Month: September 2019

Indian rooftop solar market grew at an estimated CAGR of 83% over past three years. While the market grows rapidly, operation and maintenance (O&M) provision is often ignored. Specialist rooftop solar O&M business segment has not taken off yet in India and remains a disorganized, underdeveloped market. Key reasons include low consumer awareness, tendency to cut costs, policy thrust on adding more capacity (rather than improving performance), low scalability/ profitability and lack of skilled personnel.

Rooftop solar O&M is a highly localised business requiring frequent site visits for cleaning and other maintenance tasks. The actual cost of performing full O&M services (cleaning, breakdown and preventive maintenance) is prohibitively high for small residential plants (< 100 kW) and plants in non-urban locations in comparison to the market benchmark fee of around INR 0.4 million/ MW per annum).

There are few specialised rooftop solar O&M service providers because of poor business viability and customer resistance to long-term contracts. Such services are therefore provided by EPC contractors or developers/ consumers in-house in most instances.

Figure: O&M provision for rooftop solar installations

Source: BRIDGE TO INDIA estimates

Note: Some part of services may be outsourced where O&M provision is retained in-house by system owner.

Unfortunately, the government has not helped the development of this market by referencing all policy initiatives and incentive schemes against commissioned or planned capacity (as against solar power output). There is no specific government policy initiative warranting robust performance or thorough O&M focus in rooftop solar in India. Most stakeholders including government agencies, EPC contractors and suppliers are focused on capacity growth with little emphasis so far on performance evaluation and monitoring.

Lack of focus on O&M is highly value destructive. As per BRIDGE TO INDIA estimates, Poor operational performance can not only cause significant financial loss to investors and lenders but also lead to customer backlash and wasteful use of government subsidies. The key to putting more emphasis on O&M and creating viable business models lies in creating customer demand. The government can play a critical role by undertaking consumer education, performance monitoring/ analysis and skilling initiatives.

After failure of all previous and ongoing policy initiatives to kickstart domestic manufacturing of solar modules, MNRE has recommended imposition of basic customs duty on import of all solar PV cells, components and modules. It has recommended that duties of 10-15% be introduced in April 2021 and gradually ramped up by 2023-2024 to 30% on cells and modules, and 15% on wafers, glass, metal frames, EVA and other materials.

The long implementation period seems designed to give manufacturers sufficient time to plan their investments and ensure no adverse impact on current project pipeline;

Progress is contingent upon cells and modules being declassified from a global trade agreement signed under the World Trade Organisation (WTO) framework;

The proposal is an acknowledgement of poor competitiveness of domestic manufacturing;

Table: MNRE recommendation for customs duty

The time-staggered structure with no sunset clause seems well thought out on paper although there is a serious execution challenge. There is also curiously a gap of eight months between lapsing of safeguard duty (July 2020) and proposed introduction of customs duty (April 2021). Full duty imposition from 2023 onwards (2024 for components) would give manufacturers the necessary 3-4 years to plan their investments and operationalise manufacturing capacity. It would also ensure that there are no ‘change in law’ claims from the developers. Another potential benefit is that if module prices fall sufficiently during the gestation period, there would not be an overly negative impact on cost of solar power.

The challenge here is that solar modules and cells are currently classified as information technology products in the Information Technology Agreement, a global trade agreement signed under the WTO framework. We understand that the customs duty proposal is subject to cells and modules being declassified from this agreement. That may not be so easy or quick. There is also the issue of how to support the existing manufacturers in the intervening period. On this point, the government seems to be banking on PSU, KUSUM and SRISTI to assure demand for domestically manufactured modules.

Customs duty is a simple and blunt tool to support domestic manufacturing. It is an acknowledgement of poor competitiveness of domestic manufacturing but can be effective and is easy to administer. The critical question is – will it lead to more manufacturing investments and make India self-sufficient in solar technology? Progress would depend on trade resolution at WTO and the government persuading investors that the duty structure is not prone to dithering.

India’s total installed solar capacity touched 34,154 MW on 30 June 2019. This capacity is split between utility scale, rooftop solar and off-grid solar as 27,934 MW, 4,960 MW and 1,260 MW respectively. Total project pipeline – projects allocated to project developers and at various stages of development – stood at 19,698 MW as on 30 June 2019.

Figure: Total installed and pipeline capacity at the end of June 2019, MW

Source: BRIDGE TO INDIA research, MNRE

Note: ‘Others’ include projects executed under open access, REC and other miscellaneous categories.

Utility scale solar capacity addition had been slowing down in India for the last year and Q2 remained slow with only 1,104 MW of capacity addition against our estimate of 1,536 MW. The slowdown is attributable to many reasons – land and transmission bottlenecks, tight liquidity in the financial system, and increase in many input costs affecting profitability of many projects. Distribution Company (DISCOM) payment delays have also hurt the sector very badly. Rooftop solar remains a bright spot with capacity addition of 515 MW in Q2 2019. Capacity addition share jumped to 28% in 2018-19 from 6% just five years ago.

