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New urgency needed for faster energy transition

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India’s economy and power sector continue to reel under effects of COVID-19. IMF has projected FY 2021 GDP to contract by 10.3% over the previous year. As the vaccine is not likely to be widely available until mid-2021, a long period of uncertainty looms. The economic slowdown poses critical concerns for the renewable power sector:

Power demand has gradually recovered to last year’s (subdued) levels but there are concerns that long-term growth prospects may have been dimmed.

DISCOM financial position has grown even more perilous due to unfavourable shift in demand away from the lucrative C&I consumers and, lower billing and collection efficiency. Payment delays to power producers continue to soar despite injection of INR 310 billion (USD 4.1 billion) liquidity support by PFC and REC.

Banks are even more shy of new lending particularly to smaller consumers, contractors and project developers.

Figure: Power consumption and DISCOM dues

Source: CEA, PRAAPTI portal, BRIDGE TO INDIA research

The troubling part is that renewable power capacity addition has anyway been slowing down considerably recently due to strong headwinds on multiple fronts. We estimate total capacity to reach 121 GW by 2022, significantly behind the 175 GW target. The government has announced a new bold target of 450 GW for 2030 – entailing capacity addition of 36 GW every year – but the pathway for doing so is not clear.

Figure: Renewable power capacity addition

Source: BRIDGE TO INDIA research

In the economic recovery measures announced so far, renewable power has received scant attention. The government has agreed to provide concessional liquidity support of INR 900 billion, now increased to INR 1,200 billion (USD 16 billion), to DISCOMs for clearance of outstanding dues and commitment to future reforms. Battery cell and solar PV manufacturing have been identified as ‘champion sectors’ as part of the atma-nirbhar policy but any concrete measures are yet to be announced.

As uneconomic uncertainty still persists, there is pressure on the government to provide greater stimulus and undertake new measures to boost growth. We believe that there is a unique opportunity to kill two birds with one stone – support the economy and pave way for faster energy transition through a ‘green recovery’ package. Such a package would have considerable benefits in the form of accelerating flight against climate change, improvement in air quality (Indian cities are amongst the most polluted in the world), greater energy security, fostering economic and technological innovation as well as improving long-term competitiveness of domestic businesses.

Strong merits of ‘green recovery’ process have already led many countries to pursue this path. The European Union, Japan and South Korea have committed to achieving carbon neutrality by 2050. Many countries have announced dedicated R&D funds, new technology initiatives and scale-up programmes.

Germany is building R&D capability with a focus on digitalisation and coupling of electricity, transport and heating sectors.

France plans to spend EUR 32 billion in development of the renewable energy and energy-efficiency sectors. The French government has also released a National Hydrogen Strategy, providing for an investment of EUR 7.2 billion by 2030.

South Korea and Italy have ramped up subsidy support for rooftop solar PV projects. The Italian government has increased subsidies for households installing solar and storage systems.

Singapore is developing a solar PV roadmap to potentially meet 43% of the city-state’s power demand by 2050.

Nigeria has earmarked USD 620 million for installation of solar home systems by 5 million households, thereby creating 250,000 jobs.

In Australia, plans are afoot to develop a hydrogen-based industry.

There are many urgent priorities for the sector in India: develop technology and manufacturing competence, digitalisation, improve system resilience through storage and demand-supply flexibility, and greater provision of land and transmission capacity besides long-overdue reform of the distribution business. If the government can grasp this opportunity by taking effective steps, it can pave way for a wonderful and long-term transformation of the economy.

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Haryana deals a low blow to open access

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Haryana electricity regulator, HERC, has recently adjudicated on two petitions by Cleantech Solar and LR Energy respectively, open access solar project developers in the state. Both developers had obtained all necessary approvals from the state nodal agency (HAREDA) and state transmission company (HVPN) to build and connect two separate 20 MW projects to the state transmission network. However, on completing construction of the projects, when the developers applied for final long-term access approval and execution of Connectivity Agreement, the DISCOMs declined to give approvals on various grounds.

