Month: March 2020

Coronavirus damage impossible to assess

India has been in a near complete lockdown since 22 March 2020. The current three week lockdown is due to last until 14 April 2020. All commercial and social activity including all international and domestic travel has been completely banned. Only essential services including healthcare, food and critical infrastructure – telecom, power, security and banking – are exempted.

On the face of it, India has been relatively untouched so far. Total number of infected patients and fatalities was reported to be 1,024 and 24 respectively as on 28 March, minuscule in comparison to rest of the world but the fear is that these numbers are hugely underreported. Because of severe lack of testing facilities, very few people are being tested. Actual numbers could be far greater, possibly explaining the government’s overly cautionary stance.

A number of relief measures have been announced to mitigate economic fallout of the virus. For the renewable sector, there are three relevant provisions.

Force Majeure relief for delay in construction

MNRE has issued a guidance to the various government authorities that project developers should be given more time for achieving COD under Force Majeure provisions in the contracts. This is mere guidance – actual relief would be granted on a case-by-case basis depending on duty to mitigate, actual project level impact and other specific provisions in individual PPAs. We expect the legal process of obtaining time relief to still be a contentious affair as the project developers would try to maximise time extension for a host of reasons – the Solar Power Developers Association is seeking a six-month blanket relief – but the authorities are likely to take a stricter stance.

Continuity of project operations

MNRE has separately notified that all operational renewable projects should be allowed to operate without any operational or logistical hindrance.

Moratorium on servicing bank debt

India’s central bank, the Reserve Bank of India, has loosened monetary policy and allowed a three month moratorium on debt repayments plus relaxation in working capital lending norms.

We believe that the direct sector fallout in most cases would still be detrimental but contained. There would be no compensation for additional operating, interest and working capital costs. But any commissioning shortfall would simply move to latter part of the year and overall utility scale project activity levels are expected to catch up within about 3-6 months (assuming no extended lockdown or other disruption).

However, we fear that the indirect impact would potentially last much longer and be far more damaging. Average power demand in India has shrunk by a staggering 36 GW, or about 25% of total demand, because of the lockdown. While high tariff demand from commercial and industrial consumers has collapsed, low tariff residential demand has gone up. If this demand shift prevails for a weighted average period of two months, financial hit for the DISCOMs is estimated at about INR 400 billion (USD 5.3 billion), more than double their annual losses.

Figure: Daily power demand in India

Source: POSOCO

In addition, because of reported delays in payments by end consumers, the government has allowed the DISCOMs to defer payments to power producers by up to three months. As a result, working capital position of IPPs, already struggling with payment delays, is expected to deteriorate even further. Reduction in power demand has also depressed power prices on the exchanges to about INR 2.20/ kWh and raised the risk of curtailment.

Rooftop solar and open access projects with C&I offtake are expected to face even more difficult construction and offtake risk related scenarios.

Bad news does not stop here unfortunately. INR has depreciated against USD by about 5% in the last month increasing capital costs. International freight charges have shot up. Shipments, stuck at ports, are incurring demurrage charges. There is mass exodus of labourers to their native places. Fearing disease and employment uncertainty, some workers may choose to not come back to their regular jobs at all. It is too early to estimate net impact on the sector or hazard a guess on when we would see a return to normal. The timing, coming towards the end of the financial year, couldn’t be worse.

We pray for good health and safety of all our readers.

Power demand for cooling applications accounts for about 17% (210 TWh in 2017-18) of India’s total electricity requirement. As per a projection by the Ministry of Environment, Forests and Climate Change (MOEF&CC), this demand could increase to 985 TWh by 2037-38 in the business-as-usual scenario. But the Ministry’s India Cooling Action Plan (ICAP) has projected this demand falling by 300 TWh if appropriate measures including energy conservation building code (ECBC), more efficient cooling appliances, district cooling and thermal energy storage are adopted.

Figure: Projected power demand from cooling applications, TWh

Source: Ministry of Environment, Forests and Climate Change Note: Accelerated adoption scenario assumes implementation of additional cooling load reduction measures.

Inability of renewable power to meet evening peak loads is a major reason why grid operators and DISCOMs are hostile towards it. Reduction in cooling demand would reduce the evening loads and make renewable power more attractive to DISCOMs, who rely on expensive thermal power for evening peak demand.

