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Public sector rooftop market stays sluggish

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SECI issued a new tender in February 2019 for development of 97.5 MW grid-connected rooftop solar projects. These projects will be developed on pre-identified government buildings across all 36 states and union territories under CAPEX and OPEX modes (12.5 and 85 MW respectively). This is the first rooftop solar tender issued by SECI after the not-so-successful 1,000 MW tender in December 2016.

The basis of classification of states into different zones is not clear as the difference in tariffs between states with similar solar irradiance is steep;

Lack of pre-feasibility study may again delay execution;

PSU rooftop solar market has not achieved its potential due to on-site execution challenges and poor coordination between different government agencies;

States are classified into four different zones. States within the same zone will have a single ceiling tariff. Projects will be awarded through competitive auctions. Bidding will be conducted on a zonal basis instead of state-by-state.

Highest identified capacity is in Karnataka (7 MW) followed by Delhi and West Bengal (6 MW each). Average installation size is 269 kW across 362 sites. Bidders can avail capital subsidy up to INR 13,750/ kW (for zones 1-3) and INR 33,000/ kW (for zone 4) as per the latest MNRE notification.

Figure: Zonal classification of states

The basis for classification of states is not clear. States with similar solar irradiance such as Karnataka and Andhra Pradesh have been slotted into different zones.

Figure: Zone-based allocation capacity and tariffs

Source: SECI

SECI’s 1,000 MW tender failed to get desired results (only 226 MW actually allocated) because of lack of prior site assessment and poor coordination with the site owners. Commissioning was also delayed due to the long-drawn PPA signing process. We are, however, not sure if the correct lessons have been learnt. Site assessment has again been left to the bidders. Moreover, the site owners are required to bear net-metering charges, which may again delay commissioning of projects. Bid submission is also delayed due to the ongoing general election.

PSU customers account for only 15% of the total rooftop capacity. Despite the huge potential, this market has failed to take off due to execution challenges and poor coordination between different government agencies.

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Time to reconsider manufacturing policy

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Bid submission date for SECI’s 3 GW manufacturing linked tender has been extended again due to lack of responses. We understand that SECI has received no responses so far and it looks increasingly likely that this tender will be cancelled like its 10 GW predecessor. That pins all manufacturing hopes on the new PSUKUSUM and SRISTI schemes. But we are not hopeful that either of these initiatives would have a more positive ending.

Despite multiple initiatives, there has been only one significant manufacturing investment (Adani) in over 5 years;

The manufacturing policy has been compromised by focus on cheaper power generation, poor implementation and lack of long-term planning;

Unless there is some quick progress, the government should urgently rethink the policy;

Considering the huge goodwill spent by this government in support for domestic solar manufacturing and its MAKE IN INDIA policy, the failure is troubling. Notably, there has been no major investment in the sector since Adani’s 1.2 GW cell and module line becoming operational in 2016. Despite safeguard duty imposition in July 2018, India remains reliant on imports for more than 80% of its requirement. Local manufacturers, mostly small-scale with obsolete technologies, remain uncompetitive. Most of them are sitting idle and incurring heavy losses. Leading international module manufacturers with multi-GW scale capacities (Jinko Solar, Trina, JA, LONGi) have, over the years, examined viability of local manufacturing and decided to stay away.

The reasons for poor progress are not hard to understand. Notwithstanding an attractive domestic market, odds are stacked up against manufacturing because of red tape, high costs and poor infrastructure. Government support could make the difference but has been blighted by confused priorities between manufacturing and cheaper power generation as well as poor implementation. In 2014, the government rejected anti-dumping duty deeming it a risk to generation capacity prospects. And it blinked again in 2018, when safeguard duty was imposed for only 2 years and at a much lower level than recommended by the Ministry of Commerce.

Table: Manufacturing initiatives in the solar sector 

Source: BRIDGE TO INDIA research

As this table shows, the bleak situation has forced the Indian government to come out with ever more radical ideas in the hope that something will stick. In the process, the government has ended up creating an environment of confusion and risk for the entire sector. It is time for an urgent rethink on this subject and perhaps, a retreat if things don’t improve soon.

