Month: January 2019

Rooftop solar market in India has seen share of OPEX model increase from barely 2% in 2012 to an estimated 35% as of September 2018. The model is growing rapidly as it is very attractive particularly for the C&I consumers – they make assured cost savings over grid power without any upfront capital investment. Plus, system installation and operation responsibility lies with specialist third party developers who have an incentive to ensure better quality and reliability.

We expect the share of OPEX model to continue to increase in the medium term and peak at it around 40% by 2020.

Figure: Capacity addition trends in the Indian rooftop solar market

Source: BRIDGE TO INDIA research

C&I consumer segment dominates the OPEX market with 78% share. The project developers prefer C&I consumers because of larger installation size (typically > 500 kW) and comfort on their long-term credit risk. Public sector consumers account for 20% share of OPEX market. Many central and state government agencies are aggregating demand from such consumers and issuing large tenders. However, progress so far has been slower than expected because of complex tender based processes and on-site execution challenges.

Residential OPEX market has still not taken off unlike in some of the western countries because of poor financial incentive for such consumers to adopt rooftop solar (low grid tariffs), poor scalability and high execution challenges.

Longer term, we believe that OPEX market share would peak at about 40% and start declining thereafter as capex costs continue to fall and consumers gain more awareness about technical and operational aspects of installing rooftop systems. This market is also bound to face growth challenges over time as the number of acceptable credit worthy C&I consumers is limited.

Gujarat has cancelled the Banaskantha solar park based 700 MW utility scale solar tender for which an auction was conducted in December 2018. Winning bidders were SB Energy (250 MW, INR 2.84/ kWh), Fortum (250, 2.89) and Engie (200, 2.89).  Reason for cancellation is same as ever and arbitrary – the winning tariffs are “too high.”

Main reason for high tariffs is the extremely high solar park charges fixed by another arm of the Gujarat government;

5,300 MW of valid winning bids have been cancelled by different agencies in the last year in the expectation that they can keep driving down tariffs ever lower;

Arbitrary tender cancellations are taking the shine off India’s solar story and threaten to turn the investors away;

Winning bids were about INR 0.40/ kWh higher than in the last solar auction conducted by the state in September 2018. Main reason for high tariffs is that solar park charges in Banaskantha were fixed at extremely high levels (by another arm of the Gujarat government). We have computed net present value of these charges at INR 8 million (USD 0.1 million)/ MW, about 2.5 times the cost of similar services in the open market. If the charges were set at more reasonable levels, the winning tariffs would have been lower by about INR 0.30/ kWh. We understand that the winning developers argued this point with the Gujarat government and offered to reduce tariffs if solar park charges are made more competitive but with no result. Curiously, unlike other states, Gujarat does not specify any ceiling tariffs in its tenders. So, there is no formal guidance to bidders on acceptable tariff range.

This cancellation comes after a previous cancellation of a 500 MW tender by the state in April 2018 where winning tariffs came in the range of INR 2.98-3.06/ kWh. In that instance, cancellation was partly justified as the auction took place just weeks before announcement of safeguard duty and the developers duly added a fat risk buffer to the tariff. Three months later, the state got much lower tariffs of between INR 2.44-2.45/ kWh but the reduction was largely due to sharp fall in module prices and clarity over safeguard duty risk. Unfortunately, the procurement agencies have learnt the wrong lessons and cancelled 6,725 MW of valid project bids in the expectation that they can keep driving down tariffs ever lower.

Figure: Utility scale solar capacity – tender progress since January 2018, MW

Source: BRIDGE TO INDIA research

Gujarat attracts leading international developers to its tenders because of its sterling reputation, highly rated DISCOMs and prompt payment track record. But the state is damaging its standing by repeatedly cancelling tenders and runs the risk of turning investors away.

Indian RE has faced many challenges in the last year. Many players, hurt by adverse risk profile and low returns, have exited the sector. There are clear signs of consolidation in the bidding activity and the number of active, deep-pocketed bidders is down to about ten. Government agencies need to beware – they need to provide attractive investment environment to attract capital. Solar is growing in many other parts of the world and international capital, in particular, can be fickle.

India’s general elections are around the corner. Scheduled date is May and final detailed time-table should be announced soon around early March. There is emerging consensus that no single party is likely to return with majority in the parliament. The increasing possibility seems one of a highly fractured verdict and a weak coalition government. This is giving rise to fears if RE could lose policy thrust in India. The other fear is that a weak government may more generally herald a period of economic uncertainty with focus on populist vote winning policies rather than on fundamental sectoral reform.