Some recent initiatives give us a useful peek into efficacy of potential measures to reduce cooling load arising from measures proposed under ICAP. Space cooling, which includes air conditioners and fans, accounts for 64% of cooling load and is a focus area for load reduction. Large scale district cooling has so far been implemented only in the GIFT City, Gujarat reducing the city’s cooling load from 240 MW to 135 MW. More schemes are expected to be implemented in Bhopal, Coimbatore, Pune, Rajkot and Thane on a pilot basis. Thermal storage has been adopted by several commercial and institutional entities, especially in hospitality and IT sectors. Tata Power, the Mumbai DISCOM, has successfully demonstrated reduction of load by 80% using thermal storage. Success on ECBC compliance front has, however, been limited. Only 13 states have notified ECBC and its implementation remains questionable.

With limited adoption of proposed measures so far, medium to long-term viability of shifting cooling demand away from electricity remains uncertain. But India is bound under the Montreal Protocol to phase out ozone-depleting substances (used in refrigeration and air-conditioning) by 2030. Doing so would be hugely beneficial for the renewable sector.

MNRE is understood to be in advanced stages of waiving requirements for bank guarantees by project bidders. As per a news report, MNRE is proposing that instead of bank guarantees, the developers may provide letters of comfort from one of the three government owned financial institutions – Power Finance Corporation (PFC), Rural Electrification Corporation (REC) and Indian Renewable Energy Development Agency (IREDA).

The move is motivated by a desire to free up banking lines of credit for the developers and improve ‘ease of doing business’ in the sector.

Reeling under bad-debts, most banks are reluctant to take fresh exposure to the sector;

Eligibility criteria and bid guarantee requirements in the Indian tenders are already extremely lax in comparison to international practices;

Relaxation in bank guarantee norms would expose DISCOMs and debt providers to undue project risks;

Bidders are currently required to provide a bank guarantee for about 1-2% of capital cost at the time of bid submission as earnest money deposit. This guarantee is released when the bid is not successful, or when the successful bidders furnish a performance bank guarantee for about 2-4% of capital cost at the time of executing the PPA. The performance bank guarantee is released on project commissioning net of any penalties for delay in achieving financial closure and/ or commissioning.

The move to relax bank guarantee norms is driven by pressure from developers hurting from tightening credit conditions and aversion of banks to lend to the sector. Share of bad-debts in total banking exposure to power sector has touched an unprecedented 18%. In most cases, the banks are insisting on 100% cash collateral for providing bank guarantees. Based on about 7,000 MW of tenders where bids have been submitted (auctions pending) and almost 38,000 MW of renewable projects under construction, total money locked up in bank guarantees is estimated at INR 50 billion (USD 675 million). For the leading developers, individual bank guarantee requirement is estimated at about INR 3-5 billion (USD 40-65 million). Including change-in-law claims for safeguard duty and GST, working capital requirement of developers has soared.

Figure: Bidding volume and pipeline for leading developers in 2019, MW

Source: BRIDGE TO INDIA research
Note: This data includes utility scale solar and wind projects. Pipeline data is applicable as of 15 March 2020.

As the 2022 deadline for 175 GW approaches, the government seems to be getting jittery about waning bidder response and undersubscription in tenders. Weak progress on commissioning – only 753 MW of renewable power capacity was commissioned in the first two months of this year – and worsening outlook due to Coronavirus disruption may be other reasons why the government is keen to appease developers.

However, at a time when project execution risks are rising and completion delays are getting worse, the move to relax bank guarantee norms seems ill advised. Eligibility criteria in the tenders are already very lax. We believe that dropping bank guarantee requirements would lead to speculative bids and expose DISCOMs and lenders to undue completion and quality risks.

If banks are wary of power sector exposure, the government ought to address their concerns rather than pass risk to public financial institutions and offtakers. Similarly, calling an end to unnecessarily destructive practices such as delays in tariff adoption by regulators, tender cancellations and payment delays would be hugely helpful to the sector.

The Directorate General of Trade Remedies, under the Ministry of Commerce & Industry, has opened a fresh investigation into solar cell and module imports. The investigation follows an application for extension of safeguard duty by Adani and Jupiter Solar, a local cell manufacturer. Their application seeks continuation of duty for four more years after the current duty expires in July 2020.

