Month: August 2020

Indian Energy Exchange opened a new window for trading of renewable power this week. Solar and non-solar renewable power can be traded separately under four different contract types: intra-day, for delivery within 3.5 hours; day-ahead, for delivery next day; daily, for delivery between two to ten days ahead; and weekly, for delivery from Monday to Sunday. Buyers will be able to fulfil their RPO targets by purchasing renewable power on the exchange provided sellers have not been issued RECs for the same power. No revision in schedule will be allowed for intra-day and day-ahead contracts. Revisions are allowed for daily and weekly contracts but with at least two-days advance notice. Deviation penalties would be applicable as per CERC regulations (at national APPC for inter-state trading, currently INR 3.60/ kWh) or state regulations (for intra-state trading).

Trading interest is likely to be confined to DISCOMs keen to fulfil their RPO targets;

Price expectations may be hard to bridge as buyers look to reduce costs but sellers mainly focus on selling surplus renewable power contracted historically at much higher prices;

Together with launch of spot trading and announcement of other new trading initiatives, the move heralds an exciting and potentially transformational opportunity for the sector;

As almost all generation capacity is tied up in firm PPAs, volumes are bound to be thin. Sellers would mostly comprise DISCOMs that have entered into renewable PPAs in excess of their RPO targets (Karnataka, Andhra Pradesh, Tamil Nadu). The buyers are also likely to be mostly DISCOMs, primarily in north and east regions, keen to buy renewable power to meet their RPO shortfall. This route would be financially more attractive than buying Renewable Energy Certificates (RECs), a market suffering from regulatory uncertainty and shrinking volumes. Interest from C&I consumers is expected to be low at least initially due to low volumes, very short-term nature of the market and open access policy constraints.

We see a few other potential issues. Price expectations of buyers and sellers may be hard to bridge. Given the surplus power situation in the country and prevailing solar auction tariffs, buyer appetite would be mainly around INR 2.50/ kWh whereas sellers would be keen to sell power contracted at much higher prices. Scheduling conditions are quite onerous with limited provision for revisions. And finally, the need to pay immediately for power may keep some buyers away. As expected, trading volume has been patchy in the early days hovering below 10 MW for most part.

Launch of green power trading follows commencement of spot trading of power from 1 June 2020 onwards. This window is ideal for buyers and sellers in meeting their unforeseen last-minute requirements. Trading volume has already soared to 15% of total volume. Monthly average price of INR 2.31/ kWh is nearly in line with day-ahead market price of INR 2.40/ kWh.

Figure: Volume traded at Indian Energy Exchange and share of total power consumption

Source: Indian Energy Exchange, NLDCNotes: DAM – day ahead market; TAM – term ahead market; RTM – real time market

Longer-term trading windows and new instruments including derivatives are expected to follow in near future. Another new concept proposed to be launched shortly pertains to market-based economic dispatch, whereby all power sale transactions including those under long-term PPAs would be routed through exchanges.

These are all very exciting and transformational developments for power sector in India. Although some people have voiced doubts about prospects of power trading, we believe that launch of market-based mechanisms is highly desirable and the logical next step in evolution of the market. Exchange-based trading provides more information to all market participants including financiers and consumers, and leads to greater transparency, efficiency and better decisions. However, we doubt that these moves would lead to creation of new merchant power generation capacity anytime soon as we see no financing appetite for such projects currently.

ReNew recently made a surprise announcement to set up a 2 GW PV cell and module manufacturing line. Adani and Azure, the latter in partnership with Waaree, are already due to set up cell and module manufacturing capacity of 2 GW and 1 GW respectively as part of their win in the manufacturing-linked tender. Several other companies, including both manufacturers and project developers, are believed to be in advanced stages of considering setting up new manufacturing capacity. The list includes Vikram Solar, Premier Energies and US-based First Solar amongst other names. As per a news report, MNRE has received proposals aggregating total manufacturing capacity of about 10 GW.

The government is planning to throw everything from duties to cheap capital and land to demand certainty for growth of domestic manufacturing;

Most companies seem to be making opportunistic short-term bets based on government incentives;

Government incentives alone cannot be a sufficient basis for investment decisions of private investors or developing manufacturing into an engine of long-term economic growth;

The tide of company announcements comes in the wake of fervent plans of the Indian government, which seems to be throwing everything at manufacturing. In addition to extending safeguard duty by a year, it is looking to levy customs duty on all imports. There are plans to offer 5% interest rate subsidy and subsidised land with automatic project clearances. The government has also directed public financial institutions to offer debt financing of up to 75% of total capital cost to manufacturing ventures. Historically, lack of any debt financing has been a major business barrier as companies have found it difficult to fund the capital-intensive business.

