Month: July 2019

It is nearly a year since announcement of safeguard duty on import of PV cells and modules. To recap, the Indian government enforced duties on all imports from China, Malaysia and all developed countries starting 31 July 2018 for a period of two years. The duty level was set at 25% in the first year, falling to 20% and then 15% in the subsequent six-month periods.

The safeguard duty has failed to support domestic manufacturing because of the very short implementation period and promise of ‘change in law’ compensation to developers;

India continues to rely heavily on imports for meeting its demand;

Prospects of domestic manufacturing appear bleak as in the absence of a cogent plan, the government seems to be following a trial and error approach;

With all previous measures including capital subsidies and DCR (domestic content requirement) having failed, the safeguard duty was expected to be a key policy support measure for domestic manufacturing. But as we predicted at the time, the implementation period of two years is too short to attract new manufacturing investments. Even the existing manufacturers have failed to derive any meaningful benefit. Some project developers have been offered ‘change in law’ compensation, where provided in the PPA, and have therefore continued to rely on imports. Others have routed imports from exempt countries including Thailand and Vietnam. Share of imported modules in utility scale solar still hovers around 90% mark, consistent with the preceding years. Meanwhile, some of the larger domestic manufacturers have failed to capitalise on the duty because being located in SEZs (special economic zones), they are liable to pay duties in the same way as manufacturers outside India.

Going forward, the duty rate is set to fall to zero by 31 July 2020. Developers have already been assuming no duty payment for ongoing auctions as they get 18 months to build projects.

The only market where domestic manufacturers have enjoyed some success is small private rooftop and open access solar installations. Not being eligible for any ‘change in law’ compensation, such customers have been a little more willing to purchase domestically. The larger developers and contractors prefer imports despite higher cost because of concerns about quality of domestic modules.

In a nutshell, therefore, the safeguard duty has barely made any difference to the fortunes of domestic manufacturing. Most of the cell manufacturers have indeed shut down and the module manufacturers are operating at low capacity utilisation and/ or betting on exports. We believe that the domestic manufacturers would file another petition shortly for further duties.

Meanwhile, the Indian government seems to be pushing through a mix of curiously devised schemes – 12 GW PSU scheme, a new 6 GW manufacturing-linked tender, and 36 GW distributed solar schemes for rooftop and rural solar. Having committed so much to domestic manufacturing, the government risks losing credibility if it cannot produce quick results.

Last month, the International Energy Agency (IEA) declared 2019 a critical year for hydrogen and stated that it has a key role in a clean, secure and affordable energy future.

Hydrogen is potentially a very attractive energy source as it combusts cleanly and does not produce carbon emissions. It is also a dense carrier of energy with each kilogram containing 2.4 times as much energy as natural gas. It can be produced in a variety of ways and can be transported in gas form by pipelines or in liquid form by ships, much like liquefied natural gas (LNG). Hydrogen can be used as a storage medium for excess renewable energy (which may otherwise have to be curtailed) and finds applications across a range of sectors such as energy production, steel production, transport and heating.

Today, hydrogen is used mainly as a feedstock for industrial processes including ammonia production for fertilisers (50%), refining (35%), and food, electronics, glass and metal industries.[1] Its adoption is gaining momentum as the need to decarbonise and improve energy security increases. A major drawback is that production is energy and cost intensive. Hydrogen is produced by chemically breaking down natural gas (steam reforming) or by splitting water (electrolysis). However, with advancements in technology, especially electrolysis, and renewable energy becoming cheaper, production is expected to become cost-effective as well as less carbon-intensive.

Many countries around the world are already accelerating their hydrogen-based energy production programmes. China has taken the lead accounting for two-thirds of worldwide hydrogen production currently. It aspires to become the world’s largest hydrogen and fuel cell market by 2030. Similarly, the UK expects hydrogen to be deployed widely across heat, transport and industrial processes by 2050. Australia is planning to release a national hydrogen strategy by end of this year. Recently, Dubai broke ground on its first green hydrogen production facility using solar power. Major energy importers such as Japan, South Korea and Singapore are signing agreements with Australia and New Zealand for setting up hydrogen export ports/ hubs. Indeed, Japan has dubbed the Tokyo 2020 Olympics as the Hydrogen Olympics to showcase its expertise in hydrogen technology.

India has also recently taken a small first step towards using hydrogen. Indian Oil Corporation is carrying out a pilot project to blend hydrogen into CNG for use in 50 buses in Delhi. Recently, MNRE invited preliminary project proposals for pilot demonstration of four hydrogen fuel cell powered buses in the Delhi-NCR region. But the Indian government does not yet have a larger strategy to integrate the fuel into the energy mix. Strangely, it is the Supreme Court pushing for hydrogen usage.