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Solar park scheme simplified and downscaled

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In March this year, MNRE introduced significant changes to the government’s solar park scheme. The amendment envisages SECI acting as the solar park developer and paring down the scope of services to bare bones land and external transmission infrastructure. Internal transmission and all other infrastructure facilities (site levelling and fencing, access to water and electricity, drainage etc) have been excluded for SECI developed parks. The amendment also restricts central government capital subsidy of INR 2 million/ MW to only SECI parks.

By restricting central government subsidy support to only SECI solar parks, MNRE has effectively signalled an end to other modes of solar park development;

Solar park share has fallen to about 15% of total solar project development, much lower than the 67% target;

Downscaling the scheme scope is a step in the right direction but unless implementation improves urgently, the scheme risks losing relevance;

The new model also envisages significant changes in the fee that the project developers must pay for using solar parks:

100% of land ownership or rental cost;

40% of external transmission infrastructure cost subject to a range of INR 1-3 million/ MW;

INR 0.02/ kWh to the respective state government for facilitating land acquisition;

INR 0.02/ kWh to SECI for creation of a payment security fund to mitigate DISCOM payment risk for use by all project developers in solar parks;

The scheme still allows other government authorities or private companies to develop solar parks. However, restriction of central government subsidy support to only SECI solar parks effectively signals an end to other modes of development.

The scheme, with a target capacity of 40,000 MW, was supposed to play a crucial role with two-thirds share of the 60,000 MW utility scale solar target. But solar park development has not taken off as envisaged due to implementation delays, poor infrastructure quality and exorbitant cost. So far, MNRE has approved 38 solar parks with a total capacity of only 23,104 MW across 16 states. As of 31 December 2018, actual project capacity commissioned and in pipeline was only 4,195 MW and 4,125 MW (17% and 20% share) respectively. The share falls to just 14% for new tenders issued and in various stages of bidding.

Figure: Share of government solar parks

Source: BRIDGE TO INDIA research

Notes: This data is as of 31 March 2019 except for commissioned capacity, which is as of 31 December 2018. Pipeline capacity comprises projects which are allocated but not yet commissioned. New tender issuance includes tenders for which auctions are yet to be completed. Data excludes all solar parks developed outside of MNRE solar park scheme.

The scheme, announced in 2016, is a good example of bold policy initiative and the Indian government’s commitment to the sector. It has been immensely helpful in scaling up growth and attracting international investors. But poor coordination between different government agencies, delays in land acquisition and completion of transmission works have reduced the scheme’s effectiveness. Solar park development – land identification and acquisition, approvals for land conversion, clearances, levelling of land, developing internal roads, transmission and other infrastructure – usually takes up to 3-4 years. Nonetheless project tenders have been rushed out in a bid to meet capacity addition targets.

We believe that paring of the scheme to just land and external transmission connectivity is a step in the right direction. On-the ground implementation needs to improve urgently, failing which, the scheme risks losing relevance. Despite growing challenges in land acquisition and transmission connectivity, most developers are beginning to go the self-development route as is evident from the success of many large recent ISTS auctions.

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Time to act on PV waste management

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Following a recent blueprint on use of antimony in glass used in solar modules by MNRE, India’s Ministry of Environment, Forest and Climate Change (MOEFCC) is expected to announce a policy on waste management by end-April 2019. This process follows an order issued by the National Green Tribunal (NGT) in January 2019 to formulate a policy for waste management of solar modules containing antimony. The NGT order was, in turn, in response to an individual plea filed in August 2017.

Antimony constitutes less than 0.3% of the textured glass used in manufacturing of solar modules. The World Health Organisation (WHO) considers that in its form of use in modules i.e. antimony trioxide, it has very low toxicity. However, there is a possibility of antimony leaching into soil and water and having an adverse impact on human health. This possibility is higher for India as most of the existing module waste is likely being sent to unregulated landfills in the absence of requisite recycling facilities.

The NGT order is likely to ignite a serious discussion on PV waste management in India, which remains a grey area. Apart from antimony, a solar module may contain lead or cadmium compounds as well as potentially hazardous fluoro-polymers.