How much all of this actually plays out is anybody’s guess. There is a huge gulf between Indian manufacturing businesses and their Chinese competitors on technology, scale, in-house business capability and external eco-system. Government support can be fickle at the best of times and does not provide a sound foundation for long-term investment decisions. Uncertainty of policy design and poor implementation have been amongst the biggest challenges in the sector. The government has already failed to implement customs duty from 1 August 2020 onwards as promised. Our best guess is that about 5-7 GW of new downstream manufacturing capacity would be actually set up over the next three years.

But the new businesses do not unfortunately herald India’s manufacturing resurgence. The rush to set up manufacturing capacity is not based on strong business fundamentals. Almost all companies seem to be making opportunistic short-term bets based on government incentives and trade barriers rather than plotting a long-term roadmap to develop business competitiveness. If the Indian government is serious about developing manufacturing as an engine of long-term economic growth and wants to move beyond rhetoric, it will have to work much harder than offering incentives.

This video presents a monthly snapshot of key policy and regulatory developments in India’s renewable power sector.

This video presents a summary of major developments for renewable tenders during the month. It includes details of tender issuance, bid submission, completed auctions and related market trends.

CERC, the national power sector regulator, has issued a set of proposed amendments to procedure for grant of inter-state transmission system (ISTS) connectivity approval to renewable projects. Among the major proposals is relaxation in the onerous bank guarantee requirements. Deadline for commissioning of transmission line and obligation for payment of transmission charges are proposed to be linked to scheduled COD of renewable projects rather than fixed dates. Timelines to achieve specific milestones after award of connectivity approval are also proposed to be relaxed along with a proposal to enable sharing of dedicated transmission lines between various developers.

Transmission has been a critical bottleneck to growth of the renewable sector;

Ministry of Power, MNRE and CERC have collectively taken several steps to address associated challenges;

These initiatives are highly encouraging for the renewable sector although some teething issues still remain;

Proposed changes in bank guarantee requirements include linking guarantee amount to type and status of bays allocated to the project instead of project capacity and complete waiver of construction bank guarantee if the developer constructs transmission bays at the ISTS substation. Moreover, CERC has proposed to reduce time of return of guarantees from six months to one month post renewable project COD.

These changes come on back of several other steps taken by Ministry of Power, MNRE and CERC over the last few years:

The Central Transmission Utility (CTU), responsible for ISTS planning and network management, is being demerged from Power Grid Corporation to address conflict of interest between the latter’s role as transmission system developer and network manager.

MNRE and SECI are now part of transmission planning committee resulting in better planning and synchronisation of transmission infrastructure development with renewable project development.

The Green Energy Corridor and Renewable Energy Zone schemes are designed to create evacuation infrastructure for new renewable power capacity of 106.5 GW by 2022. Total estimated cost of these schemes is INR 647 billion (USD 8.6 billion) is being funded by the government together with concessional finance from development FIs.

More transmission work is being tendered out through competitive bidding, as against allocated directly to Power Grid Corporation under cost plus mechanism, reducing cost and time required for new infrastructure by up to 30-50%.

MNRE recently extended commissioning deadline for projects eligible for ISTS charge waiver from December 2022 to June 2023 besides providing blanket waiver to projects implemented under the PSU scheme and manufacturing-linked tender.

Figure: Renewable Energy Zone scheme target, GW

Source: CERC, BRIDGE TO INDIA research

Overall, these initiatives are highly encouraging for the renewable sector. Transmission has been a critical bottleneck to growth of the sector. Poor coordination, planning and execution have led to extensive delays and even cancellation of renewable power projects.

For sure, there are still many teething issues for renewable projects. Critically, there is no guarantee by the CTU that transmission infrastructure would be available by scheduled COD of the renewable project. And there is no provision for compensation in case or transmission infrastructure is not ready. There is also even now uncertainty in getting connectivity approvals particularly in Rajasthan. Heavy regional concentration of capacity – more than 50% of total solar pipeline of 41 GW is proposed to be located in Rajasthan – is still creating bottlenecks.

Last week, Norfund, Norway’s development finance institution, announced a USD 100 million investment together with Siemens into Berkeley Energy Commercial Industrial Solutions (BECIS). The two companies have agreed to invest USD 50 million each into BECIS, which offers rooftop solar and other energy solutions to C&I consumers under PPA model. BECIS, founded by Berkeley Energy, is a new C&I renewable energy platform spanning south and south-east Asian countries. Another C&I renewable platform, Radiance Renewables, has been recently set up by Green Growth Equity Fund with investments from India’s National Investment and Infrastructure Fund (NIIF), Department for International Development (DFID UK) and Lightsource BP.

