Month: June 2020

After a year of deliberation, MNRE has announced that basic customs duty (BCD) shall be levied on all cell and module imports from 1 August 2020 onwards. The proposal, pending approval from The Ministry of Commerce and Ministry of Finance, mentions 15% and 20% duty rates on cell and modules in the first year, going up to 30% and 40% respectively from second year onwards. MNRE has indicated that the duties are expected to stay for a long time with no set date for expiry.

Adani, Tata Power, Vikram and Waaree would be the main beneficiaries but most of them would be keen to enter into JVs with Chinese companies for financing, technology and procurement assistance;

A comprehensive and well-planned manufacturing policy is needed alongside BCD for shoring up domestic manufacturing competitiveness;

BCD effect would take about two years to trigger as developers would continue to import from China because of cheaper prices and ‘change in law’ protection;

The government has been deliberating on customs duty for over a year now. COVID-19 and border dispute with China have hardened the government stance on both timing and level of duties. Most likely, the duty shall also be applicable on various components including glass, frames and chemicals but polysilicon and wafers would be exempted. There is no clarity as yet if the duties would be applicable on inverters also.

Figure: Solar duty structure

Figure: BRIDGE TO INDIA research

Will BCD actually lead to manufacturing investment in India?Yes, but only to a limited extent. The proposed duty levels are sufficient to tide over the cost disadvantage of domestic manufacturing. We expect Adani, Tata Power, Vikram and Waaree to be the main beneficiaries and most obvious candidates for expansion. Most of them are likely to look for JV opportunities with Chinese companies for financing, technology and procurement assistance. US-based First Solar is a potential candidate. There may also be 1-2 dark sheep, possibly leading industrial houses in India. Reliance, Jindal and Mahindra have shown intent in the past to enter solar manufacturing business. But we do not see any material interest from the Chinese, for obvious reasons.

Will India become a solar manufacturing superpower?Sadly, no. BCD alone is not going to cut it. The Chinese players dominate solar manufacturing through substantial investments in scale, R&D and value chain control. Indian companies have mammoth capability gaps and would continue to rely heavily on Chinese suppliers. Imports meet 40-60% of domestic requirement across the capital goods sector because of shallow technology capability, fragmented scale and high cost structure. Moreover, with the economy weakening and banks not keen to lend, financing would be a major hurdle.

India’s notoriously fickle policy regime also does not help. A comprehensive and well-planned manufacturing policy is essential for shoring up domestic manufacturing competitiveness.

Will we gain complete energy security?For the reasons discussed above, not in the next 5-7 years at the very least.

What will be the impact on tariffs? Will DISCOMs still buy solar power?A 40% duty would increase tariffs by INR 0.50-0.55/ kWh. Solar would still remain far cheaper than conventional power but demand over 1-2 years would be subdued partly because of excess supply situation.

What will be the impact on current project pipeline?Setting aside 12 GW capacity allocated in the manufacturing-linked tender, India has a solar project pipeline of 27.2 GW. Fundamentally, there should be no adverse impact on the pipeline projects as most tenders offer an all-encompassing ‘change in law’ protection. The developers would continue to import from China because of cheaper prices. But the problem would be funding incremental capital cost as lenders would not be keen to do so. We estimate equity requirement of projects to almost double posing a major (but temporary) headache for the developers.

About 2.1 GW of the pipeline is earmarked for domestic modules. Netting that off and assuming a typical DC:AC ratio of 1.4x leaves us with 35 GW market for imported modules over the next 2-3 years. Assurance of this business makes the Chinese companies reluctant to invest in India in the short-term.

What about rooftop solar and OA markets?These markets are already bearing 15% safeguard duty burden. The impact of 5% additional duty would be negligible. Implementation of the duty structure along planned lines should lead to a temporary burst in activity in 2020-21 as demand comes forward in anticipation of higher duty from August 2021 onwards. Longer-term impact may not be material either because of the falling cost trajectory.

