Month: May 2019

CERC released a discussion paper for a redesign of ancillary services mechanism in India in September 2018. The paper has been issued in response to various shortcomings in the existing ancillary services mechanism, introduced in 2015, as also highlighted by the power system operator, Power System Operation Corporation (POSOCO).

Ancillary services are meant to relieve transmission congestion and minimise frequency fluctuations in the national grid. These services are generally provided by primary (response time of few seconds-5 minutes), secondary (30 seconds-15 minutes), fast tertiary (5-30 minutes) and slow tertiary (more than 15-60 minutes) reserves. India has a very limited ancillary services market with only the slow tertiary reserves being utilised at present. Maintenance of primary reserves is mandated by Indian Electricity Grid Code but seems far from being opened to market. A pilot project for secondary and fast tertiary reserves is currently underway and both services are expected to be opened to market shortly.  

Other than the limited size and nature of the market, a major problem in efficient operation of the ancillary service market is that DISCOMs use these services mainly to meet their energy needs during peak hours as against for meeting unforeseen changes in supply of and demand for electricity.

Figure: Reasons for use of ancillary services, number of ancillary services instructions

Source: POSOCO

The ancillary services regulation predominantly utilises services provided by central thermal power generators, which have ramping limitations and are not fit to provide fast response services. It mandates provision of ancillary services in the form of regulation up (increase generation over and above scheduled generation) and regulation down (reduce generation below scheduled) services at the instruction of the system operator. A limiting factor is that power generators are eligible to provide only their unrequisitioned capacity i.e. capacity that has not been scheduled for dispatch, which is usually not available in required quantity at the required time. Such services are paid for at a pre-determined price — INR 0.50/ MWh for regulation-up service paid to service provider and 75% of variable charge paid by the service provider for regulation-down service.

The discussion paper proposes to do away with these restrictions through various progressive changes:

Include inter- and intra-state power generators as well as RE generators within the ambit of ancillary services regulations;

Shift to market-based pricing through uniform price auction;

Co-clearance of day-ahead energy and day-ahead ancillary service bids i.e. minimise the joint cost of providing energy in the day-ahead market and ancillary services while determining market clearing price ;4

Inclusion of non-synchronised reserves under the ambit of slow tertiary services;

Development of ancillary services market in India has been hindered by non-availability of adequate reserves and lack of appropriate financial incentives. Allowing RE generators and state power generators to participate is a welcome step. Moreover, successful implementation of gate closure concept, as recommended in another discussion paper by CERC on real time markets, is critical for all suppliers to participate. This concept would assist the system operator in grid balancing but may face resistance from DISCOMs as they frequently resort to revision of schedules close to real time to manage imbalances.

The discussion paper is a small but long-awaited step in moving to a market-based ancillary services framework. India needs an effective and deep ancillary services market to support growth of RE and new technologies such as energy storage. There is no clarity on the time-table but we hope that the proposed measures will be introduced before too long.  

Contrary to most expectations, the BJP led political alliance has won the general election with a thumping majority, even bigger than in 2014. Prime Minister Modi is expected to take oath for the next five-year term on 30 May 2019. It seems that the cabinet of ministers could also be sworn simultaneously. It will be interesting to watch who assumes charge of MNRE particularly as the Prime Minister is expected to include many new names in the cabinet.

We have always maintained that India’s renewable energy growth story is fundamentally strong and independent of which way the political winds are blowing. Return of the Modi government with a decisive mandate is nonetheless a positive and reassuring news for the sector. Given the continuity of administration, we do not expect change of any notable significance in the direction.

The new government should lay emphasis on two fronts – one, efficient execution to pacify investor concerns and address the growing sense of crisis; and two, reforms to ensure strong foundations for long-term growth of the sector. We suggest a time-based prioritisation approach based on criticality of challenges that lie ahead.

Short-term (first year)

Find a permanent solution for DISCOM offtake risk;

Provide binding clarity on GST for different business models and contracting structures;

Identify suitable parcels of land and make requisite information – details of ownership, usage restrictions, transmission access and cost – available to the industry;

Provide a clear long-term policy roadmap for rooftop solar and open access;

Diversify focus away from large solar parks to distributed generation including development of rural and agricultural RE schemes;

Develop a robust and comprehensive domestic manufacturing policy to provide long-term visibility to investors;

Medium-term (1-3 years)

Undertake quality audits, formulate detailed India specific technical quality and product standards for different technologies and applications;

Push Electricity Act amendments (separation of content and carriage);

Phase out all direct financial incentives including capital subsidies, free transmission and cheap debt except for residential, agricultural and rural applications;

Develop a detailed storage plan – technologies, applications, pricing models;

Formulate a 2030 and 2050 energy vision for the country;

Long-term (> 3 years)

Move to market-oriented power pricing, encourage shorter PPAs;

Build flexibility in the power system by making coal plants more flexible, widening and deepening the ancillary services market and introducing demand side management measures;

Invest in local R&D capability;

It may seem like a long wish list but as almost every other country is discovering, transition to a clean energy world is not easy. A multi-dimensional policy package is essential for attracting investments and restoring market confidence. Most importantly, there should be a strong thrust on improved execution and enforcement. All too often, many good policy initiatives have been undone by execution pitfalls (UDAY, RPO, open access, net metering, to name just a few) and we need to learn from past failures.

