Month: August 2019

Energy storage is slated to play a critical role in supporting rapid expansion of variable RE in the grid while ensuring its stability and security. While a number of grid-scale solar-storage hybrid tenders have been issued recently, activity in behind-the-meter market is yet to pick up pace in India.

The residential market, especially in tier I cities, adopted home inverter systems early on to deal with historic issues of grid power reliability. The commercial and industrial (C&I) consumers, on the other hand, have been using a mix of captive thermal and diesel generation sets for power back up. Rapid technological enhancements in batteries and fall in their prices are expected to lead to a huge opportunity for energy storage systems in this segment.

Storage has a number of other potential applications useful for C&I consumers. Combining storage with RE power generating source can help C&I consumers maximise utilisation of cheaper RE and be more self-reliant. They can also use storage to reduce demand during peak hours, when power prices are higher than normal, resulting into savings in electricity bills. Then, there are potential savings to be made by reduction in demand charges as the consumers can bring down their connected load with the help of storage. Finally, as and when the ancillary services market develops in India, storage systems can be used to create additional revenue streams by C&I consumers.

Realisation of these potential benefits by C&I consumers depends on having a conducive regulatory and policy environment. First of all, there is a need for an effective Time of Day (TOD) pricing and market for grid balancing services. While many states already have TOD pricing, the peak to off-peak price ratios are usually in the range of 1.15-1.20, which is not considered adequate incentive for consumers to shift their consumption. This is lower than in most other countries (see chart below). The ancillary services market also needs opening up as it is still very limited at present with only slow tertiary services (response time of 15-60 minutes) being utilised. CERC intends  to redesign the ancillary services mechanism in India by introducing a slew of reforms in order to move towards a market-based mechanism for procurement.

Figure: Peak to off-peak electricity tariff ratio in selected regions globally

Source: BRIDGE TO INDIA research

Note: Data is for selected utilities within each region.

The second prerequisite for C&I storage market is techno-economic improvement in battery storage technology. Average li-ion battery pack prices have reduced by around 85% from 2010 to 2018. Further reduction by 20-25% in the next three years should tilt the scale and make storage financially attractive.

The Ministry of Power has constituted a new panel to examine “deepening of the power markets in India.” The panel comprises representatives from the Ministry of Power, CERC (India’s chief power regulator) and CEA (Central Electricity Authority). Its mandate is to examine the current power procurement model in India, heavily biased towards long-term PPAs, benchmark it against international norms and make recommendations to improve efficiency and competitiveness of the power market.​

Share of short-term traded power remains in single digits;

Heavy reliance on long-term PPAs restricts competition, and distorts risk-reward equation between the power producers and consumers;

Transition to a short-term market model would be challenging requiring incremental progress;

DISCOMs procure as much as 90% of their total power requirement through long-term PPAs. Only about 10% of the power is sourced from trading on the exchanges and other short-term procurement, a mix of bilateral trading with other DISCOMs and IPPs. This share has remained stubbornly low, despite launch of power trading on the exchanges more than ten years ago, as shown in the following chart.

Figure: Short-term power volume and share in India

There are many serious problems arising from the DISCOMs’ heavy reliance on long-term PPAs. Even where the PPAs are signed pursuant to an open competitive process, this process is highly inefficient and non-transparent. It is restricted to a few players willing and capable of developing greenfield projects. The procurement cycle is too long ranging between three years (solar, wind) to over 10 years (large hydro, nuclear). The risk-reward structure is byzantine leading to a high risk of default, insolvency and litigation. Overall, this model detracts from market principles, restricts customer choice and leads to wasteful capital allocation and poor risk management.

The role of short-term markets is much greater in most developed nations (UK: 52%, Denmark: over 90% and the USA: 40%). We need to look at these countries and learn from their experience.

Inevitably, the transition to a short-term market model will present its own challenges. For one, banks and investors would hesitate to fund new projects with high market risk. Two, the entire value chain including the DISCOMs would need to upgrade their data analysis and risk management systems. The transition would also necessitate reform of key input markets – fuel supply and transport, land, and transmission access. Progress would therefore be slow and incremental. The government should start by gradually reducing the PPA term and limiting the share of power benefitting from assured purchase commitment.

We believe that it is a much needed initiative by the Ministry of Power to modernise the power sector and make it ‘fit for purpose’ for a vibrant market-based economy. The Indian power sector has been held back by an outdated procurement model. Twenty-five year, fixed price PPAs need to go.

SECI has issued a new 1,200 MW ISTS (inter-state transmission system)-based tender. The tender includes two significant changes from the typical template. For the first time ever, the choice of technology – solar, wind or solar-wind hybrid – has been left to the developers. Second, the projects need to include a storage component such that they can supply at least 3 MWh of power/ MW/ day (about 31% of total power output) during the specified “peak hours” of 06:00-09:00 and 18:00-24:00. Developers would be allocated projects based on the lowest peak-power tariffs bid in an e-auction process. Off-peak power would be sold to SECI (ultimately, the DISCOMs) at a fixed price of INR 2.70/ kWh.

