Month: September 2020

Pumped hydro has once again emerged in the power sector discourse with Greenko developing a 1,200 MW site in Andhra Pradesh and another 1,260 MW site in Karnataka. The Andhra Pradesh project would be coupled with solar and wind power plants as part of the company’s 900 MW project win in SECI’s 1,200 MW peak power tender. Separately, Andhra Pradesh has recently invited EOIs for preparation of pre-feasibility studies and detailed project reports for 6.3 GW pumped hydro capacity across seven locations in the state.

Greenko would be the first developer in India to build a pumped hydro project co-located with wind and solar plants;

Due to high development risk and rapidly falling cost of battery technologies, viability window for pumped hydro is short and no other developers seem keen on it;

Greenko’s willingness and ability to develop pumped hydro projects in anticipation of market demand could pay handsome rewards;

Use of pumped hydro for balancing the grid has been under consideration for a few years as share of renewable power in the grid has been rising steadily. But so far, it has mainly remained a talk with little on-the-ground action. Greenko would be the first developer in India to build a pumped hydro project co-located with wind and solar plants. The main problem is that gestation period for pumped hydro projects is typically 5-7 years, often even longer. This timeframe is not consistent with tendering process for renewable projects, where completion is expected within 18-24 months of PPA date.

Pumped hydro has significant advantages as well as disadvantages when compared with batteries and other forms of storage. It has lower capital cost, can provide longer duration storage, is much safer, has no import dependence and has a very long project life of over 50 years. As an example, Greenko’s 1,200 MW pumped hydro component has estimated capital cost of INR 55 billion (USD 725 million), effectively about USD 75/ kWh, much lower than cost of battery storage systems estimated of approximately USD 300/ kWh. Pumped hydro is also a very versatile technology – it can provide a wide range of grid services including balancing and ancillary services as well as optimisation of transmission system. These advantages are offset by two formidable disadvantages. First, the long gestation period comes with high development, environmental and construction risk. Project bankability is low and even public sector developers shy away from these projects. Second, while India is touted to have a total pumped hydro potential of close to 100 GW, there is no assessment of how many sites are suitable for co-located solar and wind projects.

Government agencies can mitigate some of the development risk by identifying potential sites and completing social and environmental risk assessment studies in advance. Other states should take a cue from Andhra Pradesh in this regard. We believe that given the rapid advancements in battery technologies, pumped hydro has a limited time window of 5-7 years. It is difficult to conceive construction of new pumped hydro projects beyond this timeframe.

Greenko has followed an exceptional approach in anticipating need for storage and developing pumped hydro projects. The company, aided by ample and patient equity support, has been identifying and developing suitable sites while waiting for the right bidding opportunities. This approach could pay handsome rewards as procurement agencies issue more hybrid schemes for firm, dispatchable power.

BRIDGE TO INDIA hosted a webinar on 28 August 2020 to discuss rooftop solar adoption by MSME consumers. Participants included a cross section of industry stakeholders: Mr. Ravinder Singh (Chief – Solar Rooftop Business, TATA Power), Mr. Ashutosh Puntambekar (Sr. Vice President & Head, Electronica Finance), Mr. Kushagra Nandan (Co-founder, SunSource Energy) and Mr. Vivek Bhardwaj (Head of Sales – India, GoodWe); and two MSME representatives (Mr. Sandeep Kishore Jain, Managing Director, The Solo Group and Mr. Rajesh Nangia, CEO, Encoders India) that have recently installed rooftop solar systems on their premises.

We estimate total rooftop solar installed capacity in the MSME segment at only about 800 MW, less than 15% of total rooftop solar capacity. This is exceptionally small given that MSMEs constitute more than a third of total exports and GDP and almost half of total manufacturing output and industrial power demand. Although the segment has a huge potential of 25-27 GW capacity, constraints like lack of awareness and financing options continue to hinder progress.

Figure: Rooftop solar installed capacity as on 30 June 2020

Source: BRIDGE TO INDIA research

The two MSME representatives shared their experience of installing rooftop solar systems and challenges faced. They were overall satisfied with their decision and system performance. Encouragingly, they highlighted that they were mainly focused on quality rather than prices while choosing suppliers. Both companies funded the installations internally but faced a major hurdle in securing grid connectivity approvals. Many states continue to take as long as 6-12 months to provide net-metering approvals.

All panellists agreed that the that the MSME market is very tough to penetrate because of lack of financing and insufficient understanding of rooftop solar. The two installers added that there is a lack of awareness particularly in tier 2-3 cities. Mr. Singh stated that financing systems above the size of 100 kW is a challenge for MSMEs because they do not have access to financing unlike larger players. Mr. Nandan mentioned that they see huge growth potential in MSMEs but are targeting select clusters at a time. There was a consensus on the need for hybrid and innovative business models for this market to pick up as traditional CAPEX and OPEX models are not suitable for MSMEs.

