Month: March 2019

MNRE has issued a new viability gap funding (VGF) scheme for setting up 1,000 MW grid-connected solar PV projects in north-eastern states. The government intends to provide VGF support of up to INR 10 million/ MW for these projects. Power is proposed to be sold to DISCOMs at a fixed tariff of INR 3.00/ kWh through SECI. Minimum bid size shall be 5 MW and commissioning timeline is specified at 21 months.

The VGF scheme was formulated in 2013 to make solar power affordable for DISCOMs when tariffs ranged between INR 7.00–8.00/ kWh. The scheme was revised progressively as module costs and solar tariffs came down to INR 3.00/ kWh. A total utility scale capacity of 3,935 MW was allocated between 2014 and 2016 with total VGF support of INR 30,899 million (USD 441.41 million).

But as solar capacity has grown rapidly, it has got more concentrated predominantly in south-western states including Karnataka, Andhra Pradesh, Rajasthan, Gujarat, Maharashtra, Tamil Nadu and Telangana. These states enjoy favorable conditions like high irradiation, land and grid connectivity availability, and supportive policies. But progress in the north-east has been limited. Total installed capacity across the seven states of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Sikkim and Tripura stands at just 17 MW. The pipeline capacity is 85 MW under an auction conducted by Assam Power Distribution Company Limited.

Slow progress in north-east is mainly attributable to low irradiation, land availability constraints and hilly terrain. Land acquisition possesses a unique challenge as free hold land occupation is not permitted for non-tribal consumers. Most of the land, typically hilly with poor road/ rail connectivity, is owned by government or local tribes and restricted for farming or forestry use. The region is also prone to frequent civil unrest and insurgency.

The MNRE scheme aims to overcome these challenges with VGF support to make solar power affordable for the states. We believe that this is a good initiative to make solar power accessible in the region. But the scheme size seems ambitious as total peak power requirement in the region is only 2,700 MW. To make the scheme effective, the government would also need to make dedicated efforts to solving some of the specific regional challenges around land and transmission availability.

India’s central government recently approved some changes to promote large hydro power (capacity > 25 MW). The changes include designation of large hydro as renewable power, a sub-limit for new hydro power purchase obligation (HPO) within RPO (targets yet to be determined) and measures to make it more affordable. There is also a provision for budgetary support for enabling infrastructure, roads and bridges, up to INR 15 million/ MW depending on project size.

The changes are desirable as they could reduce upfront cost of hydro power by 20-25%;

Because of complex land acquisition, geological, environmental and resettlement challenges, the sector has become unattractive to private investors and financiers;

Market-based pricing of power, creation of a vibrant ancillary services market as well as greater public sector investment are crucial for growth of the sector;

Designation as renewable power may bring some notional benefits (‘must run’ status, marginally lower cost of funding, accelerated depreciation) but the measures to reduce upfront cost of power are more important. Changes include increasing normative project life to 40 years (earlier 35 years), increasing debt repayment period to 18 years (12 years) and escalating tariffs annually by 2%. We believe that these changes, together with budgetary support, could bring down upfront tariffs by 20-25%.

Being a flexible source, large (reservoir-based) hydro power has always been talked about as an ideal balancing source for renewables. It can ramp up and down quickly, can provide peaking energy and ancillary services support to stabilise the grid. Its other main advantage is no need for any international technology or fuel source. In other words, it offers high energy security. In theory, India has an untapped potential of almost 100,000 MW of hydro power and that explains why the Indian government is so keen to support this power source.

But the benefits are outweighed by some formidable disadvantages. Hydro power is costly – capital cost ranges between INR 70-90 million/ MW – and has a long gestation period of around 8-10 years. Time and cost overruns are highly common because of complex land acquisition, geological, environmental and resettlement challenges. Over 12,000 MW of projects have been stuck in the pipeline for many years because of these challenges. Cost of power for some of the recently completed projects has come out higher than INR 8.00/ kWh. Water resource is also becoming more unpredictable.