Approvals are being denied to fully constructed projects on specious grounds only to serve DISCOM interests;

Haryana has amended its solar policy at every turn creating chaos in the sector – only 69 MW capacity has been commissioned in the last four years;

The blatant abuse of power by HERC and other state authorities is a warning sign for investors and consumers and does not bode well for the open access market;

In the case of LR Energy, HERC has simply noted that because of the company’s “dispute” with the state utilities including HAREDA, DISCOMs and transmission company, it is desirable that the company signs a PPA with the DISCOMs instead at a tariff to be approved separately. In Cleantech Solar’s case, where the company had argued against various objections raised by the DISCOMs and HAREDA relating to ‘captive’ nature of the company’s SPV and its shareholding structure, HERC has ruled against the company. The status of Cleantech Solar’s project is therefore unclear.

Similar issues had recently arisen in the case of Amplus Solar, which was denied final long-term access approval for a 50 MW open access solar project after construction was completed. Amplus Solar had no choice but to “agree” to sign a PPA with the DISCOMs at a tariff believed to be around INR 2.80/ kWh.

Haryana is probably the worst instance of ad hoc and inconsistent renewable policy formulation and implementation by states. The state had issued a very favourable solar policy in 2016 with a target of 3,200 MW solar capacity by March 2022 (50% capacity addition through rooftop solar). The policy, offering a complete waiver from all transmission and wheeling charges as well as CSS and other surcharges, was extremely favourable to open access projects. After a couple of amendments in 2017 and wrangling between different state agencies, HAREDA issued guidelines for approving projects under the state policy and received applications for projects aggregating over 1,000 MW capacity. The guidelines were further amended and the policy was finally notified and approved by HERC with multiple restrictions in 2019. The transmission and wheeling charges were waived only for 500 MW of aggregate ‘captive’ capacity. Unsurprisingly, only 69 MW of solar capacity has been commissioned in the state in the last four years.

Haryana’s case typifies problems faced by open access market. DISCOMs and other state agencies, under ever growing financial pressure because of weak demand, delayed payments from consumers and high T&D losses, are not only reversing favourable policies, but also refusing to give approvals and creating implementation hurdles.

Figure: Open access solar capacity addition, MW

Source: BRIDGE TO INDIA research

Consequently, growth in open access renewable market, which holds huge growth potential, has stalled in the last few years. DISCOMs in many states including Andhra Pradesh, Telangana, Gujarat, Rajasthan and Maharashtra remain opposed to open access, but Haryana has touched a new low and sent a warning to investors and consumers. Given growing financial problems of DISCOMs, prospects of this market may yet grow worse before getting better.

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Open access renewables suffering at the hands of DISCOMs

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BRIDGE TO INDIA hosted a webinar on 29 September 2020 to discuss India’s open access (OA) renewables market. Participants included Mr. Dinesh Jagdale (Joint Secretary, MNRE), Ms. Bhavna Prasad (Director – Sustainable Business, WWF India) and a spectrum of private sector stakeholders comprising  Mr. Arvind Bansal (CEO, Continuum Wind Energy), Mr. S Manikkan (CEO, Radiance Renewables) and Mr. Tejus Arsikere (Chief – Solar farms, CleanMax) as the three developers; Mr. Arijit Mitra (Head of Distributed Generation, LONGi) and Mr. Vivek Bhardwaj (Head of Sales – India, GoodWe) representing the equipment suppliers and Mr. Amar Narula (Partner, Trilegal) bringing in the legal perspective. We also had two C&I consumer representatives on the panel – Mr. Debasish Ghosh (AVP, Hindalco Industries) and Mr. Ashwin Kak (Associate Director, AB InBev).

C&I consumers currently source only about 5% of their power requirement directly from renewables. The consumers are under growing pressure from their investors and customers to scale up renewable procurement and reduce carbon emission. Renewable power also has the benefit of being cheaper than grid power in most states. Despite strong interest from consumers and developers, OA renewable capacity addition has slowed down in the past two years due to hurdles posed by DISCOMs and state regulators. As a result, the industry is facing a number of distressing policy and regulatory issues.