Hydrogen is one of the many new energy sources competing alongside renewables, pumped storage, batteries, fuel cells and others in the race to a carbon-free world. The roadmap remains unclear and riddled with complex technical, operational and financial challenges. But there is a large prize at stake and all possible options need to be explored.

In March 2019, the Indian government announced the much-awaited phase II of the Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles (FAME) scheme after delaying its announcement for over two years. FAME-I was initially set until 2017 but was extended up to March 2019. FAME-II has a total budget outlay of INR 100 billion (USD 1.5 billion) until 2022 and focuses on public transport, demand aggregation and subsidies to encourage adoption of EVs.

FAME-I had a planned outlay of INR 8 billion in two years but only INR 5.8 billion was actually allocated in over four years. India’s EV market has been dominated by cheap, unregistered and uncertified three-wheelers. Two-wheelers and four-wheelers accounted for only 0.15% and 0.04% of total domestic sales respectively between FY 2015-19. FAME-II envisages a more holistic growth of the EV industry by providing support for essential building blocks including charging infrastructure, R&D and greater manufacturing indigenization.

Figure: Fund allocation under FAME India scheme, INR million

Source: Ministry of Heavy Industries and Public Enterprises

FAME-II proposes to spend INR 86 billion on upfront subsidies for purchase of EVs. Electrification of shared transport is rightly given a major push with buses to receive 40% of total subsidy amount (up to INR 5,000,000 per vehicle) and other commercial vehicles to receive 20% of total subsidy amount (INR 150,000). The jump in subsidy bill is large in comparison to FAME-I but it would still cover only 1.5 million vehicles until 2022 (2% market share).

NITI Aayog recently recommended phased introduction of commercial four-wheeler EVs rising from 2.5% in FY 2020-21 to 40% in FY 2025-26. It also recommended that all new vehicles sold 2030 onwards should be electrified. But with high cost of EV’s being a main market barrier and the Indian government being unable to support the market through a larger subsidy support, the target seems aggressive and unrealistic.

The recent budget has introduced some positive measures with a range of GST and direct tax benefits. But confusion about government targets for EVs is not helping the market. We believe that growth in the next few years would be restricted to public transport and fleet operators.

India is estimated to have added new rooftop solar capacity of 1,836 MW in FY 2018-19, up a remarkable 61% over previous year. Total installed capacity is estimated at 4,375 MW as on 31 March 2019. Due to negative growth in utility scale solar over the last year, rooftop solar’s share of the total solar market has shot up to a very respectable 28% (11% in the previous year).

Rooftop solar has very attractive growth potential with none of the financing or operational challenges associated with utility scale solar;

The market place is extremely price sensitive and many players are struggling to survive;

The policy stance needs to turn accommodative to reap full benefits of this highly compelling energy source;

The latest data compilation exercise completed by BRIDGE TO INDIA shows some interesting market trends. Maharashtra, Rajasthan and Gujarat are the three biggest states by annual installation and growing strongly. In contrast, Tamil Nadu, Karnataka, Telangana and Punjab have slowed down relatively due to a mix of policy and market related factors.

The market place is highly dynamic with huge churn in player rankings (see table below). Tata Power remains the largest EPC contractor but large corporates continue to lose market share due to high cost base and inability to offer any product or technology differentiation. Small, specialist players including Sunsure, Sunshot, Fourth Partner, Solar Square are performing relatively much better. The market is operating at wafer-thin margins with many players struggling to survive and system quality a frequent victim. Share of unorganised players has reached an all-time high of 57%.

Table: Top players in India rooftop solar

Source: BRIDGE TO INDIA research

Note: These rankings have been determined on the basis of capacity installed in FY 2018-19.

The OPEX market share has increased marginally to 37% from 34% in the previous year. Cleantech Solar has retained its lead status. There are three new players in the top ten rankings – Fourth Partner, Sunsource and TEPSOL (a subsidiary of Think Energy Partners). Again in the inverter market, the leader (Delta) has retained its position but there is high churn with the Chinese players increasingly dominating this market at the cost of their European peers.

Looking to the future, the market faces some significant hurdles. First, the DISCOMs increasingly see rooftop solar as a threat and are militating against it. The policy stance is turning hostile as states attempt to pull back from free net metering. The central government, meanwhile, seems to have disregarded rooftop solar in its push for ever increasing targets. Uncertainty persists about the INR 118 billion (USD 1.7 billion) SRISTI scheme, which has a target of installing 26 GW in three years. Second, in a market where low price rules the roost, there are growing fears about sub-standard installation quality. As these systems age, their poor performance is likely to lead to a consumer backlash. Finally, uptake in residential and SME segments continues to be low due to poor consumer awareness and financing constraints.