Consequently, hydro power is deemed uncompetitive with other power sources. Private investors and banks are extremely reluctant to finance such projects. According to the International Energy Agency, global capacity addition fell from 31 GW in 2008 to 24 GW in 2017. India’s hydro capacity has been nearly stagnant. Total installed capacity of 45,400 MW has barely grown in the last ten years with average annual capacity addition of just 987 MW

It is unfortunate that the unique benefits of hydro power are not valued and monetised as such, making it uncompetitive, in particular, with solar and wind power. Market-based pricing of power, creation of a vibrant ancillary services market as well as greater public sector investment are crucial for growth of the sector. But the severe operational and environmental challenges make us believe that hydro power is likely to remain a marginal source even in a best-case scenario.

In January 2019, Government of Andhra Pradesh issued a new solar policy superseding the solar policy issued in 2015. The state aims to add 5,000 MW of solar power capacity in next five years.  Solar park capacity addition target for next five years is increased to 4,000 MW from 2,500 MW. The major change is the state’s abrupt pull back on open access. The state has decided to withdraw almost all incentives available to open access solar:

Electricity duty and cross subsidy surcharge (CSS) are no longer exempted;

Distribution losses are no longer exempted for projects injecting power at 33 kV or below;

Wheeling and transmission charges are exempted for connecting to national transmission grid, but exemption is withdrawn for intra-state open access projects;

Purchase of unutilized banked energy is capped at 10% of total banked energy during the year, price is reduced to 50% (100% earlier) of average pooled purchase cost (APPC);

Other relatively minor changes include support of the state nodal agency, NREDCAP, in acquiring government land for project developers. The government also proposes to give preference for power purchase, evacuation connectivity and energy banking to projects developed by local solar equipment manufacturers and related ancillaries.

Under the earlier policy proposed to be valid until March 2020, CSS was exempted for 5 years and electricity duty, transmission and wheeling charges and distribution losses were exempted for 10 years for projects connected at 33kV or below. The new policy makes the state unattractive for open access. It increases landed cost of solar power for industrial consumers by INR 2.38/ kWh and INR 0.95/kWh for third-party sale and captive consumption respectively.

Andhra Pradesh was considered a high potential state for open access due to its attractive policy regime, relatively easy land availability and strong solar eco-system. We had estimated open access solar capacity in the state to increase from 154 MW in December 2018 to about 500 MW by March 2022. That appears highly unlikely under the terms of new policy.

The policy reversal is clearly to appease state DISCOMs, who continue to struggle financially despite financial support from UDAY scheme. In 2017, Madhya Pradesh withdrew most incentives for open access solar projects, followed by Karnataka in 2018. Haryana is still struggling to implement the policy first announced in 2016 and has recently issued an order withdrawing exemptions of OA charges for third-party sale projects. As we maintained in our recent report on open access solar, the market is being held back by policy challenges with frequent changes and negative attitude of DISCOMs and other state agencies.

DISCOMs across India are increasingly railing against private procurement of renewable energy. Following Uttar Pradesh’s recent decision to cancel net metering for C&I consumers, Andhra Pradesh and Haryana have withdrawn most incentives provided to open access solar power. And Maharashtra State Electricity Distribution Company (MSEDCL), India’s largest DISCOM, has again petitioned the state regulator for cancellation of net metering and levying wheeling charges and losses to (previously connected) net metering consumers.

Loss of high paying C&I consumers severely hurts DISCOMs, who are pushing vigorously for a level playing field with private IPPs;

Abrupt policy reversals give the industry no adjustment time and risk panicking investors;

Policy risk poses the biggest challenge to private sale of power business;

Under the state’s new solar policy, Andhra Pradesh has withdrawn almost all incentives available to open access solar. Electricity duty, cross subsidy surcharge (CSS), distribution losses and wheeling charges shall be payable by most consumers wishing to avail open access solar power. Further, purchase of unutilized banked energy is capped at 10% of total banked energy during the year with applicable price reduced to 50% (100% earlier) of average pooled purchase cost (APPC). Under the earlier policy, proposed to be valid until March 2020, CSS had been exempted for 5 years and electricity duty, transmission and wheeling charges and distribution losses were exempted for 10 years. The new policy almost overnight kills open access solar prospects in the state by increasing landed cost of power for industrial consumers by INR 2.38/ kWh and INR 0.95/ kWh for third-party sale and captive consumption respectively.

