Month: December 2018

MNRE is reportedto have asked states to proactively issue more RE tenders and reduce dependence on central government agencies. MNRE’s advice states that states are better positioned to structure tenders based on their price expectations, offtake requirements and RPO obligations.

As per our tender database, the split between state and central government tenders is almost 50:50 over the past five years although wide variations can be observed on an annual basis.

Figure: Share of central and state government tenders

Source: BRIDGE TO INDIA research

Interestingly, we find that tariffs in state government tenders have been consistently higher than in central government tenders. This is understandable due to higher DISCOM risk perception in comparison to central government agencies. The difference varies from state to state – for example, Gujarat DISCOMs, being highly rated, procure power at same rates as SECI and NTPC, but lower rated DISCOMs (Uttar Pradesh, Tamil Nadu, Madhya Pradesh, amongst others) haver to pay much higher premium for their own tenders. The tariff difference has persisted over the years although it has come down from an average of about 25-35% three years ago to about 12% over time.

Figure: Weighted average tariffs in central and state government tenders, INR/ kWh

Despite having to pay a substantial tariff premium in their own tenders, most states have curiously preferred this route over buying power from SECI and NTPC. Rajasthan and Andhra Pradesh are the only exceptions as seen in the chart below. There is no rationale for this behaviour unless the DISCOMs and state governments intend to deliberately delay payments or default on their PPA obligations, not a viable option under central government tenders. The project developers, in contrast, have become more indiscriminate in their choice of tenders as evident from the gradually diminishing tariff premium.

Figure: State-wise share of tenders issued during 2014-18

Source: BRIDGE TO INDIA research

Note: This chart excludes pan-India, inter-state transmission based tenders issued by SECI and NTPC.

So why the unexpected advice from MNRE to states now? We believe that it is an attempt merely to speed up tender issuance by eliminating any possible friction or coordination time between different state and central government agencies. MNRE is focused on achieving the 100 GW target and is keen to expedite issue of tenders.

As 2018 comes to an end, we take stock of the progress made by the RE sector in the year. After finishing 2017 on a record high, total capacity addition is expected to fall by 32%. The fall is most notable in wind (down 46%), followed by utility scale solar (down 36%). In contrast, rooftop solar has grown by about 75%.

Source: BRIDGE TO INDIA research

The one significant positive during the year was module prices falling substantially – by more than 40% – after rising through H2 2017. The fall has helped to counter effect of GST, safeguard duty and Rupee depreciation making the low tariffs bid out in early 2017 (nearly) viable.

MNRE’s mega roll-out plan, announced at the end of 2017, failed to live up to expectations. Tender issuance rose markedly but many tenders had arbitrary tariff ceilings or were poorly structured and were undersubscribed as a result (manufacturing linked tender 10,000 MW, SECI Uttar Pradesh 275 MW, SECI pan India hybrid 1,200 MW, Assam 100 MW). Further, tenders with an aggregate capacity of 4,025 MW were cancelled because SECI and the DISCOMs found bid tariffs unacceptably high (SECI 2,400 MW, GUVNL 500 MW, UPNEDA 1,000 MW and GRIDCO 125 MW). Total final allocation is still considerably up on the last year at 19,166 MW (+171% yoy).

2018 was also the year when many on-paper risks, ignored in the frenzy of online auctions, became real. GST, safeguard duty and BIS guidelines have together presented huge headaches for the sector despite CERC clarifications on ‘change in law’ relief. Projects across the board have suffered delays due to these and other challenges in procuring land and transmission infrastructure. 12% annual depreciation in Rupee and almost 2% increase in interest rates made a big dent in project returns. It is not a surprise that the investors are finally becoming more cautious. Access to capital has become more difficult – many of the expected IPOs and large M&A deals have stalled and the sector is getting consolidated.

There were other notable disappointments. Distributed solar holds so much promise but there has been no progress on SRISTI (rooftop solar) and KUSUM (solar pump) schemes. Announcement of the purported national storage mission has kept getting delayed.