Mr. Puntambekar added that Electronica Finance is currently financing up to 75% of total cost of rooftop solar systems up to 300 kW for MSME customers. Typical interest rates are 11-14%. He mentioned that because of limited ability to repossess rooftop solar assets unlike other manufacturing machinery, a collateral is required for larger loans. Mr. Singh agreed but argued that alternate financing models with non-collateralized, lower cost solutions are critical to unlocking the MSME market.

Overall, the speakers were unanimous about the huge potential of MSME market. There are plenty of reasons to be optimistic due to rapidly improving technology landscape, falling capital costs and improving technical awareness.

BRIDGE TO INDIA has just completed the latest round of data compilation exercise for rooftop solar. 1,140 MW of new capacity is estimated to have been installed in the 12-month period to June 2020, down 40% over previous year. Installation activity was tracking fairly well up to January 2020, after which the COVID effect hit the market. Activity levels fell sharply from February onwards initially because of delays in equipment shipments, but later because of extended lockdown, shortage of labour and related reasons.

C&I consumers are hesitant to make buying decisions amid ongoing business uncertainty;

Residential and MSME market segments are constrained by lack of financing solutions;

Rooftop solar faces limited growth prospects in the short-to-medium run due to risk of economic downturn, potential import duties on solar equipment and withdrawal of net metering;

The slowdown came at the worst possible time as Q1 is by far the busiest quarter for new installations. Progress across states and consumer segments was consistently down across the board. The only exceptions were Madhya Pradesh and Telangana, both benefitting from some large C&I installations.

Our quick checks with top contractors and developers across the industry show that business activity has picked up significantly in the last few months. Installation interest seems even stronger amongst C&I consumers because of attractive savings potential of rooftop solar but closures are slow. Companies are hesitant to make buying decisions amid ongoing concern around business operations, power demand and financial status. Discussions are also getting protracted because of risk of import duties on modules (and, possibly inverters). There is a discernible shift in preference towards OPEX model as businesses are reluctant to incur capital expenditure for non-core operations. 

Figure: Capacity addition by consumer segment, MW

Source: BRIDGE TO INDIA research

Meanwhile, we understand that the residential market, expected to be on an upswing due to government subsidies and policy thrust, remains weak particularly in larger cities. Rooftop solar is not a priority for households at a time of rising health concerns and financial uncertainty. The MSME market is also highly constrained due to lack of affordable financing solutions. Weak growth in these segments is disappointing as the market’s over-dependence on private C&I consumers makes it prone to growth shocks.

Going forward, rooftop solar faces three main risks in the short-to-medium run. Adverse impact of COVID on consumer finances and liquidity in the banking system could last for 2-3 years. Imposition of import duties would be a major dampener as contractors renegotiate prices or consumers delay installation decision. An escalating duty structure, as conceived by MNRE, could keep costs high for the foreseeable period. And finally, DISCOM resistance to free net metering is bound to get stronger. Even the Ministry of Power has proposed withdrawal of net metering connectivity for all systems bigger than 5kW. 

Latest MNRE data shows that less than 9,000 solar pumps were installed in FY 2020, the lowest in last five years. Progress on distributed solar projects for agricultural consumption is equally disappointing. Maharashtra, Haryana and Rajasthan are the only three states to have issued tenders for agricultural feeder based solar projects. Maharashtra’s 1,400 MW tender has been undersubscribed repeatedly despite four auctions till date. Haryana has not even announced bid submission date for its 279 MW tender issued back in January 2020. Rajasthan has allocated 725 MW on a preferential basis to more than 600 farmers at a tariff of INR 3.14/ kWh.

Actual progress against the scheme targets is abysmal;

Growth prospects of solar pumps seem bleak in view of the insurmountable financial barriers;

Distributed solar is a sound policy objective but needs focused policy support to overcome on-the-ground challenges;

MNRE had announced the ambitious KUSUM scheme in 2017 (cabinet approval was received in 2019). The target was to add 25,750 MW of solar capacity – 10,000 MW distributed solar projects up to 2 MW each in size plus 2.75 million solar powered pumps – by 2022 with total capital subsidy support of INR 344 billion (USD 4.6 billion).

Figure: Solar pump installed base

Source: MNRE

The problems with pumps are several and obvious. Most importantly, the central and state governments simply do not have funding capacity for required subsidies. Farmers are even less keen – why pay 10-40% of pump cost upfront when they can instead get free (albeit unreliable) power from the grid. Second, the government mandates use of domestically manufactured cells and modules but limited availability and high cost of such modules are major challenges. Moreover, overall techno-commercial efficiency of a pump is almost half of a larger ground-mounted solar installation.

Some analysts have therefore claimed that agriculture feeder based small solar projects of up to 2 MW each are the ideal solution to providing solar power to farmers. Such projects face less acute land and transmission challenges. They also create more widespread economic benefits of solar deployment with jobs, investment and land rental income opportunities accruing to farmers across the country rather than to larger developers in concentrated pockets in a few states.

Figure: Comparative assessment of different solar power sources for agricultural supply

Source: BRIDGE TO INDIA research

Andhra Pradesh has jumped on the bandwagon with its own ambitious scheme to develop 10 GW of distributed solar capacity to meet the entire agricultural demand in the state. But given the recent renegotiation, curtailment and payment problems faced by developers in the state, it will be a miracle if this scheme takes off.