We expect no dilution in policy support for RE irrespective of who forms the government;

There is little correlation between governments run by different ruling political parties and RE development;

Major policy action would be off limits for a few months putting initiatives like National Storage Mission and SRISTI at risk;

We have two broad takeaways from the pressures of electoral cycle and emerging political environment. First, the policy purdah would be imposed as soon as the elections are announced. The government would still be able to make minor policy tweaks and issue project tenders in the run up to elections, but major policy action would be off limits. That puts initiatives like National Storage Mission and SRISTI at risk of considerable delays. Populist giveaways and gimmicks are expected to attract voters in the next few months. Most of these are likely to be aimed at the farming sector and low-income section of the population. There may be some funding for the KUSUM solar pump scheme but any meaningful progress is unrealistic.

Second, we believe that the sector enjoys broad cross-political support and there is unlikely to be a retreat irrespective of who forms the government. Support for the sector is seen as being development-oriented. It is also seen as a way to earn international plaudits as India’s efforts to form International Solar Alliance (ISA) point to. A state level analysis confirms that there is little correlation between governments run by different ruling political parties and RE development. Examples – Karnataka and Andhra Pradesh, two leading RE states have been ruled by Congress and TDP respectively, whereas Maharashtra and Uttar Pradesh lag significantly despite strong BJP governments. ­

Figure: Commissioned and pipeline RE capacity vis-à-vis March 2022 target

Source: BRIDGE TO INDIA researchNotes:

This chart includes data for only utility scale solar and wind projects.

Rajasthan, Madhya Pradesh and Chhattisgarh have recently elected Congress led state governments.

For pan India tenders with provision for inter-state transmission connectivity, capacity is assigned to states based on offtake rather than project location. This information is not available for about 5,400 MW of pipeline projects.

Encouragingly, there are some studies showing that coalition governments do not have an adverse impact on economic growth and performance. But a note of caution is still needed – day-to-day policy formulation and urgency behind the sector would be likely casualties in the event of a coalition government.

To read more about our assessment of the RE sector in 2019, please read our latest report – India RE Outlook 2019.

In the last six weeks starting December 2018, 22 utility scale tenders aggregating 15,453 MW of capacity have been issued for wind and solar power projects in India. This spree has come as MNRE announced a revised plan in December 2018 to issue tenders for an aggregate capacity of 80,000 MW by March 2020 – equivalent to a phenomenal monthly average of 5,000 MW.

It is encouraging to see more demand for RE from leading power consuming states such as Maharashtra, Gujarat and Uttar Pradesh;

Progress on tenders last year was very poor as multiple tenders were undersubscribed and/ or cancelled resulting in weakening investor confidence;

Issuing more and more new tenders without addressing operational and financial constraints faced by the sector is a pointless exercise;

In total, there are now 24,862 MW of utility scale projects for which tenders have been issued but auctions are yet to be held. Most of these tenders are for solar project development. Share of wind and EPC tenders has been steadily falling. It is pleasing to see a surge of issuance in Maharashtra, the biggest power consuming state and a relative laggard in the sector.

Figure: Project location for tenders issued for which auctions are yet to be held

Source: BRIDGE TO INDIA research

Note: Jammu & Kashmir tender is for supplying power to other states.

MNRE has been keen on issuing more tenders since December 2017. However, actual progress has been much slower due to multiple instances of tender undersubscription and cancellation. Private sector response has dimmed in response to poor tender design, low tariff expectations and transmission sector bottlenecks. Ratio of successful project allocation to tender capacity issuance fell to a record low last year.

Figure: Tender issuance and auctions, MW

Source: BRIDGE TO INDIA research

As MNRE goes on another tender issuance spree, there is a growing sense of déjà vu. Lessons have not been learnt from past failures and this makes us believe that 2019 would be a repeat of the last year. First, power demand growth simply does not merit issuance of new tenders at such scale. Demand has picked up in the last six months to about 8% but we believe that this is a temporary boost ahead of the general elections as industrial activity remains subdued. Many DISCOMs are cautious about buying more RE power despite record low tariffs because of RE’s intermittency problem.

Second, we don’t see any room for tariffs to go down in the near-term as costs are expected to remain stable while economic and political environment is likely to be somewhat volatile. At the same time, competitive intensity in the private sector is falling. In such a scenario, investors are expected to be more cautious with capital raising posing significant challenges for most of the year.

In essence, there is a growing divergence between expectations of DISCOMs and procurement agencies on one hand, and project developers and their investors and lenders on the other hand. Unless the market becomes more investor-friendly, bidding environment is expected to remain challenging.

The state of Uttar Pradesh is gearing up to apply blockchain technology to the energy sector. In October 2018, UPERC, the state regulator, organized a conference on creation of an eco-system using blockchain technology to explore decentralized energy trading, track RE production and facilitate payment gateways for charging EVs. More recently, the regulator has proposed to allow peer-to-peer power transactions using blockchain technology in its rooftop solar PV regulation, 2019.

