Month: February 2019

After years of anticipation, grid scale storage tenders have finally started picking pace in India. Seven tenders with a total storage capacity of 84 MWh (with 78 MW of solar PV capacity) have been issued in the last one year. These tenders have been issued by SECI, NTPC and NLC predominantly in remote areas of Jammu & Kashmir, Lakshadweep, Himachal Pradesh and Andaman & Nicobar Islands. There is huge market interest in storage tenders but participation in tenders is still limited because of specific eligibility conditions requiring minimum construction or operational experience and/ or domestically sourced content. Mahindra Susten, L&T, BHEL, Hero, S&W, IBC Solar, Exide have been amongst the most active bidders so far. There has also been some concern from the private sector that storage specifications are not clearly defined. But we believe that this aspect is improving slowly as awareness of storage technologies is improving gradually and procurement authorities are beginning to define specifications in more detail. 

There have also been two new wind-solar hybrid tenders (160 MW and 600 MW) issued in Andhra Pradesh with optional storage component. India’s current grid-scale commissioned storage capacity is only 10.75 MWh. AES and Mitsubishi inaugurated a 10 MW, 10 MWh facility in Delhi. Other relatively small systems are located in remote villages in West Bengal (1.73MW), north-east (6.85 MW) and Lakshadweep islands (2.19 MW). The market holds huge potential particularly as the growing share of variable renewable energy – up from 5.6% in 2014 to 10.6% in 2018 – creates a formidable challenge in maintaining grid stability. Because of environmental and commercial concerns associated with traditional storage systems including pumped hydro, we believe that battery-based energy storage systems would dominate the market. The Government of India has been planning to issue a National Energy Storage Mission along the lines of National Solar Mission with specific targets for capacity deployment, local manufacturing and policy support. It is expected that announcement of NESM – due imminently – would provide a major boost to the market.

Last week, India’s Cabinet Committee on Economic Affairs finally issued its approval for two signature policy schemes announced by the government more than a year ago. The two schemes – SRISTI, covering rooftop solar and KUSUM, covering agriculture solar – are ambitious. The target is to add total distributed solar capacity of approximately 36,000 MW and 25,750 MW with a capital support of INR 118 billion and INR 344 billion (total USD 6.5 billion) respectively by March 2022.

The two schemes are an unrealistic and outdated mix of capital subsidies, feed-in-tariffs and financial incentives;

There is no money or time left for this government to implement the new schemes;

Lack of imagination in policy making is a worrying sign for the sector;

In rooftop solar, the government wants to continue capital subsidy support of 20-40% for residential consumers. Plus, it aims to offer 5-10% of benchmark capital cost as incentives to DISCOMs to get their support for this market. The government also wants to solarise agriculture through installation of 1.75 million solar pumps, another 1 million pumps powered by solar power and 10,000 MW of distributed power plants of up to 2 MW capacity each. A capital subsidy of between 60-80% is proposed for pumps and there is a promise of feed-in-tariff, to be approved by respective state regulators, for power injected into the grid.

As the following table shows, the numbers are not realistic. Moreover, the proposed incentive of 5-10% for DISCOMs is insignificant both in terms of absolute quantum and as compensation for loss of their revenue

Apart from the fact that the numbers do not seem to add up, it is not clear how the two initiatives would be funded. The central government is walking a fiscal tightrope and has been unable to find money for the sector. MNRE’s budgetary allocation of INR 52 billion for FY 2019-20 remains unchanged over previous year. The National Clean Energy Fund, with a cumulative corpus of INR 860 billion, has already been appropriated for other spending needs.

The essence of cabinet clearance after more than a year of announcement of the two schemes is also unclear. At this stage of the political cycle, it seems more like an exercise in political posturing rather than a serious intent. With the ‘model code of conduct’ likely to be imposed from early March, actual implementation is unlikely during the term of this government. That is perhaps a good thing. Upfront subsidies offer little value for money and have failed to achieve purported benefits in the past. They distort incentives for installers and lead to mis-selling and shoddy execution. Moreover, the high cost of administering subsidies wipes out almost 50% of the proposed benefit.

