Category: Market Outlook

BRIDGE TO INDIA understands that Ministry of New and Renewable Energy (MNRE) plans to allocate 1,500 MW of solar PV projects under the National Solar Mission (NSM) towards the end of this year. These new projects are likely to follow the bundling mechanism, similar to phase one of the NSM and unlike the Viability Gap Funding (VGF) mechanism used for the recent 750 MW of NSM projects, where Power Purchase Agreements (PPAs) have already been signed for 700 MW and another 50 MW PPAs should be signed soon with the waitlisted bidders. Apart from that, another 1,000 MW allocation is planned under the VGF mechanism for the next year.

The capacity allocation plan by central agencies under NSM will be back on track for phase two of the NSM

If states continue to provide new capacity, the target of 10 GW by 2017 for NSM will most likely by achieved despite failure of RPO mechanism

MNRE and CERC have revived their efforts to boost the REC market

As per the guidelines for phase two of the NSM (2012-2017), 2,320 MW of PV and 1,080 MW of CSP projects were to be allocated through the central agencies by March 2015 (refer). The remaining 5,600 MW of capacity out of the 9,000 MW target was expected to come up through state government initiatives and the Renewable Purchase Obligations (RPO) mechanism. However, with only 150 MW of CSP projects implemented to date, PV allocations for central agencies would need to go up to 3,250 MW. Now, with 750 MW of allocations already under way, 1,500 MW of new allocation by March 2015 and another 1,000 MW by March 2016, the capacity allocation plan by central agencies under the NSM will be back on track for phase two of the NSM.

Apart from these initiatives, there are plans to develop one 1,000 MW power project by public sector entities, four power projects of 500 MW each to be allocated to private developers and another 1,000 MW of projects on defense land. State allocations in Uttar Pradesh, Punjab, Rajasthan, Andhra Pradesh and Karnataka are expected to contribute significantly to new installed capacity in 2014-15. With 2.5 GW already installed, if the states are able to continue providing new capacity, the target of 10 GW by 2017 for the NSM will most likely be achieved with ease despite failure of the RPO mechanism.

Further, BRIDGE TO INDIA understands that the Central Electricity Regulatory Commission (CERC) has suggested necessary changes in the Electricity Act to ensure enforcement of RPOs.  MNRE and CERC have revived their efforts to boost the Renewable Energy Certificate (REC) market but there is no clarity on how and when any new measures will be announced.

India is an ideal market for renewable energy. The country is immensely energy hungry but has a supply shortage: It has coal, but of low quality. There is hardly any gas or oil. Importing fossil fuels is difficult and increasingly expensive. At the same time, it has a vast potential for generating power from the sun, from wind, from small hydropower and from biomass. And yet, according to a new study by Pew Environment, its investments into renewables have grown by only 2% on an average over the last five years, compared to a GDP growth of between 5-10% and a growth in electricity generation capacity of between 4-10% over the same period. As a measure of its GDP, India’s investment intensity into renewables is less than 0.10, compared to the US’s 0.22, China’s 0.41 or even South Africa’s 0.82. Why is India’s renewable energy sector underachieving?

Bureaucracy and a lack of dependable and transparent policies are holding back investment

Renewables in India are mid-way in transition towards becoming mainstream, non-subsidized energy supply options. Corresponding regulations are still in the making

In the long-term, India will, by default if not by design, be one of the most important markets for renewables

Today, India has 30 GW of installed renewables. The majority of it comes from wind (18 GW), followed by small hydro (5 GW) and solar (2 GW). In wind, India was an early mover, with significant growth already in the early 2000s. However, the market has now slackened. Solar, the technology favored by politicians in the last years, has grown fast from a very small base in 2010 and 2011, but has stagnated since. The highly ambitious targets of many manufacturers and project developers have not been met. There is a sense of soberness in the market.

In 2013, India was only ranked 8th with respect to new renewable capacity additions. Even in a field such as distributed solar power – which would be so ideally suited to Indian conditions (weak grids and high insolation) and needs (power deficits and rising tariffs), India is only 11th. (See two charts by Pew Environment, below.)

There are three main reasons for India’s underperformance. They relate to and enforce each other. At the most immediate, a key challenge is the policy process. Renewables in India are still driven mainly by some kind of government support, whether in the form of tax incentives, capital subsidies, feed-in tariffs or certificates. There is an excessive focus on bringing down tariffs through auctions. This has resulted in below-par quality execution and plant performance, which has in turn affected returns and investor and banker confidence.

In addition, many programs are not well managed, putting off investors and slowing down the market as a whole. Examples are: the capsized Renewable Purchase Obligations (RPO) and corresponding Renewable Energy Certificates (REC) schemes or the non-availability of actual funds for the distributed solar capital subsidy scheme. Some policies especially at the state level were simply not well thought through initially: they are delayed, changed too often or simply not feasible. The Tamil Nadu Solar Policy is an example. This condition has been exacerbated by the distorting effect on policies of the current election season (general elections are due in April/May 2013). In many ways, the shortcomings in the renewables policies are shadowed by the energy sector as a whole, which has come to a grinding halt in the last two years.

Project developers can be faulted, too, in focusing on short-term gains and attempting to extract above market returns by trying to combine different incentive schemes. Too many of them are running after improbably promising policies rather than focusing on the fundamentals. And too much running without results has dampened spirits.

A more systematic problem is the lack of a strong innovation and finance ecosystem in renewables in India. Despite that fact that the country has installed 30 GW of solar power already, the economic base is slim: manufacturers of wind turbines and solar cells and modules are struggling. Investment into R&D is far too low. There are too few academic centers of excellence researching into materials, applications and business models. Innovation in infrastructure finance is non-existent. Very few renewables companies have tapped into the stock market. Venture capital is scarce – as are companies to invest into. This could be very different: China has built manufacturing champions that are increasingly innovative. Germany has an excellent landscape of specialized companies interacting with universities and politics to build new solutions. The US has many innovative renewables start-ups and the venture funding to give them a chance to become successful. Without a strong ecosystem, even if the market picks up, it will be non-Indian companies that capture most of the value.