Border tension with China does not augur well

This week saw violent clashes between Indian and Chinese armed forces. 20 Indian soldiers have died in reportedly the worst clashes in the last 58 years. These events have revived longstanding distrust of China and lent an edge to the precarious relationship between the two countries. There is growing political chorus for boycott of Chinese goods and reducing trade reliance on China. The Indian government has issued instructions to seek alternate sourcing arrangements where possible. It has also accelerated efforts to promote domestic manufacturing by providing ready land and infrastructure with necessary permits to interested businesses. MNRE has constituted its own special cell to further this initiative for the renewable sector.

The government is keen to reduce the soaring trade deficit and growing dependence on China in critical sectors;

But short-term policy options to reduce Chinese module imports are limited;

The huge technology, scale and cost gulf between leading Chinese manufacturers and their Indian counterparts cannot be bridged through hasty decisions;

India has a massive trade deficit of about USD 50 billion per annum, up from USD 22 billion just ten years ago, with China. The government has been keen for some time to reduce this surplus through a mix of trade and non-trade barriers. Two months ago, the government even imposed restrictions on equity investments from “neighbouring countries.” There has been little real progress so far but the government stance is hardening.

For the renewable sector, the issue is straightforward but not easy: how to reduce module imports from China? India, like most other nations, remains hooked on cheap Chinese imports for 80-90% of its module requirements. The panoply of initiatives to promote domestic manufacturing over the years have failed to produce a dent on imports. Meanwhile, the Chinese manufacturers have continued to tighten their stranglehold over the global market through aggressive investments in R&D, upstream diversification and capacity addition.

Figure: 2019 module production volume of top five Indian and Chinese manufacturers, GW

Source: BRIDGE TO INDIA research

Given the lack of alternate supply sources, the policy option is straightforward – either import from China or pay 25-30% premium for domestic capacity as well as traverse the hard yards on critical infrastructure, education, labour reforms etc. To develop the whole value chain from polysilicon to modules would require a minimum 5-6 years gestation period and investment to the tune of USD 6-8 billion. In sum, it is not going to be easy to become self-reliant anytime soon. Plus, there is the risk of negative impact on project development pipeline.

The border tension has escalated the risk of abrupt policy decisions by a notch. The Indian government would do well to ignore rhetoric and realise practical limitations of domestic manufacturing aspirations. The issue at hand needs a serious deliberation with a balanced, long-term perspective.

Stuck in old timesWe find it remarkable that the Indian government has launched a new scheme for commercial mining of coal. The scheme, launched as part of COVID stimulus package, purportedly aims to boost self-reliance in the energy sector. The target is to expand coal production by 225 million MT annually by 2025 with total anticipated capex of INR 700 billion (USD 9.2 billion). It is disappointing that rather than paving way for future with support for new green technologies, the government is stuck in dirty technologies.

SECI has approved award of an astounding 12,000 MW project capacity in its 7,000 MW manufacturing-linked project tender. The auction was held back in January 2020 with Adani Green and Azure announced as winners with tariff bids of INR 2.92/ kWh. The two developers had bid for 4,000 MW and 2,000 MW project capacity but are being awarded 8,000 MW and 4,000 MW respectively after exercising the 100% green-shoe option. In addition to developing projects of this capacity, the two bidders would be required to build PV cell and module manufacturing capacity of 2,000 MW and 1,000 MW respectively.

Extended timelines and attractive tariffs should help in tiding over various project development and financing challenges;

The project award would offer a financial bonanza to the two bidders because of the implicit tariff subsidy and proposed basic customs duty on modules;

It remains to be seen if the DISCOMs sign up to buy such large quantum of power at the relatively high tariff;

The win represents huge success for both Adani (current RE operational capacity 2,208 MW) and Azure (1,652 MW). The tariff is extremely attractive – last two solar auctions by SECI and NHPC saw winning bids between INR 2.50-2.56/ kWh – particularly in view of falling equipment costs and development period of five years (25% completion every year from second year onwards). Land, transmission and debt financing should not be a problem due to long timelines, attractive tariffs and the government’s 50 GW renewable park push.

Salient terms of the tender are as follows:

Manufacturing capacity should come onstream by the end of year two.

Cells and modules produced should have minimum efficiency of 21% and 19% respectively.

There is no restriction on module sourcing for the projects.