As we wrote six months ago, lack of government policy initiative is a missed opportunity. Rooftop solar has very attractive growth potential with none of the financing or operational challenges associated with utility scale solar.

Gujarat has asked winning bidders in its May 2019 wind auction for 1,000 MW projects to match the lowest tariff of INR 2.80/ kWh bid by Enerfra, a local developer. Seven other winners including Adani, ReNew, Greenko, EdF, Vena, INOX and Powerica, who had bid tariffs between INR 2.81-2.95/ kWh have been told that PPAs will be not signed unless developers reduce tariff to INR 2.80/ kWh. Meanwhile, Acme, India’s largest solar developer, is seeking to cancel its 600 MW winning bid of INR 2.59/ kWh in a 2,000 MW solar auction completed by NTPC in August 2018. The company’s argument is that its project has not been approved by the Telangana state regulator in the stipulated timeframe of 2 months – a condition precedent in the PPA – allowing it to terminate the PPA.

DISCOMs are reluctant buyers of RE as it is ill suited to meet their peak load requirements and balancing costs are estimated to be high;

In a highly competitive market, the developers continue to bid aggressively in response;

Both sides are fixated on prices leading to jitters and increasing risk of bid cancellations, tariff renegotiation, curtailment and poor execution;

Both instances reflect a growing malaise in the RE sector. Gujarat’s rationale for renegotiation is that the tariff premium of INR 0.15/ kWh (+5.4%) in the winning bids is too high. That doesn’t make sense and also goes against the auction rules. The real reason of course is that the DISCOMs are stuck between a rock and a hard place. Deeply stressed financial position and political pressure to keep tariffs low is forcing them to squeeze RE developers instead. Despite wind and solar power being far cheaper than all other sources of power, they are reluctant buyers as RE is ill suited to meet their peak load requirements. They still need to procure more expensive conventional power with high fixed costs. RE also has higher transmission costs and its variable output profile/ ‘must run’ status poses all sorts of challenges to the grid. In a study completed in 2017, the Central Electricity Authority (CEA) estimated additional cost of balancing RE at around INR 1.50/ kWh. Gujarat has already cancelled two solar tenders aggregating 1,200 MW capacity because the tariffs were “too high” and it might do so again.

Unfortunately, the developers have been only too keen to comply. Bidding has stayed aggressive consistently with developers taking a favourable view of the operating and financial environment. Our calculations show that with execution challenges mounting and the financing environment also getting tough, most ISTS solar and wind bids below INR 2.70 and INR 2.90 respectively are not viable. Risk-adjusted equity returns are barely in double digits.

The implications for all stakeholders are unsavoury. It remains to be seen how developers would sustain their aggressive bids. IPO plans are looking unrealistic and the secondary market is also challenging. The risk of bid cancellations, tariff renegotiation, curtailment and delayed project execution is high and rising. Relationships between generators and offtakers are getting fraught and do not bode well for future of the sector.

RE power trading a sensible move

The Indian Energy Exchange (IEX) has repeatedly proposed to the Central Electricity Regulatory Commission (CERC) to allow spot trading of renewable energy through a separate window on its platform. While CERC had disapproved the proposal for Green Day Ahead Market  in 2017 citing lack of readiness of the renewable energy market, it has now directed IEX to seek stakeholder comments before it responds to the recent petition on introducing Green Term Ahead Market.

IEX has proposed four different types of contracts – intra-day, day-ahead contingency, daily and weekly. It has made further recommendations on design of such contracts:

15-minute contracts (instead of hourly contracts for conventional energy) to make up for variability in RE power generation;

No revision in generation schedule;

15% less generation than scheduled without any penalty;

In the past, CERC has not been too keen on a separate window for RE trading. It has been concerned about market readiness, impact on REC mechanism and market liquidity. Most of the RE capacity is tied in long-term PPAs and there is no investment appetite in new merchant power capacity in the current scenario. Moreover, since revisions in schedule are not allowed in contracts, it is likely that market participation would be further restricted to only solar as wind power tends to have a relatively more uncertain output profile.  

On the brighter side, a trading window will offer a new sales avenue to IPPs and investors struggling with curtailment and PPA renegotiation risks. Open access project developers with shorter PPAs (typically 10 years) and potentially higher default risk would also be keen on this option. On the demand side, C&I consumers as well as states with relatively low renewable sources should be keen on purchasing RE power without the restriction of entering into long-term PPAs. Stricter RPO compliance will further strengthen the case for a market-based mechanism for renewable power.  

Low trading volumes and lack of market depth is a valid concern. However, we believe that growing RE capacity warrants opening up of the market. Lack of alternate offtake options could become a market deterrent in the long-term. Additional infrastructure and operational cost of allowing trading is likely to be minimal. There is potentially a lot to be gained and little to lose.