In January 2019, Uttar Pradesh Electricity Regulatory Commission (UPERC) issued new Rooftop Solar PV Grid Interactive Systems Gross / Net Metering (RSVP) Regulations, 2019. These regulations supersede RSVP Regulations, 2015. Key features of the policy are as follows:

Cancellation of net metering for commercial, industrial, institutional and government consumers;

System capacity to not exceed 100% of contract demand and be within 1 kWp – 2 MWp;

Surplus power generation under net metering compensated at INR 2.00/ kWh, far below APPC (average power purchase cost);

Power injected under gross metering arrangement to be compensated at weighted average tariff of large-scale solar projects as discovered in competitive bidding in the latest financial year plus an incentive of 25%;

Maximum aggregate capacity at local distribution transformer is increased by 3 times and set as 75%;

DISCOMs to publicly provide information regarding available capacity of distribution transformers;

Cancellation of net metering for C&I consumers is a major policy setback and it would seriously affect growth of rooftop solar in Uttar Pradesh. It is not clear if already installed systems (223 MW capacity) will be grandfathered under the old regulations. If not, all these systems as well as systems under installation would become unviable overnight. C&I and public sector consumers account for an estimated 98% share of total installed rooftop solar capacity in the state.

C&I consumers save INR 8-12/ kWh payable for grid power by adopting rooftop solar. But under gross metering, net realisation would come down by more than half to about INR 4.00/ kWh – equivalent to weighted average tariff for large-scale solar project auctions in FY 2018 (INR 3.20/ kWh) plus 25% incentive. Not only is this tariff too low, timely payment from DISCOM is far from assured as state DISCOMs remain amongst the weakest in the country.

We understand that various market participants are lobbying for policy reversal but that appears unlikely. Tamil Nadu has already implemented such a change in somewhat ad hoc manner, while Maharashtra has also tried unsuccessfully to back track on net metering. The message is loud and clear – the DISCOMs are going to fight against free net metering (or indeed any form of net metering). In our opinion, policy volatility is one of the biggest risks facing this market. The industry needs long-term policy visibility and grandfathering of existing investments. Any changes should be introduced after due consultation and phased in to avoid drastic shocks.

Something unique happened in the Renewable Energy Certificate (REC) market last month. Prices of solar RECs moved above the specified floor (INR 1,000/ MWh) for the first time ever and touched INR 1,750/ MWh. Non-solar RECs also traded above the floor level at INR 1,500/ MWh. The price jump came even as trading volumes continued to stay low.

The reason for price rise is that the REC supply has not kept up with demand. Total RE capacity registered for RECs was only 3,948 MW as on 31 March, 2018, just 5.3% of total operational RE capacity. The number of RECs issued fell to 6.2 million in 2018 from 8.2 million in 2015. One of the most popular mechanisms for projects to generate RECs has been to sell ‘brown’ power to DISCOMs at APPC (average pooled purchase cost). Even today, about 42% of total capacity registered under REC mechanism is supplying power to DISCOMs at APPC. But with power prices falling steadily for both RE and conventional sources and supply exceeding demand, the DISCOMs are no longer keen to buy uncontracted ‘brown’ RE power. The affected projects are therefore increasingly forced to sell ‘green’ power to C&I consumers under open access route and forego RECs.

In contrast to diminishing supply, REC demand has been looking up. A disproportionate 40% of demand is coming from private sector entities – captive power producers and open access consumers – keen to fulfil their compliance requirements. Compliance by DISCOMs is still patchy with many state regulators treating them softly because of their perilous financial position. But MNRE’s RPO monitoring cell seems to be gaining traction and should help push demand further.

As a result of the demand-supply mismatch, REC inventory accumulated because of poor compliance in the early years is nearly exhausted. Unsold stock of solar and non-solar RECs has fallen to 0.5 million and 1.7 million from 4.4 million and 13.2 million respectively in the last two years.

Notwithstanding the short supply of RECs, it is clear that this market has lost its relevance as a tool to support RE growth. With cost of RE power falling to below INR 3.00/ kWh, the DISCOMs are reluctant to buy RECs as evident from low trading volumes in the last three months. The solution lies in making RE accessible to resource deficit states in north and east India. We believe that a new mechanism is therefore needed to replace RECs. Enabling RE power trading on the exchanges and facilitating ‘contracts for difference’ style structures may be one potential solution.

A DISCOM payment crisis has been building up again in India. The Ministry of Power payments portal shows that outstanding dues increased to INR 410 billion (USD 5.9 billion) by November 2018 (March 2018: INR 250 billion). These numbers are based on limited available data, actual amounts are likely to be much larger. Worst offending states include Uttar Pradesh, Tamil Nadu, Karnataka, Andhra Pradesh, Telangana, Madhya Pradesh and Punjab. Payment delays range from 2-3 months to as much as 9-10 months in the worst cases. We understand that dues of some large renewable IPPs may have gone up to as high as INR 15 billion (USD 0.2 billion).