Figure: Estimated C&I power consumption sources

Source: BRIDGE TO INDIA research

Both Hindalco and AB InBev mentioned that they want to scale up their renewable power programme and have been examining different procurement options. Hindalco currently has an installed capacity of 45 MW open access solar, with another 60 MW in pipeline. They also have plans to foray into pumped hydro and energy storage in the future. AB InBev has made a commitment to achieve net zero carbon emissions globally by 2025. Interestingly, they mentioned that while they have already achieved more than 50% renewable penetration in many countries, they are struggling to go beyond 10% in India. Both consumers also talked about various challenges on regulatory and policy fronts as well as land acquisition and transmission connectivity. A growing challenge in recent times is ad hoc cutback in banking provision whereby many states are either removing banking provision altogether (Andhra Pradesh and Madhya Pradesh) or restricting it to 15 minutes only (Karnataka). Inconsistent interpretation of ‘group captive’ policy with different shareholding and power consumption norms by different states is also a major concern. For example, Maharashtra has been levying additional surcharge even on captive projects.

The project developers, on their part, believe that the OA market has very attractive growth prospects and could grow by 30-40% per year. Among states, Karnataka is deemed attractive due to stable policy landscape and banking provision. Gujarat, Maharashtra and Odisha are also deemed favourable with increasing demand. Continuum mentioned that they are hybridising their 800 MW of wind projects with addition of solar and storage capacity over the next 2 years. The move allows them to use existing connectivity infrastructure and provide greater quantum as well as more reliable power to customers with a much higher savings potential in comparison to standalone solar or wind projects. However, hybridisation is only possible where the developer has 100% ownership of assets and dedicated evacuation infrastructure.

On countering DISCOM resistance to OA power, most panellists agreed that unless DISCOMs earn similar margin from OA power as grid power supply business, their resistance would continue to grow. Some states (Gujarat, Tamil Nadu and Odisha) have already achieved this equilibrium through increase in OA charges. Other interesting discussion points in the webinar were related to need for bilateral RECs and innovative business models like Contract for Differences (CFD) or virtual PPAs for the market to grow. One of the panellists mentioned that some large-scale consumers are seriously exploring the virtual PPA option.

To address the policy and regulatory concerns of the panel, Mr. Dinesh Jagdale added that MNRE along with the Ministry of Power (MOP) has been making constant efforts to make policy and regulatory framework more stable. He mentioned that MOP is expected to shortly release directives to ease regulatory procedure for OA connectivity and reducing minimum capacity threshold from the current 1 MW.

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Greenko successfully carving its own trail

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Last month, Greenko announced acquisition of 873 MW of operational wind assets from ORIX, Japan, who also agreed to invest USD 980 million into the company for a minimum 20% stake. It is one of the largest in-bound investments into the renewable sector so far and provides a double shot in the arm for Greenko: simultaneously boosting its operational portfolio size, now up to 5.1 GW, and also providing it with substantive growth capital.

Greenko is the only major renewable developer to have consciously stayed away from all project auctions (other than recent hybrid tenders);

It is diversified across renewable technologies and has been proactively developing a portfolio of pumped hydro projects to meet growing need for 24×7 despatchable renewable power;

By maintain a steady financial and operational strategy, and staying patient, Greenko has successfully differentiated itself in a highly commoditised sector;

Greenko has taken on a very different path to growth in comparison to its peers, first eschewing project auctions, and then focusing on developing despatchable power projects rather than standalone renewable projects. Remarkably, Greenko is the only company in the sector that has consciously stayed away from all project auctions – other than the two recent hybrid tenders – believing that the market is overly competitive with risk-adjusted returns being consistently below cost of capital. Instead, the company has made substantial acquisitions after the assets have been built and derisked. Over the years, the company has acquired a total of 2,000 MW of assets making some substantial acquisitions including Orange (1,000 MW), Skeiron (385 MW) and SunEdison India (587 MW).

There are other fundamental ways in which Greenko has differentiated itself. Its portfolio is more diversified across technologies with a growing share of hydro power. Most of the debt funding comes from offshore green bonds and the company has more financial headroom in comparison to other developers (see table below).