Blockchain, a nascent technology most often associated with cryptocurrency, is seen as a new frontier in the energy space. It is a distributed database technology that securely maintains a growing ledger of data transactions and other information among network participants. It is expected to change the way power is traded with new business models for peer-to-peer transactions between distributed power generators and storage facilities on one hand, and EVs and power consumers on the other hand. It can potentially allow power generators to set up dynamic smart contracts in response to ongoing changes in demand-supply and other market factors, creating a dynamic pricing system. The ability to record every asset, transaction and energy flow in a way that is tamper proof, verifiable and accessible to all participants could be transformational.

Internationally, Europe is the most active region for blockchain pilots, with utilities working on EV charging, connected home and wholesale trading and settlement. One of the early successful case studies for use of blockchain technology is the Brooklyn micro-grid project in New York that creates localized energy marketplaces for transacting energy across existing grid infrastructure. In October 2018, WePower, a European blockchain-based RE trading platform in collaboration with the local transmission operator shifted all their energy trading data onto blockchain.

In the Indian context, we believe that the regulatory system needs to change very fundamentally to exploit the potential of blockchain technology. According to the Electricity Act, 2003, no person/ entity is allowed to undertake trading or distribution of power without a license. Also, the Reserve Bank of India (RBI) has barred Indian banks from serving virtual currencies and cryptocurrency exchanges which are considered as the basic transaction entity in blockchain. It is hard to see how blockchain can be adopted in the energy sector unless the regulations are relaxed. For that, we need a consensus amongst policy makers, regulators and other stakeholders on wider reform of the power sector and viable mechanisms for blockchain adoption.

2018 was the first year to see a dip in RE capacity addition in India. The highest reduction was in wind (-52%), followed by utility scale solar (-29%) but rooftop solar continued to grow healthily (+73%). 

Figure 1: RE capacity addition, MW

Source: BRIDGE TO INDIA research

2018 saw a huge surge in new tenders. However, actual project allocation was much less due to multiple instances of tender cancellations. 

Figure 2: Tender issuance and auctions, MW

Source: BRIDGE TO INDIA research

Tender issuance was dominated by SECI pan-India tenders (21,300 MW). Maharashtra, Uttar Pradesh, Andhra Pradesh, Gujarat and Karnataka were the top five states to issue new tenders. 

Figure 3: Tender issuance in key states, MW

Source: BRIDGE TO INDIA research

Solar PV module prices saw a steep decline in 2018, falling from USD 0.33/ W at the beginning of the year to USD 0.21/ W at the end. 

Figure 4: Solar PV module prices, USD cents/ W

Source: BRIDGE TO INDIA research

Note: These prices are for imported modules on a CIF basis (before any local tax or duty). Wind tariffs declined substantially in 2018 and stayed below solar tariffs for most part of the year. 

Figure 5: Average solar and wind tariffs, INR/ kWh

Source: BRIDGE TO INDIA research

The Indian government’s revised deadline for providing universal electricity access to all households under the SAUBHAGYA scheme lapsed on 31 December, 2018. The scheme portal shows that 24 million households, 97% of the revised target, have been electrified since October 2017. The only states yet to achieve 100% electrification – Rajasthan (current status 98%), Chhattisgarh (99.6%), Assam (95%) and Meghalaya (83%).

SAUBHAGYA and ‘power for all’ have the potential to boost power demand by 3-5% in the short-term and much more in the long-term;

Universal availability of power can create a virtuous growth cycle and attract more investments into the sector;

Insulating DISCOMs from political pressure to make them financially sustainable is the key to longer-term reform of the sector;

The progress, notwithstanding minor slippages, is impressive. It is a crucial milestone for the power sector in India. If the government is serious about the proposals to provide 24×7 power and penalise DISCOMs for any failure to do so, it can bring about a radical transformation in the sector. We have already seen a notable uplift in power demand this year, which in the absence of major upturn in industrial activity points to success of SAUBHAGYA. The increase seems due as much to new connections as to a gradual decline in load shedding in the past 2 years.

Figure: Power demand growth, GW

Source: CEA, Ministry of Power

Universal availability of power has immense potential to drive socio-economic growth and creating a strong virtuous growth cycle. And it is critical for overall revival of the sector in many respects. Better utilisation of existing assets, many of which remain stranded because of lack of PPAs, would mean improvement in asset returns and bank balance-sheets. It also means higher demand for renewable power. As demand increases (and prices go up as a result), more investment capital is bound to flow into the sector.

But there is the inevitable question – how much of this progress is sustainable? Can rural and residential consumers really expect 24×7 power on a long-term basis? There is certainly some historic evidence that power ‘demand’ goes up in five-yearly cycles in advance of the general elections. DISCOMs have little incentive to supply power to rural and marginal residential customers as their tariffs are extremely low. At the same time, cost to serve these consumers is relatively high because of high T&D losses and poor collections.

For SAUBHAGYA benefits to endure and become permanent, we need genuine reform of the power sector – separation of ‘content’ and ‘carriage,’ insulation of DISCOMs from tariff subsidies and tariff rationalisation – but that seems a distant prospect yet.