Agricultural solar has been touted as a panacea for the power sector and even the wider economy – reliable supply to farmers boosting farm output and rural incomes, reduced transmission losses, improved DISCOM finances, lower diesel consumption and so on. However, the scheme suffers from poor conceptualisation and implementation. It is a sound policy objective but needs focused policy support to overcome on-the-ground challenges.

Central Electricity Regulatory Commission (CERC) recently issued a draft regulation for power markets. The regulation is aimed at improving transparency in market trading and lay groundwork for derivative trading in near future. 

Figure: Power traded through short-term markets

Source: CERC annual market monitoring reports

One of the most important proposals is to set up a market coupling operator for discovery of a common clearing price across all power exchanges for day-ahead (DAM) and real-time (RTM) instruments. However, the justification provided for introduction of this operator is not entirely convincing. CERC claims that harmonisation of prices across power exchanges would lead to optimal utilisation of the cheapest sources of power and transmission corridors. The commission also claims that a common market price is necessary to benchmark financial derivatives and contracts expected to be launched soon.

Surprisingly, the commission has made no mention of market-based economic dispatch (MBED, mooted in 2018) in the draft regulations. MBED aims to maximise utilisation of power plants with low variable charge, potentially requiring all power plants, even those with existing long-term PPAs, and DISCOMs to trade electricity through power exchanges. If achievement of optimal utilisation of cheapest power plants is indeed the objective, MBED should have been central to these regulations. CERC has claimed annual savings of INR 62 billion (USD 831 million) in a simulation conducted for Andhra Pradesh, Karnataka, Telangana, Maharashtra and Chhattisgarh.

With respect to benchmarking to a common price, there is no such precedent in other markets. The two national stock exchanges trade independently with separate derivative contracts. Further, any difference in prices at two or more platforms is bound to diminish overtime.

Another proposal in the draft regulation envisages setting up an OTC trading platform with information of all buyers and sellers. We believe that this measure would increase transparency in the bilateral market and potentially increase trading volume and competition.

The draft regulation also includes a brief mention of ancillary services and capacity contracts but falls short of providing any details, operational guidance or implementation timeline for either of the two contracts. Lack of operational guidance for these contracts or clarity on introduction of MBED makes this draft regulation a missed opportunity in our view.

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.

In an encouraging development for renewable power, Indian states and private investors are turning their back en masse on new thermal power capacity. Energy minister of Maharashtra, the largest power consuming state, announced last week that the state will not add any new thermal power capacity. Reasons cited include increasing cost of thermal power production and pollution. The state wants to meet 25% of its power requirement from renewable resources, up from current 9%. Maharashtra’s announcement comes after two other states including Gujarat, another major power consumer, and Chhattisgarh, one of the largest coal producing states, announced retreat from new thermal power last year.

State governments, DISCOMs, private investors and consumers are collectively turning back on thermal power;

Share of private investment in thermal power capacity addition has fallen from 65% to almost nil in just five years;

The Indian government needs to define a clear roadmap for phasing out new thermal power by 2024 to provide clear direction to policy makers and markets;

With most states now grappling with power surplus as well as environment and climate change related issues, more similar announcements can be expected soon. DISCOMs across the country have anyway been reluctant to sign new long-term thermal PPAs for a few years now. Private investors and power consumers are following in the same direction. Even the Indian Railways have announced a goal of attaining zero carbon emissions by 2030. The Railways are aiming to achieve 100% renewable energy adoption by building 20 GW of new renewable capacity by 2030. Meanwhile, Tata Power and JSW Energy, two of the largest private thermal IPPs, have recently declared that they do not anticipate setting up any new thermal power plants. Both companies now want to focus only on renewables for their future expansion plans. The investors are concerned about safety of their investments and do not consider long-term prospects of thermal power – increasing taxes, higher litigation risk and cost disadvantage vs renewables – as attractive.

Shifting investor preferences can be most clearly seen in the profile of new thermal power generating capacity developed each year. In just five years, share of private sector in new capacity addition has fallen from 65% to almost nil. Of the 46.6 GW of thermal power plants in various stages of construction, only 7% (3.3 GW) is being developed by private IPPs.

Figure: Share of thermal power capacity addition

Source: CEA, BRIDGE TO INDIA research

We maintain that given limited viability of other generating sources (hydro, nuclear, biomass) and non-firm nature of renewable power, thermal power will have an important role to play in India for years to come. We expect coal to account for over 50% share of total power production in the country for at least another 20 years.

Nonetheless, government-owned companies still investing so heavily in new thermal power plants is indefensible. Thermal plant PLFs are down to historic lows of around 50% and it is almost inevitable that all new plants will end up making losses in the long run. The central government is showing lack of vision in trying to expand thermal power and coal production rather than laying out a clear roadmap for phasing out new thermal power by say, 2024. Absent the government doing so, the market forces will drive the same changes but in a somewhat chaotic and expensive manner.

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