Haryana has withdrawn incentives for third party open access solar before even a single project could come up under the state’s liberal solar policy issued in 2016. MSEDCL’s petition follows its earlier unsuccessful attempt in July 2018 to replace net metering with gross metering and levy grid usage charges on rooftop solar power. This time, the regulator has stated in its order that “there is merit in the submissions of MSEDCL” and reserved judgement until a public consultation process can be completed.

Taken together, the import of all these policy moves is loud and clear. Renewable IPPs face a tough adversary in the DISCOMs. More DISCOMs are believed to be considering similar measures to block private sale of renewable power and/ or levy CSS and other grid charges on private sale of power. With equipment costs coming down significantly in the past few years, the regulators are increasingly on their side. The best-case scenario for the industry seems to be to accept some charges and hope for a gradual, more predictable shift in policy with grandfathering of existing investments. The Uttar Pradesh net metering reversal has already led to a drastic slowdown in rooftop solar market in the state. We understand that developers and contractors have suspended work on all under construction projects.

BRIDGE TO INDIA has released its quarterly market report – India Solar Compass Q4 2018. The report contains detailed analysis of solar capacity addition, tender issuance, leading market players, prices and other market trends for the last quarter as well as our estimates for the next two quarters.

Only 1,446 MW capacity was added in Q4 2018 – 990 MW utility scale solar (68%) and 456 MW (32%) rooftop solar. Utility scale solar capacity addition has been sluggish since Q2 2018 and was down 46% over Q4 2017. In contrast, rooftop solar is growing strongly and is up 47% y-o-y. Total installed solar capacity has reached 28,057 MW in the country, split between 24,202 MW utility scale solar and 3,855 MW rooftop solar.

A few other highlights from the report:

There was an unprecedented spike in tender issuance with 51,118 MW of new tenders in the year (15 GW issuance in Q4 alone);

Floating solar, solar-wind hybrid and storage tenders picked up pace in 2018;

Project pipeline reached 17,658 MW as on December 31, 2018;

Module prices fell to USD 0.20/ W in Q4, down 44% over previous year but a substantial part of this fall has been offset by safeguard duty, GST and fall in Rupee-USD rate;

Adani (1,958 MW), Acme (1,801 MW) and Tata Power (1,300 MW) were the top three project developers in 2018;

The market place continues to be very competitive with extensive churn in player rankings. For utility scale projects commissioned in 2018, GCL (704 MW), Risen Energy (668 MW) and Trina (531 MW) were the leading module suppliers, while Sungrow (1,114 MW), ABB (1,110 MW) and Huawei (982 MW) were the top three inverter suppliers. Self-EPC continues to be preferred heavily with nearly 50% share of the total market. Sterling & Wilson maintained its lead (894 MW), followed by Mahindra Susten (357 MW) and L&T (210 MW).

We expect a significant pick up in construction activity in 2019, however module prices are expected to stay firm or even harden marginally.

A quick look at the profile of winning bidders in utility scale wind and solar auctions over last three years throws some pointed results. The role of international investors – utilities, developers and financial investors (pension funds, sovereign wealth funds, PE funds) – is becoming more critical. Their combined share has gone up steadily from 32% in 2016 to 65% in YTD 2019. Indian investors – large and small – are being squeezed out of the market as project sizes increase and risk-return equation becomes unfavourable.