The mono-crystalline module market has finally started gaining traction in India. In April 2019, ReNew announced commissioning of its 300 MW solar project using mono-crystalline modules in Pavagada solar park, Karnataka. Other utility scale project developers including Mahindra and Amplus have also started deploying mono-crystalline modules. Some rooftop solar contractors and developers are also believed to be considering mono-crystalline modules for their installations.

Key advantages of mono-crystalline modules include higher efficiency (1-1.5% higher than multi-crystalline), lower BOS costs, better space utilization, longer panel life, superior heat tolerance, improved performance and aesthetics.

Worldwide, the modules market has already made significant progress in transition to high efficiency modules including mono-crystalline modules. The US, Europe, Japan and even China (financial incentives available for use of high efficiency modules under the Top Runner programme) have been quick to adopt these products. Leading module manufacturers are also rapidly upgrading their capacities. In China, the world’s biggest module manufacturer, mono-crystalline modules accounted for 46% share of total module production in 2018. This share is estimated to go up to 57% in 2019[1]. Longi, which produces only mono-crystalline modules, is ramping up its capacity from 8.8 GW in 2018 to 16 GW in 2019[2]. Most of the top-tier suppliers including Jinko, Canadian Solar, Trina and JA Solar are also planning to shift majority of their portfolio to mono-crystalline products over the next 1-2 years. As production of mono-crystalline modules ramps up, supply of legacy modules is expected to shrink over time.

In India, mono-crystalline acceptance has been low because of the significant price premium (USD 3-4 cents, or about 15-20%) over vanilla multi-crystalline modules. The Indian market is hyper-sensitive to prices. The price gap needs to fall to about 1 cent to offset savings in other capital costs and output gains for higher adoption of mono-crystalline modules. We believe that this scenario is about 2-3 years away. We estimate the share of mono-crystalline modules to go up from 6% in 2018 to 22% in 2019 and 80% by 2021.

Figure: Mono-crystalline module share in India

Source: BRIDGE TO INDIA estimates

[1] Source: PV Infolink https://en.pvinfolink.com/post-view.php?ID=125

[2] Source: Greentech media https://www.greentechmedia.com/articles/read/longi-and-jinkosolar-announce-big-mono-crystalline-capacity-increases#gs.drbwon

BRIDGE TO INDIA has released results of the fourth RE CEO survey. The survey received responses from 41 industry leaders covering full spectrum of companies across the value chain and geographies. The two main findings of the survey, relating to business sentiment and expected capacity addition in the next 5 years, are instructive and cheering at the same time.

The industry mood is upbeat and optimistic. 73% of the participants are optimistic or very optimistic, marginally up over last year. The ratio of ‘very optimistic’ responses is actually up significantly over last year (34% vs 18%). This comes as somewhat of a surprise given all the operational and financial problems faced by the industry over the last 2 years. But growth can ease many struggles and it seems that surge in tender activity may be giving industry enough cause for optimism. It is worth noting that we have 18.6 GW and 11.0 GW of utility scale solar and wind capacity in the pipeline – projects allocated after successful auctions and under various stages of development.

Figure: RE business sentiment 

Source: India RE CEO Survey 2019, BRIDGE TO INDIA

The other most interesting finding from the survey is an estimate of 80 GW for total RE capacity addition in the next 5 years, split between solar and wind power as 59:21. The estimate of 16 GW of average annual capacity addition is far short of the government targets but tallies broadly with our assessment. Our only disagreement is with regards to prospects for rooftop solar. We believe that share of rooftop solar will be much higher at 15 GW rather than the 8 GW as suggested by the survey.

Figure: RE capacity addition estimate for next 5 years

Source: India RE CEO Survey 2019, BRIDGE TO INDIA

Since yesterday, we have been receiving results of exit polls pointing to a comfortable majority for BJP led alliance at the centre. That should further add to positivity in the sector as 78% of the industry rates 5 years of Modi government as ‘Good’ or better (share of ‘Poor’ is only 5%).

Irrespective of who forms the next government, there is no time to waste. Tough decision making and comprehensive reform of the power sector are needed to lay foundation for long-term growth. Recent MNRE brainstorming meeting with top industry leaders is a good start.

For all other insights from the CEO survey, please download full report from our website.

Indian financial services group, Piramal Enterprises, and the Canadian pension fund major, Canada Pension Plan Investment Board (CPPIB), have announced plans to set up an RE-focused infrastructure investment trust (INVIT). Initial corpus is expected to be USD 600 million with CPPIB and Piramal committing USD 360 million and USD 90 million respectively. Balance would come from other investors.