There are no cross-linkages between project development and manufacturing components unless manufacturing capacity is delayed by more than 12 months – in this instance, power tariff would stand reduced to INR 2.53/ kWh, equivalent to the lowest discovered tariff in solar ISTS auctions in the year prior to bid submission for this tender.

Adani already has significant interests in both project development and module manufacturing. It is also cash rich after selling 50% stake in its operational solar portfolio to Total for INR 37 billion (USD 0.5 billion). But we understand that it may bring in a JV partner for the manufacturing business. Azure, on the other hand, is planning to rely on Waaree and other partners for meeting its manufacturing obligations.

The project award, touted as the largest solar project award ever in the world, would offer a financial bonanza to the two bidders if implementation goes ahead as planned. We estimate NPV of implicit tariff subsidy in the tender at INR 127 billion (USD 1.6 billion). Separately, the manufacturing business would benefit from proposed basic customs duty (BCD), under active consideration by MNRE. Interestingly, Adani Green’s stock has already shot up by 164% in the last three months, adding USD 3.2 billion in market capitalisation, as against the broader market’s increase of just 30% in the same period. But it remains to be seen if the DISCOMs actually sign up to buy so much power at the relatively high tariff. After all, power demand grew by a measly 1% in FY 2020 and is likely to fall this year by 6-8%. Many tenders have been cancelled in recent times because of DISCOM reluctance to buy power at even lower tariffs.

Power exchanges in India started offering a new ‘Real Time Market’ (RTM) trading window at the beginning of this week. The market features 48 trading slots, half an hour each, during the day for delivery of power within one hour of trading.

The new window allows DISCOMs, power producers and open access consumers to tide over short-term variations in their power schedules through an efficient market process;

Majority of trading activity is expected to be concentrated among a few DISCOMs with high share of renewable power consumption;

RTM would serve as a valuable learning experience for all stakeholders for launch of more sophisticated market instruments and ancillary services;

Until now, the exchanges offered only two power trading windows: i) Day Ahead Market (DAM) where trading takes place for two hours daily for delivery of power next day; and ii) Term Ahead Market which consists of intra-day, day ahead contingency and weekly contracts. Most of the trading has been accounted for by the DAM window – in 2018-19, 94% of all transactions on exchanges were under this route. The DAM window does not allow any intra-day revisions to schedules and hence, there was need for an additional short-term window to provide flexibility to power producers and purchasers.

The need for RTM window has arisen mainly on account of rapid increase in renewable power capacity to 90 GW, now well over half of power requirement. Increasing renewable capacity and pressure to provide 24×7 power to consumers has introduced high levels of uncertainty on both supply and demand sides. RTM allows flexibility to DISCOMs, power producers and open access consumers to meet deviation in their power schedules. In absence of such a window, the DISCOMs dealt with deviations through power plant ramp-up/ down (not always practicable or efficient), load-shedding or Deviation Settlement Mechanism (DSM) involving high risk of financial penalties.

Similarly, renewable IPPs, rather than being curtailed and/or made to pay DSM penalties, can now trade surplus power for additional income. RTM transaction horizon of 60-90 minutes is ideal for them as short-term generation can be predicted with considerably higher accuracy. The day-ahead window has larger scope for errors in power generation and hence, higher risk of DSM penalties. There may also be attractive arbitrage opportunities for smart operators using advanced load and weather forecasting capabilities. NTPC, with its substantial volume of uncontracted power, could also be a major beneficiary. Combined with Security Constrained Economic Dispatch (SCED) scheme – still under pilot phase – RTM offers an attractive opportunity to NTPC.  

First week of RTM trading points to reluctance among stakeholders, especially buyers. Sellers outbid buyers five to one in terms of volume during first five days of RTM trading. Looking ahead, trading volumes are expected to increase as industry gets more experience and power demand catches up with pre-COVID levels. Majority of trading activity is obviously expected to be concentrated among a few DISCOMs with high share of renewable power consumption.

As an additional and more efficient relief valve for short-term mismatches in power schedules, RTM should improve financial performance of DISCOMs and IPPs as well as lead to higher grid stability. It would also serve as a valuable learning experience for all stakeholders for launch of more sophisticated market instruments and ancillary services.