The case hinges on impact of imports on the business of Jupiter Solar with a capacity equivalent to only about 4-5% of India’s total annual requirement;

Uncertainty around time-table of final decision is mitigated by experience in dealing with change in law claims;

If the government can take a decisive stand and provide long-term clarity, many Indian and international companies would be willing to make large-scale investments in manufacturing;

The review application has sought to cover SEZ (Special Economic Zone)-based units, where Adani’s 1.2 GW per annum cell and module manufacturing plant is based, in the definition of domestic industry. SEZ-based units were not given benefit of duty protection in the original duty decision and the Director General has again decided to exclude them from the investigation. In effect, therefore, the decision on extending safeguard duty would be based solely on impact of imports on the business of Jupiter Solar, which seems bizarre given that their operational capacity is less than 500 MW, or only about 4-5% of India’s total annual requirement. 

Unfortunately, the timetable and process for final decision for such investigations in India is muddled as we saw last time around. The launch of investigation throws the industry into another open-ended period of uncertainty. Hopefully, however, more experience and clarity in dealing with change in law claims should prove useful. Assuming final duty in the range of 20-25%, incremental tariff requirement is estimated at about INR 0.30-0.35/ kWh. The increase seems nominal but may be enough to deter some DISCOMs from procuring solar power.

It is clear that improving manufacturing competitiveness of the economy (land and labour reforms, reducing cost of capital, improving infrastructure, developing skills) remains too arduous a task for the policy makers. Even the various measures announced so far (manufacturing-linked tenders, PSU scheme, solar pump and rooftop solar schemes) to support domestic manufacturing have proven to be ineffective. The government seems, therefore, pushed in a corner with the prospect of duty protection looking highly likely. The Coronavirus disruption has only added to urgency of ‘Make in India’ quest. Creating trade barriers for the benefit of just one company is hard to understand but seeking self-sufficiency in an industry of vital economic importance must be a sound policy objective.

Under the right framework, many Indian and international companies would be willing to make necessary large-scale investments in the sector. We hope that the government can take a decisive stand, make a quick decision and provide long-term clarity to the sector. Simultaneously, it should abandon other ineffective and costly measures to support domestic manufacturing.

Karnataka and Delhi DISCOMs have recently issued empanelment tenders for installation of residential rooftop solar systems under MNRE’s phase II rooftop solar scheme, also known as SRISTI. Including these two states, twelve states and union territories have so far issued such tenders. Six states and union territories have already completed empanelment process for a total capacity of 180 MW and obtained MNRE approval for subsidy funds.

DISCOMs are expected to aggregate demand, empanel installers and  monitor on-the-ground progress in residential rooftop solar market;

With empanelment process gaining speed, residential market should see rapid growth over next three years;

Procurement process needs to be re-tooled to achieve desired performance outcomes;

Under the new scheme, where MNRE provides 20-40% capital subsidies, DISCOMs are expected to assume responsibility for demand aggregation, empanelling installers, subsidy disbursement, installation monitoring, inspection and metering. The scheme guidelines mandate: i) use of domestically manufactured solar PV cells and modules, ii) minimum warranty of five years for all mechanical structures and equipment including inverters, net-meters and batteries, iii) commissioning period of 15 months, and iv) matching of L1 bids. The installers are also required to establish a service centre in each operational district. 

There has been a lull in government initiatives in rooftop solar since March 2019 when phase I scheme expired. With the new empanelment process, momentum is now building up and residential installations are expected to pick up rapidly over the next three years. 

Table: Salient details of state empanelment tenders for residential rooftop solar

Source: BRIDGE TO INDIA research

Note: Costs mentioned are total system costs pre-subsidy and include equipment procurement, transportation, insurance, installation, five year operations plus applicable fees and taxes.

Some states have specified very basic eligibility criteria. For instance, Andhra Pradesh requires minimum installation experience of only 50-100 kW. Other states have either specified no criteria or reserved part capacity for inexperienced installers. As a result, most of the empanelled vendors are little known local installers. And as often seen in India, high competition has resulted in price bids coming in at unrealistic levels and far below MNRE benchmark price (INR 48,000-59,000 for systems ranging in size from 1-10kW plus).

We fear that unless corrective action is taken expediently, lack of robust eligibility criteria and aggressive bidding would lead to poor quality installations and consumer dissatisfaction.