Month: November 2020

On 23 November 2020, SECI conducted an auction for a 1,070 MW vanilla solar tender where a new tariff low of INR 2.00 (USD cents 2.7)/ kWh was discovered. The low tariff was bid by Saudi Arabia’s Aljomiah (200 MW), a new market entrant, and Sembcorp (400 MW). NTPC was the other successful bidder, winning 470 MW capacity, with a tariff of INR 2.01/ kWh. The tender was oversubscribed heavily with bids totalling 4,350 MW submitted by Sprng, SJVN, Solar Arise, Vector Green, Tata Power, Juniper, Axis Energy, Ayana, Jakson, Amp Energy and O2 besides the three successful bidders.

Bidding interest for vanilla solar projects is very high as many small-mid size developers who have recently raised money are not keen on complex hybrid schemes;

Tariffs have fallen sharply only because of anxiety of the winning bidders to scale up;

The low tariffs will distort expectations of other DISCOMs and increase risk of cancellation or renegotiation of projects with tariffs higher than INR 2.50/ kWh;

As seen in the last two SECI solar auctions, bid intensity has suddenly shot up over the last few months. A look at the names of participating bidders shows that the tender received interest mainly from small-mid size developers (other than the exception of Tata Power and NTPC). Most of these developers have either recently raised money and/ or are in advanced stages of completing construction of their pipeline projects and hence, are keen to win more capacity. The developer interest was also particularly strong in this tender because of firmed up offtake (from Rajasthan) and straight forward execution for vanilla solar projects in Rajasthan. The developers are concerned both about weak power demand – SECI has nearly 18,000 MW of allocated projects without back-to-back demand from DISCOMs – and execution challenges associated with complex hybrid schemes.

Solar power tariff has fallen by 15% in five months. There is no good reason for such a sharp fall other than anxiety of the winning bidders to scale up. Projects under this tender will be connected to state grid with risk of higher downtime and curtailment in comparison to projects connected to the national grid. Module prices have been volatile, firming up over last four months, and betting on significant fall within the execution timeline is dangerous. The only mitigation in comparison to other projects being developed in Rajasthan is that power would be consumed within the state; the state development fund charge of INR 200,000/ MW per annum – equivalent to about INR 0.14/ kWh in tariff terms – will therefore not be applicable.

Our financial calculations show project level equity IRR of sub-10%, deep water territory. The following chart shows interesting bid price differential for different developers. We believe that the prudent tariff for the tender was in the INR 2.25-2.40 range.

Figure: Bid capacities and tariffs

Source: BRIDGE TO INDIA research

The implications of the unrealistically low tariff are not palatable both for the winners in this tender and for winners of other recent tenders. It distorts expectations of DISCOMs and increases risk of cancellation or renegotiation of projects with tariffs higher than INR 2.50/ kWh.

The Ministry of Power has amended competitive bidding guidelines for procuring ‘round-the-clock’ (RTC) power by blending renewable power with power from other sources. Minimum share of renewable power remains at 51%. Main change pertains to relaxation in source of other power – bidders are free to procure non-renewable power from any source as against being restricted to only coal-fired power. There is also no longer any restriction for renewable and non-renewable plants to be in the same Regional Load Desptach Centre (RLDC) area. However, the bidders are required to specify only one non-renewable source together with share of non-renewable power as well as generating stations with uncontracted capacity upfront.

Despite relaxation in power sourcing, thermal power seems like the obvious choice for blending with renewable power;

Steep increase in penalties and requirement to match L1 tariff would be major source of irritation for developers;

DISCOMs would be better served by procuring renewable and non-renewable power separately on their own;

There is no change in the minimum CUF or availability requirement of 85% annually as well as for four peak hours every day (as specified by the respective RLDC). But penalty for not fulfilling these requirements or providing specified renewable power output every year has been increased steeply from 25% to 400% of applicable tariff for the respective shortfall.

Projects up to 1,000 MW are required to achieve financial closure and COD within 18 and 24 months respectively (24 and 30 months respectively for projects greater than 1,000 MW). Bidders will be required to submit a four-part tariff bid – tariff for renewable power, fixed charges and variable charges for fuel and transportation costs for non-renewable power. Surprisingly, there is no separate component for non-renewable O&M costs. Projects would be allocated on the basis of weighted average levellised tariff, computed as per CERC guidelines. Winning bidders are required to match L1 tariff, which would be a source of irritation for the developers.