Figure: Material composition of c-Si solar modules, %

Source: Managing India’s PV Module Waste, BRIDGE TO INDIA

Modules have a 25-30 years lifespan. But this problem of PV waste management is beginning to grow already because of increasing instances of quality rejects, breakages and transportation losses, amongst many other reasons for early retirement of modules. In our report titled, ‘Managing India’s PV Module Waste’, we estimate annual module waste generation to increase to 1.8 million tonnes by 2050.

Considering the current scenario, we believe that there is an urgent need to have a clear regulation allocating responsibility for PV waste management so that the recycling cost of a PV system is built in at the time of market supply. The existing central bidding guidelines rest the responsibility of waste disposal on the developers in accordance with e-waste rules. However, these rules make no mention of PV waste. Appropriate quality standards promoting use of environmentally sustainable materials in manufacturing of solar equipment can also go a long way in lessening the burden of PV waste management.

The antimony case provides a perfect opportunity for the government and the private sector to work together towards timely action on PV waste management.

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Financially weak DISCOMs the darkest cloud on the horizon

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In November 2015, the Indian government announced UDAY scheme to restructure DISCOM balance sheets and address persistent concerns about their poor bankability. The scheme, the third such restructuring package for DISCOMs in the last seventeen years, was supposed to be a fundamental reform for long-term revival of the power sector. But after some easy wins – transfer of debt to the state governments and reduction of T&D losses from over 30% to an average of 21% – progress has stalled and the crisis is building up again.

DISCOMs are lapsing into financial trouble again and again because of their public ownership and lack of political will for an effective reform;

Financially weak DISCOMs pose multiple risks to the power sector beyond just delayed payments;

With long-term reform of the power sector still a few years away, the risk is unlikely to disappear any time soon;

Where did UDAY go wrong and why again? The answer lies in public ownership of the DISCOMs and lack of political will. The state governments, who call all the effective shots in the sector, have continued to use cheap power as a vote grabbing tool. Some of the key scheme provisions such as funding of ongoing operational losses by the state governments have not been implemented. Poorly run DISCOMs have been unable to find operational efficiencies to improve payment recovery and T&D loss position. But the most important reason is that there is no one to effectively police the underperforming DISCOMs. The regulators are too weak to act and the central government does not have the tools (or willingness?) to punish errant state governments.

Good financial health of the DISCOMs is important not just for timely payments to power projects but also for overall health of the sector. Financially stretched DISCOMs are unlikely to have the necessary resources to buy power to meet demand from agricultural and residential consumers. That has grave consequences for power demand and the government’s ‘power for all’ mission. Loss making DISCOMs are also more likely to indulge in deviant behaviour such as tender cancellation, curtailment, PPA renegotiation as well as resist growth of rooftop solar, open access and other market-based mechanisms.

Something must give as this is not a sustainable situation. Frequent busts and restructuring cycles have a heavy cost on the economy and should not be allowed to go on.

Regrettably, long-term reform of the power sector seems a few years away. If the state is unwilling to act, the private sector could force a solution by staying away from new investments. The developers are reeling under the crisis and yet ignoring DISCOM risk as there is too much capital chasing too few projects. Even the worst rated DISCOMs are able to get attractive tariffs from top-tier developers as happened in the recent Uttar Pradesh solar auction. Instead, some developers are appealing for a trade receivable discounting facility but we are not hopeful of that either as the lending community is increasingly opposed to DISCOM risk.

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Bold vision but half-baked implementation

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Last three months have seen frantic activity in the renewable energy sector. Many new policies – SRISTI and KUSUMFAME, storage, ALMM – and tenders aggregating 30 GW were rushed in the last quarter but we now have a relatively quiet six week period until the last votes are cast on 19 May 2019. We will use this period to take stock of this government’s track record.

Arguably, the single biggest achievement of the BJP government has been to upscale the 2022 renewable target to 175 GW. It was generally accepted from the outset that the new target was more of an aspiration rather than a logical calculation. It is not surprising that actual progress has significantly lagged the targets, but the bold target has nonetheless proved to be a huge draw for the sector. It has provided an overarching vision and helped attract vast amounts of domestic and international capital.