International utilities and pension and sovereign wealth funds have been attracted by the large size of Indian RE market but they remain cautious investors;

With many Indian investors unwilling or unable to compete in the sector, the number of winning bidders has gone down by 70% in the last three years;

India needs to attract new pools of capital for meeting the needs of its energy sector;

In a capital-intensive sector, the dominance of large international investors is not altogether surprising. Capital cost per MW has fallen sharply (for solar) but that has been accompanied by significant increase in project sizes. Average bid size has more than doubled from 71 MW in 2016 to 153 MW in YTD 2019.

There are other factors explaining this shift. International utilities (Engie, EdF, Enel, Fortum, CLP, Sembcorp) and pension and sovereign wealth funds (CDPQ, CPPIB, GIC, ADIA, CDC) have been attracted to the world’s fastest growing energy market and a desire to invest in alternative energy. In an intensely competitive bidding market, they have been able to grow their presence by accepting low returns (and low risk). The PE investors, on the other hand, have taken an aggressive development approach with a 3-5 year exit strategy as exemplified by Actis (Ostro Energy) and AT Capital (Orange Power).

So far, so good. But the evolving nature of the market is also partly attributable to unwillingness or inability of even the largest Indian investors (Tata Power, Aditya Birla, Mahindra, Reliance, Jindal) to compete with their international counterparts. In other words, the project development business is losing depth. The number of winning bidders has gone down by 70% in the last three years. We believe that this trend is unsustainable and should be a worry for the policy makers. International investors are highly risk averse and could be spooked by rising instances of DISCOM payment delays, policy reversals, PPA renegotiation attempts and tender cancellations. A shallow market is also more prone to external shocks including currency movements, war and international trade restrictions.

There are 23,687 MW of tenders in the bidding pipeline. The aim is to build out over 100,000 MW of RE capacity and allied infrastructure necessitating investments over USD 70 billion in the next five years alone. India needs to attract new pools of capital for transforming its energy sector and achieving its geo-political objective of higher energy security. That requires shifting focus from reducing tariffs to offering a better risk-return profile to investors. 

MNRE recently issued a notification to create an “Approved List of Models and Manufacturers” of PV cells and modules in India. The notification states that all solar projects set up under any form of government scheme or programme would be required to procure cells and modules from the approved list. It would be effective from April 2020 onwards and approvals would be valid for only two years with renewal subject to demonstration of satisfactory performance of the respective products.

Detailed implementation guidelines are still awaited but the process outlined so far seems excessive and unworkable;

The relatively simple set of quality standards introduced in August 2017 are yet to become fully effective due to lack of procedural clarity, inadequate testing facilities and high cost;

It is hard to see how the notification would achieve its stated objectives of improving product reliability and energy security in the country;

The notification would affect almost the entire solar industry in India as it covers all schemes and programmes implemented by any central or state government agency or public sector entity. Recent tenders issued by SECI have already incorporated a condition asking bidders to ensure compliance with the new notification. To get on the approved list, the manufacturers would first need to get required BIS certification for each model of cells and/ or modules proposed to be used in India. The second step would entail a prescribed application to MNRE, followed by physical inspection and audit of the concerned manufacturing facility(ies) to ensure sufficient manufacturing capacity and expertise. The manufacturers would be required to provide extensive information to MNRE on a monthly basis covering purchase of raw materials, production and sale of goods as well as supporting bank statements and compliance certificates. The approved models and manufacturing facilities would be further subjected to random quality testing and site inspection respectively to ensure compliance.

The scope of the notification and proposed procedures seem overbearing to say the least. We shudder to imagine implementation nightmares and consequent effect on the supply chain. The relatively simple set of quality standards introduced in August 2017 have caused widespread chaos in the industry due to lack of procedural clarity, inadequate testing facilities and high cost. After some five extensions, the standards are yet to become fully effective.

The notification, a bewildering exercise in scope and methodology, raises serious concerns. We doubt if MNRE or any other public sector entity has the capacity to complete physical and financial audits of manufacturers worldwide. Will the companies even be willing to provide all the necessary information? Equally importantly, it is hard to see how the notification would address concerns around “product reliability” and “larger energy security” in the country. If anything, it seems like a convoluted exercise in protecting domestic manufacturing.