We believe that the low point for the year was MNRE’s unrealistic tariff expectations, accusations of cartelisation and open threats that bids would be cancelled if tariffs rise. The mismatch in expectations betrays lack of appreciation of challenges facing private developers and can be potentially very damaging to future prospects of the sector. India needs billions of dollars of private capital and the government needs to send out an altogether more positive message to the investors.

Indian RE had nice momentum at the end of 2017. But moving another gear has proved too difficult and instead, we have taken a step back. The sector needs new thinking, policy visibility and systematic government action to address specific challenges rather than radical actions.

The one significant positive during the year was module prices falling substantially – by more than 40% – after rising through H2 2017. The fall has helped to counter effect of GST, safeguard duty and Rupee depreciation making the low tariffs bid out in early 2017 (nearly) viable.

MNRE’s mega roll-out plan, announced at the end of 2017, failed to live up to expectations. Tender issuance rose markedly but many tenders had arbitrary tariff ceilings or were poorly structured and were undersubscribed as a result (manufacturing linked tender 10,000 MW, SECI Uttar Pradesh 275 MW, SECI pan India hybrid 1,200 MW, Assam 100 MW). Further, tenders with an aggregate capacity of 4,025 MW were cancelled because SECI and the DISCOMs found bid tariffs unacceptably high (SECI 2,400 MW, GUVNL 500 MW, UPNEDA 1,000 MW and GRIDCO 125 MW). Total final allocation is still considerably up on the last year at 19,166 MW (+171% yoy).

2018 was also the year when many on-paper risks, ignored in the frenzy of online auctions, became real. GST, safeguard duty and BIS guidelines have together presented huge headaches for the sector despite CERC clarifications on ‘change in law’ relief. Projects across the board have suffered delays due to these and other challenges in procuring land and transmission infrastructure. 12% annual depreciation in Rupee and almost 2% increase in interest rates made a big dent in project returns. It is not a surprise that the investors are finally becoming more cautious. Access to capital has become more difficult – many of the expected IPOs and large M&A deals have stalled and the sector is getting consolidated.

There were other notable disappointments. Distributed solar holds so much promise but there has been no progress on SRISTI (rooftop solar) and KUSUM (solar pump) schemes. Announcement of the purported national storage mission has kept getting delayed.

We believe that the low point for the year was MNRE’s unrealistic tariff expectations, accusations of cartelisation and open threats that bids would be cancelled if tariffs rise. The mismatch in expectations betrays lack of appreciation of challenges facing private developers and can be potentially very damaging to future prospects of the sector. India needs billions of dollars of private capital and the government needs to send out an altogether more positive message to the investors.

Indian RE had nice momentum at the end of 2017. But moving another gear has proved too difficult and instead, we have taken a step back. The sector needs new thinking, policy visibility and systematic government action to address specific challenges rather than radical actions.

Last year, the state government of Maharashtra had announced a solar agriculture feeder scheme with the aim to solarise such feeders across the state. Under the scheme, developers would be selected through competitive bidding for project sizes up to 50MW. They would sign fixed-price PPA’s with Maharashtra State Electricity Distribution Company Limited, the state DISCOM, for 25 years. Project sizes are expected to range between 2-50 MW and power would be fed directly into the agricultural feeders. The state aims to solarise its entire agricultural load by 2025 (annual consumption of 30,261 million kWh), equivalent to total solar power capacity potential of about 20,000 MW.

Agricultural power subsidies are a major financial burden on the DISCOMs;

The government is rightly focusing on distributed solar power to meet the challenge of supplying reliable power to farmers;

Solar projects feeding power directly into agriculture feeders offer multiple advantages over solar pumps and other agricultural power schemes;

Providing regular grid power to farmers is an arduous ask for the DISCOMs. They are not only expected to provide (almost) free power to farmers but also endure large T&D losses. Agriculture accounts for a substantial 21% of total DISCOM power sales. As agricultural power is priced almost free across the country and cost of supply including T&D losses is about INR 6.00/ kWh, total annual subsidy cost for the DISCOMs is INR 1,173 billion (USD 16 billion). This is a huge burden on the DISCOMs and a source of most of their financial problems. It also explains why the DISCOMs need to artificially bump up industrial grid tariffs, making Indian industrial tariffs amongst the highest in the world.