Overall, the changes are largely positive for developers. Despite relaxation in source of non-renewable power, thermal power would be the obvious choice both for availability of spare capacity and cost competitive reasons. Unfortunately, the scheme remains beyond scope of pure play renewable IPPs. Renewable power alone with storage would not be able to compete with conventional power. And a tie-up with an external entity is implausible as no developer would be able to assume third party risk over 25 years. That leaves only a handful of IPPs straddling both renewable and thermal power sectors – mainly NTPC, Adani, JSW and Sembcorp – potentially interested in the scheme.

From a DISCOM perspective, getting round-the-clock power with specified share of peak power and renewable power is desirable. But we maintain that they would be better off in procuring renewable and non-renewable power separately on their own. It is not clear why they need developers to supply blended power through a highly restrictive tender process.

SECI has already issued a 5,000 MW RTC tender. Bid submission date has been repeatedly extended due to various changes sought by developers. Revised guidelines should allow the tender to finally go ahead. Another extension is expected for incorporation of revised guidelines. Small number of potential bidders means that the tender is unlikely to attract competitive bids.

Bid submission deadline for SECI’s 1,200 MW solar-wind hybrid tender (tranche 3) has been extended again to 20 November 2020. The tender was issued in January 2020 and since then, there have been five amendments and a staggering 15 extensions for bid submission date. The latest amendment issued in October 2020 follows new MNRE guidelines for solar-wind hybrid projects. Main change pertains to mix of technologies – each source should account for at least 33% of contracted capacity as against at least 25% of capacity for other source.

The amendments, made in response to demands from different stakeholders, seem arbitrary;

Shorter execution timelines, requirement to stay within 2% of L1 tariff and inadequate protection from ‘change in law’ risk would be major concerns for project developers;

Potential lack of interest from DISCOMs also raises questions for prospects of this tender;

The changes are essentially a patch work of fiddles in response to pushes and pulls from DISCOMs, equipment suppliers and IPPs. For example, DISCOMs want low tariffs. Wind turbine manufacturers, on the other hand, are unhappy with low share of wind power in previous hybrid projects (effectively about 25% of total capacity) and have been pushing for an increase in share of capacity. However, the proposed increase is nominal. Performance BG amount, now less than 2% of capital cost, is reduced as a concession to IPPs but is now too small to be a meaningful deterrent.

For project developers, shorter timelines would be a major risk particularly for the wind component – under construction projects are delayed by more than 12 months due to land acquisition and transmission connectivity constraints. The proposed ‘change in law’ compensation amount, based on cost of debt funding cost, is also troubling as in practice, any extra costs are funded by a mix of equity and debt funds. Levy of BCD on solar modules, which seems imminent, would be a substantive incremental cost and compensation based only on cost of debt would be inadequate.

All three previous solar-wind hybrid tenders issued by SECI (including the ‘blended wind’ tender) have been heavily undersubscribed. We expect interest in this tender to also remain small due to concerns around tight execution timelines, requirement to stay within 2% of L1 tariff and ‘change in law’ risk. Winning tariff could be expected in INR 2.80-2.90/ kWh range raising additional concerns around attractiveness of this power to DISCOMs.

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.

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

BRIDGE TO INDIA hosted a webinar on 3 November 2020 to discuss recent developments in India’s residential rooftop solar market. The webinar was sponsored by Tata Power and supported by Indo-German Energy Forum.

There were six participants in the webinar:  

Tata Power: Mr. Ravinder Singh, Chief – Solar Rooftop Business

Oakridge Energy: Mr. Shravan Sampath, CEO

Enphase Energy: Mr. Harsha Venkatesh Director

State Bank of India (SBI): Mr. KP Baiju, Deputy General Manager

Bajaj Finserv: Mr. Suyog Malviya, National Lead – Business Development

Kerala Electricity Board: Mr. Madhulal J, Senior Project Manager

Annual installation of residential rooftop systems has declined from 199 MW in FY 2017 to 93 MW in FY 2020 despite attractive central/ state government subsidy schemes and falling equipment costs. Most panellists agreed that slow progress in residential rooftop solar can be attributed primarily to lack of consumer awareness, limited rooftop space and lack of financing options. Mr. Singh from Tata Power mentioned that consumer enquiries have increased substantially over the last six months due to increased power consumption in residential segment, but conversion rate is still poor. To address health-related concerns of consumers, the companies are looking at options for remote site surveys and standard designs for reduced installation time.