The changes are highly desirable as they pass the burden of evaluating technology and market risks to the developers;

Tariffs would go up but RE would become more market friendly allowing it to grow faster in comparison to the current scenario;

The tender marks a fundamental and much needed shift in procurement of RE in India;

Both the changes – technology agnostic and peak power provision – are highly desirable. But SECI need not have stopped here. We believe that the tender ought to be improved further still. Projects should be specified by actual power output and not peak rated capacity. Power procurement agencies should simply specify the quantum of power required with a range-bound hourly consumption profile. Our second suggestion is that the agencies should start offering lower PPA term – test the market initially with 20 years and reduce it gradually to 10 years or even less. The combined essence of SECI’s proposed changes and our suggestions is to let the developers anticipate consumer need, macro-economic environment and market developments, and design their projects appropriately. The private sector is far better suited than the utilities to evaluate technology and market risks. An output based tender design along these lines would result in a more mature and efficient market.

Sure, the effect of these changes would be an increase in tariffs. But it would also mean RE becoming more market friendly and palatable to DISCOMs. There would be significantly less market risk for the DISCOMs and eventually, the investors and lenders through reduction in offtake and curtailment risks. Over time, these changes should widen the appeal of RE and result in faster RE growth in comparison to the current scenario.

But is the market ready? The DISCOMs seem reluctant to buy more expensive RE as the recent cancellation of many tenders has shown. Meanwhile, most developers would also view the changes as negative to their risk profile. Both sets of counterparties would need time to prepare and accept the new reality. Over time, they should both see the changes as positive. It is likely, however, that some smaller developers may be forced out of the market due to inability to cope with increased complexity.

RE bidding market has been dysfunctional for a while. It is clear that the market paradigm needs to change and SECI’s attempt to alter tender design is a crucial initiative. This tender marks a fundamental shift in how renewable power is sourced in India.

After a slow 2017-18, rooftop solar tender issuance activity picked up again in 2018-19. Central and state government agencies issued a total of 804 MW (CAPEX 291 MW, OPEX 513 MW) of rooftop solar tenders in the year, up 64% on previous year.

Figure: Rooftop solar tender issuance, MW

Source: BRIDGE TO INDIA research

Note:  Tenders below 5 MW capacity are excluded from this chart.

Various central government agencies issued tenders totaling 225 MW for government buildings and railways, 35% higher than in the previous financial year. The largest tender was issued by SECI for 97 MW, followed by

Various central government agencies issued tenders totaling 225 MW for government buildings and railways, 35% higher than in the previous financial year. The largest tender was issued by SECI for 97 MW, followed by Railway Energy Management Company Limited (60 MW), REIL (50 MW), and IIT Kharagpur (5 MW).

The state government entities also issued substantially higher capacity at 579 MW, up 79% over previous year. Gujarat Energy Development Agency issued the largest tender of 125 MW for residential, institutional and social sector consumers. Many other states including Uttar Pradesh (100 MW), Chhattisgarh (50 MW), Tamil Nadu (50 MW), Delhi (65 MW), Andhra Pradesh (15 MW) and Madhya Pradesh (10 MW) also issued tenders on behalf of private consumers. Telangana issued a 31 MW tender for government buildings followed by All India Institute of Medical Sciences, Haryana for 10 MW.

Figure: State government tender issuance, MW

Source: BRIDGE TO INDIA research

Note:  Tenders below 5 MW capacity are excluded from this chart.

Figure: CAPEX and OPEX share, MW

The ratio of OPEX model based tenders has gone up slightly from 50% in FY 2018 to 62% in FY 2019.

The tendering activity picked up after a directive issued by MNRE last year to state nodal agencies and other departments to use competitive bidding procedure to allocate capacity. The growth may also have been partly caused by planned phase out of all capital subsidies for public sector and institutional consumers.  The upward trend is unlikely to sustain in FY 2020 for the same reason.

The Indian rooftop solar market continues to be buoyant with annual grow rates of over 60%. But the experience with government tenders has been disappointing. Very often, installations are held up by problems in identifying suitable sites, documentation delays and poor financial viability. As a result, public sector share in rooftop solar is a paltry 14% with a total installed capacity of 619 MW as on 31 March 2019.

Sterling & Wilson Solar (S&W) has become a rare success story in the Indian renewable energy sector by becoming the first company in many years to successfully complete an IPO. The share sale was structured as an offer for sale by the company’s promoters; the company itself has not raised any money from the IPO. The promoters have raised INR 28.8 billion (USD 411 million) against their final target of INR 31.3 billion, revised downwards from the original target of INR 45.0 billion: INR 14.8 billion was raised from the IPO itself and another INR 14.0 billion was raised through private placement with anchor investors including Nomura, Schroder, Fidelity, ADIA, HSBC Global, Neptune, MIT, ICICI Prudential and Reliance Mutual Fund. The company had to incrementally scale down the IPO and reduce its price expectations in wake of a slowing economy and recent volatility in the stock markets.