 The Finance Minister Nirmala Sitharaman presented maiden budget of the NDA government’s second term on 5 July 2019 with a renewed focus on infrastructure. Though energy including renewables received a lot of coverage in the budget, there was no notable increase in funding allocation, subsidies or incentives.

Total budgetary allocation to MNRE for 2019-20 is INR 52.5 billion (USD 675 million), a mere 2% increase over 2018-19. Nearly 60% (INR 30 billion) of the funding is earmarked for the solar sector – INR 24.8 billion for 7,500 MW of grid-connected projects and balance for off-grid systems. Allocation to the wind sector has dropped 3% to INR 9.2 billion. It is a surprise that no money has been set aside for the two flagship distributed solar schemes covering rooftop solar (26 GW target over 3 years, budgetary outlay of INR 118 billion) and rural solar (36 GW over 3 years, INR 344 billion).

There was, however, more concrete move on electric vehicles (EVs). GST on EVs has been reduced from 12% to 5%. There is also an additional income tax deduction of INR 150,000 on interest paid on EV loans as well as customs duty exemption on certain parts of EVs. Taken together, these steps should reduce the cost of ownership of a mid-ranging EV by about 10-12%.

Elsewhere, the budget lists a slew of broad potential policy measures to deal with power sector problems. To that end, it reads more like a set of policy priorities or a wish list of the new government rather than a statement of financial spending and revenue targets. The government has proposed to boost manufacturing of solar cells and li-ion batteries, and plans to enhance EV charging infrastructure by providing investment-linked tax incentives. The Minister has also proposed a package of power sector tariff and structural reforms. She announced that the central and state governments would work together to address removal of cross subsidy surcharge (CSS), duties on open access sale of power as well as captive generation plants. There is also a mention of review of the UDAY scheme and announcement of a follow up scheme.

Most industry observers have expressed disappointment with the budget because of lack of concrete financial proposals to support the sector. But we believe that it is not strictly a bad thing. Much more than the financial support, the sector needs a clear, consistent and visible policy framework as well as strong implementation to address key challenges facing the project developers and investors.

The new Andhra Pradesh government led by Chief Minister YS Jagan Mohan Reddy of the YSR Congress Party has made a sensational announcement seeking to renegotiate all renewable energy PPAs, review ‘must run’ status for the sector and cancel all under development projects. The move was part of the party’s election campaign promise, which also included free power and a host of other sops to the poor and farmers. It is nonetheless a surprise that the government has actually gone ahead with the announcement and that too despite a counter-advisory by the central government.

The state DISCOMs are struggling financially and unable to meet the cost of the new government’s generous election promises;

The move mainly affects the 6,953 MW of utility scale solar and wind projects commissioned and/ or contracted during the last five years;

While there is little chance of any successful renegotiation, the case again highlights the perilous state of India’s distribution utilities and consequent risks for the private investors;

Andhra Pradesh has two state government owned DISCOMs, rated A and B+ respectively in July 2018 by the Ministry of Power on a mix of operational and financial criteria. But tariffs have not been revised for two years and their financial condition is believed to have worsened. Dues to power generators now stretch up to eight months.

Andhra Pradesh has been one of the leading renewable states with a commissioned capacity of 7,257 MW (solar 3,279, wind 3,978). Another 1,500 MW of solar capacity is under construction. Weighted average tariff for all contracted solar and wind PPAs is INR 4.16/ kWh and INR 4.41/ kWh for solar and wind projects respectively, largely in line with tariffs across the country.

Figure: Renewable capacity addition in Andhra Pradesh

Source: BRIDGE TO INDIA research

The state government has not stated any reason why it believes the tariffs can be renegotiated. We see no apparent financial or market merit in this exercise other than simply to keep tariffs low and support the struggling DISCOMs. The project owners are obviously bound to reject any government attempt. The case would therefore be referred to the Andhra Pradesh Electricity Regulatory Commission (APERC) (which has already approved all the projects/ tariffs), Appellate Tribunal for Electricity and ultimately, the Supreme Court of India if the state government persists. The only eventuality in which tariffs could be reduced is where the government can prove some wrong doing in project allocation and/ or determination of tariffs. But this is highly unlikely as all projects have been sanctioned by the state government agencies and approved by the state regulator under standard processes consistent across the country.

We therefore see no likelihood of success for the state government. This is an arbitrary government attempt to renegotiate PPAs. Similar moves in the past including Gujarat have failed.

The Andhra Pradesh move will no doubt spook investors and again raise the bogey of renegotiation risk in the sector. But there is a silver lining here. If the state government chooses to pursue its case vigorously, a final decision in favour of the investors would provide a useful template for similar cases in future. The risk of delayed payments and curtailment, however, is real and growing, and would continue to test investors.