Figure: Utility scale solar capacity addition, MW  

Source: BRIDGE TO INDIA research

Going forward, installation activity should pick up significantly. A total of 13,519 MW is due for completion in the next 12 months but we expect significant slippages due to reasons discussed earlier. Fall in safeguard duty to 15% in Jan-2020 and removal by Jul-2020 should ease concerns for the sector. But there is rising speculation in the market that the government is mulling further duties to protect domestic manufacturers.

Tender issuance has stayed robust with a total utility scale capacity of 10,296 MW issued in Q2 2019, although it was down 35% over the previous quarter. However, many recent tenders have been cancelled and/ or undersubscribed. Gujarat’s 700 MW Raghanesda tender was subscribed by 100 MW in May 2019. Solar Energy Corporation of India (SECI’s) 1,200 MW tender issued in June 2019, 2,000 MW tender issued in March 2019 and 1,200 MW hybrid tenders saw 50%, 53% and 25% undersubscription respectively. Recently, NTPC Ltd.’s 1,200 MW tender found no bidders forcing a deadline extension.

Ministry of New and Renewable Energy’s (MNRE) policy move to adopt an Approved List of Module Manufacturers (ALMM) to address quality issues in solar components is also likely to create further uncertainty in the sector. All installations starting April 2020 need to comply with this policy. There are concerns both about MNRE’s capacity to complete the necessary certification process in time and willingness of international as well as domestic manufacturers to hand over confidential data.

Capacity addition has been muted for over a year now but the project pipeline looks robust for Q3 and Q4, 2019. It is up to the government to take decisive action to address land acquisition, transmission connectivity and DISCOM bankability issues.

Rising incidents of tender cancellations and undersubscriptions have marred investor confidence, which has been further shaken up by Andhra Pradesh’s move to rescind the PPAs. Overall sentiment in the sector is highly stressed and all eyes are on the government if they can announce measures to revive confidence.

In response to a petition filed by the Indian Wind Power Association (IWPA), the Rajasthan High Court has recently upheld validity of the forecasting and scheduling regulations. The IWPA had challenged validity of these regulations on the grounds of high penalty charges and poor forecasting ability of the Qualified Coordinating Agencies (QCAs). The Rajasthan High Court has clarified that technical constraints cannot be a justifiable reason for disregarding the regulations.

The developers are finding it difficult to implement the regulations due to poor quality weather forecasts and lack of appropriate IT infrastructure;

The developers are also struggling to bear the compliance cost of the regulations, estimated at 1-2% of project revenues;

The internationally accepted practice seems to be to use real-time balancing markets to address deviations in RE power output rather than to penalise the developers;

Fifteen Indian states have so far issued individual regulations on forecasting, scheduling and deviation settlement. Four other states have issued draft regulations. Together, these states account for 97% of operational solar and wind power capacity in India (total 64.7 GW as on 31 July 2019). Renewable power plants are required to intimate their generation schedule to respective load despatch centres on a day-ahead basis in 96 blocks of 15 minutes each. They can revise the schedule up to 16 times a day, limited to one revision for each time slot of 1.5 hours.

The state regulations are broadly in line with the CERC framework barring some procedural differences:

The project size threshold for the regulations is 5 MW and above except in Andhra Pradesh, Gujarat, Meghalaya, Tamil Nadu, Tripura and Haryana (1 MW and above) and wind projects in Karnataka and Madhya Pradesh (10 MW and above);

Andhra Pradesh, Karnataka and Jharkhand follow state level aggregation; most other states follow pooling station level aggregation;

Most states (Andhra Pradesh, Jharkhand, Karnataka, Madhya Pradesh, Maharashtra, Punjab, Rajasthan and Telangana) have kept the penalty charges at INR 0.50/ kWh for deviation above +/-15% and up to +/-25%. In Uttar Pradesh, Chhattisgarh and Tamil Nadu, penalties are levied on the basis of (average) PPA tariffs of pooled projects;

The developers have been facing significant financial and operational challenges in implementing the regulations – high cost, poor quality weather forecasts and lack of appropriate IT infrastructure. Average penalty hit is estimated in the range of INR 0.04-0.05/ kWh for solar power and INR 0.07-0.08/ kWh for wind power at pooling station or plant level. There are additional costs for enabling infrastructure and QCA fee. Total cost impact is estimated at about 1-2% of revenue for larger projects but can be much higher for smaller projects/ developers.

The industry is struggling to bear the financial burden of the regulations. Most RE projects, particularly those commissioned before 2019, have no budgeted provision for the compliance costs. The Rajasthan order sets a notable precedent and it seems unlikely that RE generators would be given any relief from these regulations.

There is no denying that the forecasting and scheduling regulations are an essential policy tool for managing variability in RE power output. But our quick survey of some high RE penetration countries shows that most countries use real-time balancing market rather than penalising RE developers to address deviations in power demand and supply.