UDAY has failed to provide sustainable solution to DISCOM finances;

The crisis has been worsened by rollout of the SAUBHAGYA scheme and impending general elections when tariff rises are politically unpalatable;

Weak DISCOM finances and delayed payments undermine all government moves to reform the sector;

Late payments have been a chronic challenge for the power sector. There were hopes that the UDAY scheme, introduced in 2015, would provide a lasting relief with emphasis on debt transfer, tariff rises and reduction in T&D losses. The one-off financial engineering – transfer of (nearly 70%) debt to the respective state governments – was successful in temporarily shoring up balance sheets. But disappointingly, there has been little progress on key fundamental aspects of the UDAY scheme. The sector continues to see heavy meddling by the local governments as the election season looms. Average annual tariff rise of between 0-4% in the last three years has been nowhere near sufficient to meet rising costs. T&D losses are also stuck at about 21% despite the target of reduction to 15% by 2018-19.

The payment crisis owes partly to the success of the Indian government’s SAUBHAGYA scheme. Sale of power at subsidised prices to small residential consumers is costly and incurs a heavy loss of about INR 6.00/ kWh. There is some evidence to show that load shedding to agricultural and residential consumers has fallen drastically in advance of the elections. (should we provide a link here?)

As a result, annual DISCOM losses, which are estimated to have fallen by two-third from about INR 600 billion in FY 2014-15 to INR 200 billion in FY 2017-18, are expected to again increase this year. At the same time, state government power subsidy bills are also rising. Punjab is a glaring example with annual subsidy bill of INR 140 billion (USD 2 billion), more than 10% of the state’s annual budgeted revenues.

Delayed payments not only starve the IPPs of liquidity and put them at risk of default to lenders, but also eat into profits as IPPs rely on more expensive short-term debt or equity to bridge cash deficit. To make matters worse, the DISCOMs usually don’t even pay interest on delayed payments in contravention of the PPA provisions. The crisis has blown to such an extent that a radical move to make advance payments to IPPs is being proposed. But we are not very optimistic – the problem is behavioural/ systemic rather than structural.

The payment crisis comes at a very inopportune time as the industry is already reeling under multiple problems. It is one more factor draining away industry confidence and a solution doesn’t seem in sight.

After failure of its flagship 10 GW integrated manufacturing tender, SECI has issued another integrated tender combining project development (3 GW) and module manufacturing (1.5 GW). There are some notable changes over the previous tender. Minimum bid size has been reduced to 1 GW project development and 0.5 GW module manufacturing, down from 2 GW and 0.6 GW respectively. Backward integration is now limited to cell manufacturing as against wafer manufacturing. Cross-penalty structure between the two businesses is much simpler now. And ceiling tariff has been reduced marginally to INR 2.75/ kWh from INR 2.85/ kWh earlier.

Reduction in tender size is helpful from a risk management perspective but the proposed manufacturing business would be significantly sub-optimal in size;

The ceiling tariff of INR 2.75/ kWh is border line attractive at best;

We put the odds of this tender going through successfully at 50:50;

Smaller scale of project development, limited backward integration and simplification of penalty structure are helpful changes. They reduce capital exposure and should attract more players into fray. But the core underlying problem remains – the combination of two disparate parts of the value chain – manufacturing and project development – does not stack up as the two businesses have very different core competencies and risk-return expectations. Few companies want to be present in both manufacturing and project development.

Moreover, the new manufacturing business would be sub-optimal in size. In a cut-throat business, scale is seen as a major competitive advantage. Share of top ten module manufacturers globally has gone up to 60% from just 42% in 2015. Incredibly, average global shipment of top ten players has gone up to 6.3 GW per annum from less than 2.5 GW just three years ago.

Figure: Top ten global module suppliers in 2018

Source: PV-Tech, BRIDGE TO INDIA research

The proposed minimum manufacturing capacity of 0.5 GW is miniscule in comparison. And it will be seen as a loss leader by potential bidders. Unfortunately, the ceiling tariff of INR 2.75/ kWh for project development is not enough to compensate for this downside.

With safeguard duty having failed to shore up domestic manufacturing, the government is under pressure. It is doubling down on the curious integrated tender concept. We are not sure if the new tender will enthuse the market sufficiently. Some of the Chinese manufacturers, keen to diversify their manufacturing bases in view of trade war with the US, are bound to show interest. We put the odds of this tender going through successfully at 50:50.