S&W enjoys strong leadership position in solar EPC with dominant position in India, Africa and Middle-east and presence across 26 countries;

The company faces a formidable challenge of maintaining its business growth and profitability in a highly commoditised market;

There is high investor appetite for renewable energy stocks but the market is not ready for IPPs because of concerns around their high leverage and poor returns;

S&W is the largest solar EPC contractor in the world with a market share of 4.6% in 2018, more than double the second ranked player. It has consistently been the largest solar EPC domestically with market share ranging between 9-13%. But 60-70% of the business is international – spread mainly across Africa, Middle-East and SE Asia. The latter is highly prized due to higher gross margins (about 10% in comparison to less than 5% in India). Revenues and profits have grown at a CAGR of 44% and 50% over the last 3 years. But it is difficult to analyse company financials in detail as it is a newly incorporated entity with a carve out of solar EPC business from the parent entity. 

S&W has achieved rapid growth in solar EPC through aggressive expansion in other geographies and price leadership. At the final sale price of INR 780, it is valued at INR 125 billion (USD 1.8 billion), 19x FY 2019 earnings but much lower than the company’s original valuation target of INR 180 billion. S&W now faces a formidable challenge of maintaining its market leadership and profitability in a highly commoditised market. Stagnation in solar capacity growth globally over the next 3-4 years partly because of the slowdown in China, the world’s largest solar market, is also not going to help.

S&W IPO has managed to ride a wave of market optimism around the solar sector combined with attractions of a capital light and internationally  diversified business model. The development is both welcome and instructive as it follows unsuccessful attempts by many developers (ReNew, Acme, Sembcorp and Mytrah amongst others) to launch an IPO in the last two years. We believe that the stock market is not ready yet for IPPs, who will have to consider other opportunities for rotating their capital.

The Ministry of Power (MOP) and MNRE have issued a couple of emphatic orders to tackle the growing DISCOM payment crisis. The first is an MOP order in end June instructing State Load Despatch Centres (SLDC) and Regional Load Despatch Centres (RLDC), entities responsible for scheduling and issuing despatch instructions for all power, to allow despatch of power only if the DISCOMs have opened requisite letters of credit (L/C) in favour of the power generators. The order became effective on 1 August 2019. An exemption has been provided for power purchased from the state-government owned generators. MNRE has now issued a clarification stating that the tariff payable under solar, wind and small hydro PPAs shall be treated as ‘fixed charge.’

DISCOMs are in a parlous state because of constant political meddling, poor governance and pressure to keep tariffs low;

There are many operational and legal glitches to the central government’s retrospective approach to address this problem;

The long-term solution lies in separating content and carriage, and developing a consistent national regulatory framework for power distribution;

Each PPA, irrespective of contract term or type, already has a clause requiring the power purchaser to furnish an L/C to the generator – MOP has merely required the power purchasers (DISCOMs) to comply with contractual terms agreed with the generators. The order was necessitated because despite contractual agreements, most DISCOMs shockingly did not open any L/Cs and then resorted to excessive payment delays. This is believed to be the case even in most renewable energy projects including where the DISCOMs have signed PPAs with SECI and NTPC (it is hard to comprehend why investors and lenders have let the situation come to this).

There are many operational and legal glitches to the central government approach. The bankrupt DISCOMs do not have the financial capacity to provide L/Cs. Their failure to do so may result in forced curtailment and loss of revenue for the RE power generators. It remains to be seen if the SLDCs and RLDCs have the necessary operational capacity and authority to comply with the MOP order. There is reason to fear that the SLDCs, part of the state-government owned transmission companies, may simply refuse to comply with the central government orders and legally, they may be entitled to do so. If power is not despatched because of a DISCOM’s failure to provide L/Cs, MNRE wants it to pay full applicable tariff to the generators. But it is not clear if these revised rules can be enforced on the existing PPAs.

It is important to bear in mind that the DISCOMs are in such a parlous state because of constant political meddling, poor governance and pressure to keep tariffs low. Delaying payments to generators has helped them to manage their working-capital cycle and meet other payment obligations. The state governments are unlikely to be able to provide financial support because of their own fiscal constraints. The DISCOMs may, therefore, be forced to suspend capital works, network upgrades or restrict power supply to low-paying residential and agricultural consumers.

It is too early to say how the MOP and MNRE moves will play out. Our quick field survey shows that some SLDCs may already be disregarding the MOP order.

The long-term solution to DISCOM payment crisis lies in taking away the incentive (or the power) of local governments and regulators to meddle in power distribution. Content and carriage need to be separated, and we need a unified national regulator to enforce rules consistently across the country. It can sometimes take a crisis to fix things. We hope that this crisis does not go to waste.