Figure: Portfolio size and make up of Greenko and its peers.

Source: BRIDGE TO INDIA researchNotes: Pipeline includes all projects successfully awarded to developers in completed auctions including instances where PPA execution and/ or regulatory approval are pending. For hybrid projects, we have estimated solar and wind capacities based on industry norms. Adani’s operational capacity includes 2.1 GW of solar projects carved out in a separate JV with Total.

Table: High level comparison of Greenko with its peers

Source: BRIDGE TO INDIA research

Greenko says that it is developing a further 8 GW/ 40 GWh capacity in five states. Main focus is combination of hydro, solar and wind power to provide 24×7 schedulable, on-demand renewable power during peak hours to meet DISCOM demand. There are also news reports of the company trying to acquire US-based NEC, a battery storage systems integrator.

The ORIX deal validates Greenko’s unique strategy in the Indian renewable sector. It is an isolated example of a company successfully differentiating itself in a highly commoditised and competitive sector. The company has built a strong competitive barrier by patiently developing a portfolio of pumped hydro projects in anticipation of changing market needs.

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India Renewable Power Tenders Update – September 2020

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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.

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India Renewable Power Policy Update – September 2020

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

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Uncertainty dogs tender programme

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Bid submission date for SECI’s 5,000 MW renewable-thermal-storage hybrid tender has been extended to 3 November 2020. This is the eighth bid submission extension for the tender as developers have raised various concerns on tender design, contract structure and penalty regime. Bidding date for SECI’s 2,500 MW Karnataka tender and Railways 2×1,000 MW tenders has also been extended multiple times. While there are problems related to land acquisition by Karnataka government in the SECI tender, the issue with Railways tenders is unsuitable clauses related to project siting and land use.

Slowdown in tender programme, confusion regarding new tender designs and repeated deadline extensions are creating a sense of unease in the sector;

The developers, already reeling from greater execution challenges, delayed construction and higher working capital costs are suffering loss of confidence;

MNRE needs to streamline the programme and offer greater transparency to investors;

Main issues in the renewable-thermal-storage hybrid tender pertain to change in law provisions, coal linkage, connectivity regions and share of power from different sources.

A look at the monthly data for tender issuance and project award shows activity declining steadily over the last few months.

Figure: Tender issuance and auction capacity

Source: BRIDGE TO INDIA research Note: Auctions data refers to actual capacity awarded.

Uncertainty is not confined to new tenders alone. Even the status of many auctions completed in the last nine months is unclear. By various estimates, there are as much as 16-19 GW of projects where SECI has successfully completion auctions but is unable to get DISCOMs to contract power purchase. The list includes capacity awarded under 12,000 MW manufacturing-linked tender (tariff INR 2.92/ kWh), 1,200 MW peak power tender (average tariff INR 4.11), 400 MW round-the-clock power tender (INR 3.55) and 2,500 MW blended wind tender (2.99). Reasons for unsigned PPAs include a mix of low power demand and relatively high tariffs in some of the more complex tenders.

The scale of unsigned PPAs is staggering. Together with slowdown in tender programme, confusion regarding new tender designs and multiple deadline extensions, it has led to apprehension in the developer community about state of affairs. Some of these problems clearly owe their origins to COVID. But the somewhat disorderly nature of tendering process has not helped. It causes unnecessary anxiety and imposes additional cost burden on developers, who are already reeling from greater execution challenges, delayed construction and higher working capital costs.

MNRE is trying hard to tie-up PPAs and has even proposed a bundled scheme combining a mix of high tariff and low tariff projects to bring down average tariff for DISCOMs in the acceptable range. There is also belated acceptance that issuing tenders and completing auctions without firm back-to-back demand from DISCOMs is not desirable. If SECI changes its tendering approach whereby DISCOM demand is tied up in advance of tender issuance, it will be a lesson well learnt.

India has the largest tendering programme worldwide in the renewable sector. The need of the hour is to back it up with greater transparency, improved scheme design and better coordination between different government agencies.

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