Last week, we stated that investor interest in the RE sector has fallen sharply in the last 12 months. In the wake of increasing costs and execution risks, difficulties in getting debt financing and delinquent DISCOMs, the developers are finally saying no to new tenders. The number of active bidders has declined from more than 200 in 2015 to just 30 in H1-2019. We view this as formal end of the 2.5 year bull run in the RE sector.

Most of the 37.6 GW wind and solar capacity allocated in the last 2.5 years is likely to face viability challenges and sub-optimal returns;

There is a growing risk of developers being unable to fund projects or service capital on time turning RE projects into non-performing assets;

The sector faces a long-term investment shortfall unless urgent reforms are undertaken by the central government;

The bull run commenced in 2017, fed by the sheer wall of money rushing into the sector. Some of the biggest Indian industrial houses, leading international utilities, private equity, sovereign wealth and pension funds as well as hundreds of start-ups have been desperate to make an entry. Total RE capacity of 37.6 GW (solar 23.8 GW, wind and solar-wind hybrid 13.8 GW) has been allocated in this period at a weighted average tariff of INR 2.64/ kWh. That is a staggering USD 30 billion of investment with sub-optimal returns.

Figure: Winners of utility scale solar, wind and solar-wind hybrid projects since January 2017

Source: BRIDGE TO INDIA research

It is remarkable that it has taken so long for reality to sink in. Domination of financial investor led platforms and classic ‘agency problem’ between managers and owners are partly to blame. Sharper than expected fall in module costs and some successful exits have also helped to drag the bull run.

As experience in other sectors has shown, most notably in roads and thermal power, passing of the bull run can leave a horrific after effect. Investment taps in these sectors are still dry after over five years of near total inactivity. Currently, there are 29.4 GW of RE projects in pipeline. In the best case, strong sponsors would manage to successfully raise capital, execute projects and be able to carry them in the portfolio alongside more profitable assets. But most of the second and third-tier sponsors would be unable to either execute the projects or service capital on time turning them into non-performing assets.

It is time for the central government and Ministry of Power/ MNRE to show decisive leadership. Urgent long-term reform is needed to restore confidence in the sector. The government needs to focus in particular on strengthening the power distribution system, T&D upgradation and tariff reform. The urgency shown by MNRE in the last few months is therefore encouraging but it may not be easy to get the states on board.

Two auctions were completed last week by SECI for a 1,800 MW wind tender and a 1,200 MW solar tender respectively. Both were heavily undersubscribed and received only two responses each: wind – CLP (250 MW) and Enel (300); solar – SB Energy (450) and GRT Jewellers (150). Final project allocations were made only for 441 MW (INR 2.83-2.84/ kWh) and 480 MW (INR 2.53-2.65/ kWh) respectively, less than one-third of the total tendered capacity. The two tenders had ceiling tariffs of INR 2.85/ kWh and INR 2.65/ kWh respectively.

There has been a dramatic fall in bidding interest in the last six months;

Even the leading bidders are likely to go slow in future as they focus on internal challenges and execution of already substantial project pipelines;

The problems resulting in low bidding interest seem unlikely to go away anytime soon and could hurt the sector growth prospects severely;

Including the two latest auctions, there have been 11 wind and solar project auctions in the last four months in India.1 Only two of these auctions have been fully subscribed – SECI Maharashtra 250 MW in May 2019 and SECI pan India 1,200 MW solar in June 2019. The other nine tenders have been heavily undersubscribed. The chart below shows how bidding interest in the sector – measured as a multiple of total bid response to total tendered capacity – has fallen dramatically in the last six months.

Figure: Utility scale solar and wind tenders, MW

Source: BRIDGE TO INDIA research

Note: Data includes only those tenders that have not been cancelled subsequently and where bids have been submitted already. Tenders with total capacity of 8,933 MW are excluded as their bid submission data is not available. Manufacturing linked tenders are also excluded.

As per our database, the number of bidders in the renewable market has fallen from more than 200 in 2015 to only 31 in H1 2019. Share of top five bidders in total bid submissions has gone up sharply from 36% to 54% in just 18 months. We expect some of these five bidders – SB Energy, ReNew, NTPC, Adani and Azure – to also go slow in future because they have built substantial project pipelines and face their own internal operational and financial challenges.

There are many reasons for falling investor interest – increasing cost and risks associated with land acquisition plus transmission, tightening liquidity in the financial markets, and aggressive ceiling tariffs. There is also heightened risk awareness in the wake of mounting payment delays and PPA renegotiation attempts. None of these problems seems like going away anytime soon, so the bidding uncertainty may persist particularly if the government is keen on rushing out more capacity to auctions. Low investor interest could hurt the sector growth prospects severely and unfortunately, this risk has been ignored by the government, DISCOMs and developers alike.

[1] In addition, part capacity of two Gujarat tenders for Raghanesda and Dholera solar parks (200 MW and 750 MW respectively) was reissued but was again undersubscribed receiving responses of only 100 MW and 50 MW respectively.