Recent tenders have received bids as low as INR 34,000 (USD 453)/ kW making such systems highly affordable and financially attractive. The downside of such low prices is risk of poor-quality installations by small, local players resulting in consumer dissonance. There was consensus amongst panellists that lack of appropriate quality standards is a major risk for the market. Mr. Madhulal from KSEB clarified that their tenders include sufficient provisions to ensure rigid quality standards and compliance with performance requirements. Another challenge in these tenders relates to mandatory use of domestic modules for availing subsidies – limited supply and high prices of domestic modules have impeded growth and prevented use of more efficient, higher wattage modules.

Mr. Sampath from Oakridge Energy mentioned that their integrated financing and technical solution has been received well in the market. The panellists noted that while PSU banks offer attractive interest rates, their approval process takes a long time and is very complex. NBFCs, on the other hand, offer quick turnaround times but their higher interest rates are unattractive to consumers as rooftop solar is not an impulse purchase. There is huge need for innovative financing products meeting unique requirements of this market. SBI acknowledged that financing rooftop solar is a challenge for the bank due to small ticket size of loans. The bank is keen to consider financing aggregated portfolios. The bank is in discussion with World Bank for a credit line of about USD 200 million dedicated to residential rooftop solar market. Meanwhile, Bajaj Finserv mentioned that they do not have standard products for this market but are keen to partner with large installers for a bundled offering.  

Mr. Madhulal highlighted KSEB have shortlisted 42,000 consumers for installation of 200 MW capacity, of which 46.5 MW has been allocated to installers. The state has another 150 MW tender in pipeline.

Mr. Venkatesh from Enphase Energy emphasised significant safety and reliability benefits of microinverters for household consumers. He stated that while consumers are attracted by low EPC prices quoted by inexperienced ‘fly-by-night’ installers, they are willing to pay a premium for higher quality products as seen in other part of the world.

Overall, there is great optimism about prospects of the residential rooftop solar market. 833 MW of subsidy has already been sanctioned by MNRE. As COVID-related constraints ease and more financing solutions become available, the market should grow rapidly in the coming years.

Progress on MNRE’s residential rooftop solar policy phase 2, with a target capacity of 4,000 MW by March 2022, remains slow. The government has so far approved subsidy for 833 MW and disbursed only INR 240 million (USD 2.4 million) across the country. Progress has been held up by COVID-19, cancellation of tenders and aggressive bidding, amongst other factors. But Gujarat and Kerala have made more progress in comparison to other states with announcement of ambitious targets, large tenders and an attempt to tackle financing barrier, the biggest point of resistance for end consumers. As of October 2020, MNRE had sanctioned subsidy for 285 MW and 50 MW capacity for Gujarat and Kerala respectively (40% of total).

Table: Status of MNRE’s rooftop solar policy phase 2 until October 2020

Source : MNRE

Gujarat has announced a target of 800,000 home installations by December 2022. The state government has approved subsidy budget of INR 9.1 billion (USD 122 million) to top up subsidy available from MNRE. It is already the leading state by residential rooftop solar capacity in the country with total installation of 178 MW as on 31 March 2020 as per MNRE data. The state is also known for efficient net metering policy administration unlike most other states. The DISCOM officials are well trained, making timely inspection visits and approving applications within a few weeks of application.

Meanwhile, Kerala has emerged as one of the most attractive markets for installers and financiers due to its ambitious policy (rooftop solar capacity target of 500 MW by March 2022) and innovative scheme design. As the state has little potential for utility scale solar (fertile and expensive land) and relatively good stock of residential properties, it is focusing predominantly on rooftop solar for meeting its solar targets. The state DISCOM, KSEB, is acting as demand aggregator and investing itself in rooftop solar systems. End consumers are required to fund only 12-25% of total system cost and in return, they get to consume 25-50% of total power generated depending on their investment. Complete O&M responsibility over 25 years is retained by KSEB (passed on to bidders).

KSEB is aggregating demand through online registration by consumers. It received 278,000 applications and selected 42,500 rooftops for installation of 50 MW capacity, based on site surveys, under its first tender. The advanced registration and site examination process significantly reduces installation time and hassle for the contractors. The state has subsequently issued another tender for 150 MW capacity.

Both states have, however, struggled with their tender programmes. Gujarat issued a 600 MW tender, the largest such tender in the country, in July 2019. But only 430 MW was awarded at rates between INR 33,399-46,827 (USD 445-624)/ kWh 2020 with final allocation still pending. Timelines for another 600 MW tender, issued in February 2020, have been extended repeatedly because of COVID-19. Kerala’s 150 MW tender was cancelled and then re-issued in March 2020 with a change in business model. Final results are still awaited.

Gujarat and Kerala stand out for their serious intent to harness huge potential of the residential rooftop solar market. They also provide a good case study of how states can demonstrate leadership with innovative policies and efficient administration.