Sputtering RE needs decisive government help

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India added total solar and wind capacity of 2,074 MW (up 70% over previous quarter) in Q3 2018. Total installed capacity reached 61.1 GW on 30 September 2018 – including 23.2 GW utility solar, 3.4 GW rooftop solar and 34.5 GW wind.

Quarterly capacity addition has been highly erratic because of uncertain auction time-table;

The sector faces several challenges related to government policy, transmission infrastructure and financing;

Unaffected by many of these challenges, rooftop solar is growing robustly and is expected to outshine other RE sources by 2022;

Including expected capacity addition in Q4, total RE capacity addition in 2018 is estimated at 9.4 GW. This is down 34% over 2017 and over 50% short of MNRE’s FY19 plan of 20.8 GW. Next year should be much better with capacity addition jumping to about 15.5 GW. But it is expected to fall again in 2020 and unlikely to recover materially in the subsequent few years. These short-term ups and downs are due partly to volatility in auctions time-table. As the following chart shows, project development, tender issuance and auction time-table have been unpredictable for some time now.

Figure: RE capacity addition and tender progress, MW

Source: BRIDGE TO INDIA research

But long-term outlook for the sector is looking decidedly downbeat for other reasons, most of which are internal – MNRE has failed to decisively address GST and safeguard duty issues. It has also blundered with restrictive tariff caps and poor tender design resulting in tenders getting routinely cancelled and/ or undersubscribed. The latest affected tender is SECI’s 50 MW project in Maharashtra, for which there was only one bidder. Adverse movements in INR and interest rates are not helping. Meanwhile, MNRE has extended time allowed for completing projects from 12-18 months to 21-24 months because of transmission capacity constraints. As a result, we believe that India would fall well short of the March 2022 target of 160 GW for solar and wind power unless decisive remedial steps are taken immediately. Our revised best-case capacity estimate stands at 111 GW. One bright spot in the entire RE market is rooftop solar, which is growing faster than our expectations. We believe that this market is growing at a robust 70-80% annually. Largely unaffected by policy uncertainty and not reliant on land or transmission infrastructure, Indian consumers are beginning to exploit full potential of this opportunity thanks to sharp fall in module prices (down 30% in last nine months). We expect rooftop solar’s share of total solar market to jump from about 10% last year to over 40% by 2022.

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