Strong supply and demand side forces point to attractive growth prospects in the C&I renewable business;

Renewable developers are competing for a small pool of acceptable counterparties;

Hostile policy scenario is further limiting growth of the market;

There is strong investment interest in the C&I renewable business. BECIS and Radiance would be competing in a crowded market alongside other specialist C&I focused developers including Amplus (Petronas), Cleantech Solar (Shell), CleanMax (KKR), Fourth Partner (TPG) and AMP. Some utility scale IPPs (ReNew, Avaada, Mahindra, Aditya Birla, Tata) are also present in the market. The investment premise is to go after large blue-chip clients with A+ credit rating (low offtake risk), high energy consumption and presence across multiple countries (scalable business).

 There is equally strong demand pull from the consumer side. Companies across the board are rushing to procure renewable power for both cost and environmental reasons. The push is getting stronger as renewable power becomes cheaper and corporate boards accelerate timeframe to achieve carbon neutral status. The good news for IPPs is that the C&I consumers have an overwhelming preference for OPEX model. It offers them assured savings, no operational or technology risk and most importantly, requires no upfront financing (crucial in COVID times).

But we see two major growth constraints. The pool of large, A+ rated counterparties is relatively small in India. Within the total 80 GW C&I power demand, we estimate that only about 8-10 GW comes from suitable counterparties. All IPPs are competing for this relatively small client pool, leading to an extremely competitive and price driven market. We estimate annual C&I renewable PPA market size at only about 1,200 MW excluding public sector consumers. And as the chart below shows, growth has begun to taper off.

Figure: New deployments in C&I renewable PPA market, MW

Source: BRIDGE TO INDIA researchNotes: Rooftop solar data excludes projects supplying power to public sector consumers. Wind open access market size is estimated at between 100-200 MW per annum; year wise data is not available.

The other major constraint to this market comes from strong resistance from DISCOMs, who are reluctant to see their best and highest tariff paying customers go away. Many states including Uttar Pradesh, Haryana, Rajasthan, Gujarat, Karnataka, Andhra Pradesh, Telangana and Tamil Nadu have announced regressive policy measures withdrawing incentives, denying approvals, limiting banking provision and/ or imposing grid charges on C&I renewable projects. We expect policy scenario to grow even more hostile as COVID-19 causes a serious dent in DISCOM finances. Proposed amendments to the Electricity Act (reduction of CSS, tariff reform), if implemented, may also pose additional short-term challenges to the market. The new players would need to innovate and diversify their business offering to cope with these constraints.

Chinese module major Trina launched a new series of 550 W bifacial modules recently and announced production of a new 600 W version from next year onwards. The company also announced that it expects to triple production to 31 GW in 2022, up from 10 GW last year. The new modules use half-cut cells and are reported to have efficiency of over 21%. The company’s peers including LONGi, Jinko, Canadian Solar, JA Solar and Risen have announced broadly similar breath-taking jumps in technology and production scale.

Leading Chinese manufacturers are upgrading technology and investing aggressively in R&D and capacity expansion;

Uptake of new technologies by Indian IPPs is increasing due to affordable prices;

The government policy comprising mainly trade barriers and capital subsidies is not equipped to improve fundamental competitiveness of manufacturing;

Leading Chinese module manufacturers continue to rapidly upgrade technology and are making huge investments in R&D and capacity expansion. The Chinese government is weighing in with a new set of proposed guidelines, issued in June 2020, for module manufacturers to improve focus on advanced technologies and lower production cost. These developments have critical implications for the entire solar value chain. One, prices have crashed by 15% already this year. Mono-PERC and bifacial technologies are becoming mainstream as price differential over multi-crystalline modules has narrowed to less than USD 1 cent and 2 cents respectively (see figure). Two, the smaller manufacturers, not just in other countries but even in China are getting left behind. Most tier 2 and tier 3 manufacturers in China – lacking in technology, scale and access to international markets – are facing increasing financial stress and risk being squeezed out of the market. Share of top ten module makers worldwide (eight from China) is expected to touch a record high of 70% this year.

Figure: PV cell capacity by technology, MW

Source: PV Infolink

Three, the IPPs face a more complex choice both for module technology and suppliers. Downward pressure on LCOE is forcing them to adopt new technologies but often with limited proven track record.

In India, uptake of new technologies has been relatively slow because of high prices in the past. But with LCOE gains exceeding price differentials, bulk of new projects are now using mono-PERC modules. We expect bifacial modules to become mainstream by 2022.

Meanwhile, the government has been struggling even to implement quality assurance guidelines. Deadlines for BIS and ALMM initiatives are being progressively extended because of lack of technical infrastructure. It is a sobering thought that in such an environment and against fierce competition from Chinese manufacturers, how are Indian manufacturers going to compete? The government policy, directed mainly towards creating trade barriers and providing capital subsidies, is not equipped to improve fundamental competitiveness of manufacturing. Even the extension of safeguard duty by one year is a worthless exercise. So long as Indian manufacturers are unable to compete with their Chinese counterparts on scale and technology, the goals of energy security and self-sufficiency would remain elusive.