The ambitious target was quickly followed up with a series of very positive and decisive policy measures tackling different facets of the sector – UDAY (DISCOM finances), government solar park scheme (land and transmission connectivity), ‘Power for All’ (power demand) and DCR (domestic manufacturing). There was a huge wave of optimism around the sector with concrete on-the-ground progress. Solar and wind capacity addition rose steadily year-on-year until 2017. Indeed, solar sector added more capacity in 2018 than all other sources combined.

Figure: Power generation capacity addition, MW

Source: BRIDGE TO INDIA research, CEANotes: 2018-19 numbers are preliminary estimates. Thermal capacity addition numbers are stated net of retirements.

The other notable success of this government has been the scheme to provide grid power connectivity to every single household in the country. Progress on the SAUBHAGYA scheme has been impressive laying foundation for higher electrification of the economy.

But there have been many terrible disappointments on the way. Around 2017, things began to go awry. Safeguard dutyquality standards and GST were botched creating confusion and increasing costs for the entire supply chain. Slow progress on solar park scheme and transmission network expansion led to undersubscribed tenders and execution delays. Domestic manufacturing remained an elusive goal. The vital electricity sector reform made almost no progress. DISCOM financial position started deteriorating again, as the elections approached, resulting in critical payment delays. Needless damage was caused by arbitrary tariff ceilings and tender cancellations. Taken together, these measures have drained confidence and forced many small-mid size players out of the sector.

On a more macro note, the two biggest failures have been: 1) failure to exploit distributed and off-grid potential of solar – focus on large projects and concentration of capacity in a few states are increasing execution challenges and exacerbating grid management problems; and 2) limited progress on making the power system more resilient (more flexible thermal plants, smart grids, pumped hydro and other balancing resources, ancillary services market, demand side management).

The new government will have its work cut out as the RE sector needs a new vision and a substantial policy reform to pave way for sustained growth.

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MNRE issues a new 12,000 MW scheme to promote domestic manufacturing

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In early March 2019, MNRE finally launched the much-awaited 12,000 MW PSU scheme to promote domestic manufacturing. The scheme envisages majority government-owned entities to set up projects using domestically procured cells and modules for consumption of power in-house or sale to other government entities excluding DISCOMs. MNRE is offering an incentive in the form of viability gap funding (VGF) of up to INR 7 million (USD 100,000)/ MW. However, the projects would be awarded through competitive auctions to bidders quoting lowest VGF. Operational period for the scheme is four years until the end of FY 2022-23.

The scheme has been designed specifically to stay clear of WTO restrictions;

The tough open access policy environment is expected to be a major deterrent;

Persistent failure on the ‘Make in India’ front is creating uncertainty for the entire industry and detracting from other objectives;

The curious design of the scheme is specifically to stay clear of WTO restrictions. It is not open to private developers even if they want to sell power to public sector consumers. Projects can be located anywhere in the country and connected to national or state transmission grid. Expected commissioning timeline is 18 months from the date of project award.

The VGF support is designed to counter resistance from public sector consumers as domestically produced cells and modules are about 10-15% more expensive than imported modules (no safeguard duty applicable after July 2020). That means capital cost for these projects could be higher by up to INR 3 million/ MW over cost of projects using imported modules. The proposed VGF amount is therefore more than adequate. VGF would be disbursed in 2 tranches – 50% on appointment of EPC contractor (within 6 months of the project award) and 50% on project completion.

So far, so good. There are two major challenges, however. First, the projects would need to rely on (most likely, inter-state) open access mechanism for sale/ consumption of power, which is increasingly fraught with policy challenges. Other than Delhi Metro buying solar power from projects in Rewa in Madhya Pradesh, we have not seen much evidence of public sector consumers buying open access solar power. This problem can be solved partially by developing the projects on a captive basis rather than for third party sale. But not many public sector entities have necessary operational and financial experience to do so. Second, with total operational cell manufacturing capacity in India at only about 1,200 MW per annum, the bidders would struggle to procure qualifying module supplies.

SECI has already launched a 2,000 MW tender under the scheme with proposed bid submission date of 3 May, 2019. We expect multiple extensions and amendments. While the government should be lauded for persisting with support for domestic manufacturing, the policy ideas have not been thought through. The resulting uncertainty is unfortunately hanging like a dark cloud over the industry.

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