Unfortunately, given crucial political importance of the farmer vote, tariff reform for agricultural power is not seen as an acceptable solution. To reduce subsidy burden on the DISCOM’s, many states have therefore announced schemes to separate agriculture feeders. And partly in a bid to promote solar power, the central government announced a solar pump programme in 2014 with a target of installing 1 million pumps (approximately 4,000 MW) by March 2021. Many states including Andhra Pradesh, Uttar Pradesh, Rajasthan, Gujarat and Punjab have issued tenders for solar pumps – total number of pumps installed is estimated to have crossed 240,000 as of March 31, 2018. The pumps are typically funded by 50-90% capital subsidies from the central and state governments with farmers funding the rest. But the solar pump programme has been hampered by poor uptake from farmers, complex procurement process and delays in subsidy disbursements.

Karnataka took a different approach in 2016 by launching a farmer’s solar scheme under which 295 MW capacity with projects of up to 3 MW size has been already commissioned on farmland. Gujarat and Delhi recently announced a slightly different route to develop distributed solar plants at farming sites with the help of financial subsidies and/ or private investments respectively.

Maharashtra has taken an altogether different and seemingly better approach to tackling the agricultural power subsidy problem. The expectation is that by setting up solar plants regionally and feeding power directly to agricultural feeders, average cost of supply can be reduced from INR 6.00/ kWh (rising every year) to about INR 4.00/ kWh fixed for 25 years, thereby cutting the subsidy bill by more than a third. The state has already allocated 250 MW of projects at tariffs between INR 3.07-3.26/ kWh and issued tenders for another 2,250 MW under the scheme.

We believe that the solar agriculture feeder scheme offers major advantages over solar pump and other similar farm power schemes – relatively easy land acquisition, no major transmission investment requirement, time matching between power generation and consumption, and finally, even regional spread of investment and jobs creation. Other states should watch Maharashtra’s progress closely.

BRIDGE TO INDIA has just completed the latest round of rooftop solar data compilation exercise. India added new rooftop solar capacity of 1,538 MW in the year ending September 2018, up a remarkable 75% over previous year. Total installed capacity is estimated to have reached 3,399 MW as on 30 September 2018.

Robust growth even in the face of safeguard duty and GST uncertainty reflects huge market potential of rooftop solar;

The government’s rooftop solar policy stance is outdated and lacking in vision;

Focus needs to evolve from reducing cost (capital subsidies, tax incentives and cheaper credit) to bolstering market confidence and tackling operational challenges;

We believe that 75% market growth in a year plagued by safeguard duty and GST uncertainty is absolutely fantastic. Ongoing fall in module prices should continue to drive growth in the next few years. The other notable aspect of market growth is that it has come despite rooftop solar policy stuck in a dead-end. The market has moved significantly in the last few years with rapid fall in capital cost, changes in business models and improved technical and operational experience of the industry. But government policy has hardly changed in the last few years. It remains predicated on capital subsidies, accelerated depreciation and an out-of-date net metering connectivity framework. There have been no new initiatives since announcement of the concessional credit scheme back in 2015. Inexplicably, there has been no progress on the promising proposals announced in December 2017. MNRE has even quietly scaled down the annual rooftop solar target for 2017-18 from 6,000 MW to 1,000 MW.

We think that lack of government policy initiative is a missed opportunity. Rooftop solar has huge growth potential and should be given more policy support particularly when utility scale solar is increasingly facing acute land and transmission connectivity challenges. Its share in total solar capacity addition has already gone up to 16% from 10% in three years. And we believe that this could go up to as high as 40% by 2022 in a strong policy support scenario.

The market is growing rapidly but still faces many hurdles. Concerns of DISCOMs, who see rooftop solar as a threat, need to be addressed through technical and financial support. The net metering policy framework needs an overhaul to accommodate new business models and do away with unnecessary caps on system sizes. Uptake of rooftop solar in residential and SME segments needs to be boosted by addressing poor consumer awareness and financing constraints.

Proactive government intervention can help in boosting growth and realising full potential of this compelling energy source.