INVITs are meant for yield seeking investors looking to buy into low risk assets;

RE projects in India face unique and significant risks arising from several technical, operational and financial factors and as such are not an ideal yield play;

The track record of publicly listed INVITs and RE developers who have explored this option is not encouraging;

The Piramal Group chairman, Ajay Piramal, stated last week, “The renewable energy sector is at an inflection point and is witnessing significant consolidation, the pace of which is likely to increase in the future. We believe the timing is, therefore, opportune for aggregating assets in this sector, given that the existing players are willing sellers, in light of a constrained capital market environment — both debt and equity.”

Indeed, the market has been ripe for consolidation for a long time but progress has been hampered by wide gulf in valuation expectations. Many transactions are also believed to be stuck due to regulatory and/or legal discrepancies discovered during due diligence process. As a result, consolidation is being driven in the sector by the primary market route.

The INVIT structure shrinks valuation gap marginally due to the 0.5-1.0% value arbitrage from various tax incentives. It is debatable, however, if these gains are sufficient to make this structure viable. The fundamental attraction of INVITs is to find a permanent home – investors seeking low but stable yields – for ‘low risk’ assets. RE fits this description in theory but the reality in India is different. Solar and wind projects in India face unique and significant risks arising from poor quality, refinancing, inflation, grid availability and offtake challenges. Moreover, we believe that the risk profile is likely to get worse over time as assets age and grid penetration of renewable energy increases. Consequently, Indian RE assets are not an ideal yield play.

Our study to estimate cost of capital for solar projects came up with some surprising findings and confirms this conclusion. The cost of capital arrived at using various ‘risk build up’ approaches is much higher at 12.50-16.50% in comparison to estimates of 7.40-10.50% arrived at from the more popular ‘market multiples’ approach. In other words, the financial investors driving the sector today are simply too optimistic (or aggressive) and ignoring risks.

Only four INVITs have started operations so far. The track record of two publicly listed entities – IRB (roads) and India Grid (transmission) – is not encouraging. They are trading at hefty discounts of 35% and 14% respectively to issuance price. Acme and some other developers and funds are already believed to have explored the INVIT option but with no success so far.

Gujarat’s latest utility scale solar tender – 700 MW in Raghanesda solar park – has been undersubscribed by 100 MW. The tender was issued by Gujarat Urja Vikas Nigam, the state DISCOM holding company. Only two of the four bids were received from private companies: Tata Power and Engie (200 MW each). The other two bids were received from state government owned entities – Gujarat Industries Power Company and Gujarat State Electricity Corporation (100 MW each). This tender was reissued after cancellation of a valid completed auction in December 2018 because winning tariffs (INR 2.84 – 2.89/ kWh) were deemed unacceptably high by the state.

Gujarat made two major changes in the revised tender, both positive. The state reduced solar park charges by INR 3.8 million/MW (down 47%) in PV terms over the project life. Second, it gave a tariff guidance to the developers although the specified ceiling tariff of INR 2.70/ kWh is unviable for the chosen site as per our analysis.

It is disappointing that tenders are so routinely undersubscribed and/ or cancelled. The trend owes to an unprecedented surge in tender issuance since early 2018 when MNRE inexplicably suggested that India would aim for 227 GW of renewable energy capacity addition, instead of the 175 GW target, by March 2022. 72.6 GW of utility scale solar and wind tenders have been issued in this period (up 3.5x over 2017 on an annualised basis). But tenders have been rushed out prematurely in a desire to meet targets. As much as 17 GW of tenders have been cancelled due to poor response for a variety of reasons – badly conceptualised schemes (10,000 MW of manufacturing linked tender), land and transmission capacity constraints and unviable ceiling tariffs. Another 6.5 GW of projects have been cancelled after completion of auctions and receipt of valid bids because the DISCOMs were not prepared to pay the auction tariffs.

Net of all undersubscriptions and cancellations, total utility scale RE capacity successfully awarded since January 2018 is 20.8 GW, a lowly 29% return on total tenders issued in the period.

Figure: Status of utility scale solar and wind power tenders issued since January 2018, GW

Source: BRIDGE TO INDIA research

Note: ‘Bids submitted’ shows total project capacity for which bids have been received for the non-cancelled tenders issued since January 2018.

Amongst all the challenges faced by the RE sector in the last year, the growing incidence of undersubscriptions and cancellations is the most unnecessary. It is self-inflicted and impossible to justify. We believe that the ensuing sense of chaos sends a dangerous message to investors – callous tendering authorities, environment of suspicion and risk of PPA renegotiation or even default. India is heavily dependent on fickle international capital for realising its RE ambitions and the government needs to be extra careful here. MNRE should step in immediately and take urgent action to fix the crisis.