The third reason, why the Indian market is stagnating, is that renewables are currently stuck between two very different worlds. In the old world, renewables were thought of as specific technologies, worthy and in need of government support. The government would set targets for them and provide policies and incentives to reach them. In the new world, created by falling costs of renewables and rising costs of fossil fuels, renewables are just another energy source. They compete directly with other sources of energy. However, they are different in two crucial ways. Firstly, some of them (especially solar) can be deployed in a distributed manner, near the point of consumption. Secondly, they are mostly intermittent sources. Both factors have a large impact on the management of the grid. This is actually part of a larger, global trend as the below graphic from McKinsey shows:

In India, the trend is accentuated by the fact that there is a deficit of power. 300 million Indians do not have access to grid power and there are 60 GW of installed diesel back-up systems. Recent wind and solar policies were affected by this transition: it was unclear how much (if any) support these technologies still need and it was unclear under what rules they should be able to use the power grid. Net-metering and open access policies are developed and revised. Technical information on the grid’s ability to sustain renewables is often lacking. Utilities, used to the comfortable life of a monopolist, are skeptical about a massive privatization of the power market that renewables promise to bring. At the same time, the benchmark power and diesel prices are unpredictable as they are, at least in the short run, driven by political rather than commercial considerations.

While uncertainties about regulations hold renewables back, their large-scale adoption seems inevitable and only a matter of time: utilities in most Indian states fail to provide enough reliable power to their customers and the economics of renewables are becoming more favorable by the day. If not by design, then by default India will become one of the largest markets for renewables.

Tobias Engelmeier is the Director at BRIDGE TO INDIA.

Utilities across the world have so far overlooked or ignored the wave of distributed generation, based on cheap solar power. This, however, represents nothing short of a revolution: it transfers power (actual and economic) from suppliers to consumers. Utilities are at a crossroads. They can focus on protecting their existing business or on mastering the new opportunities as they arise. They are perfectly positioned to adopt distributed solar PV as a new business avenue. But will they do it?

Most utilities are trying to limit the spread of distributed solar PV since it undermines their monopolistic position and existing business model, resulting in a loss of revenue. They often tout the excuse of grid instability to prevent the proliferation of distributed PV.

The grid will likely not be a bottleneck and can easily accommodate significantly large amount of PV without any investment in additional infrastructure.

Distributed solar PV can be a win-win for utilities, consumers and policy makers, provided utilities recognize this.

Utilities across the world have two functions: the supply of energy to consumers and maintenance of the grid. One can argue that without maintaining the grid, energy cannot be effectively supplied. While this is true, it is important to recognize that these are two independent activities. This distinction is highly relevant to the business of distributed solar energy.

Distributed solar PV (solar PV connected at distribution level voltages) is increasingly challenging the traditional utility business model. Victor Hugo once famously remarked: “No one can resist an idea whose time has come”. Distributed solar PV is such an idea. Based on our research, we believe, by a conservative estimate, that the market in India alone will be around 2 GW in the next four years. This offers a significant business potential. What is more, tapping into this market is an important step towards learning how to succeed in the longer term, when distributed power might make up as much as half of the generation capacity (bearing in mind that India already has 60 GW of diesel gen-sets installed). We believe that in India, the growth rates will remain in the high double-digits for the next 15 years.

Distributed solar offsets grid power consumption and reduces utility revenues. Utilities in India currently try to play the “maintaining the grid” card to prevent anybody else from supplying energy to their consumers. They do this by using two arguments:

1) that the grid has been designed for a unidirectional power flow and

2)  that distributed solar will result in instability due to the inherent variability of solar energy.

There is some merit to the argument, though only at very high deployment levels of PV. There have been several studies that have been carried out internationally to show that the grid can actually accommodate high levels of PV without any considerable change in grid infrastructure. Both the perceived problems of reverse power flows and variability of solar energy can be adequately managed with the existing technology.  The concerns of utilities are therefore overrated – at least until significant PV capacity is built up.

Experience from across the world tells us that distributed solar is going to happen whether the utilities want it or not. Utilities must start perceiving distributed solar as an opportunity instead of a threat. In fact, they are better positioned to do so when compared to independent renewable energy service companies (RESCOs). Utilities, already have contractual obligations with thousands of consumers, they already have established processes, databases, and software to provide solar energy along with conventional energy. In addition, they have the necessary technical knowledge of handling grid connection issues. They are also present across the country in most places where a demand for energy exists.

So what is preventing them from doing it? Many utilities are organizationally not ready. They still live in a world that hasn’t changed since the days when the first cities and towns were being electrified. The business of supplying energy and maintaining the grid has changed very little since then. Utilities have not had to innovate and enjoyed monopolistic market positions. Today, the situation is radically different and for the first time in more than a century, their traditional business model is being challenged.

Utilities now have a clear choice – innovate and jump on to the distributed solar bandwagon or simply perish.

Akhilesh Magal is Senior Manager, Consulting at BRIDGE TO INDIA.

In a recent meeting of members of National Solar Energy Federation of India (NSEFI), Solar Alliance of Gulf Cooperation Council (GCC) and Saudi Arabia Solar Association, it was announced that as many as a dozen manufacturers from Gulf countries have shown interest in setting up manufacturing joint ventures with Indian companies (refer). We also understand that some of the Chinese manufacturing majors are scouting for similar opportunities in India.

The interest comes at a time when the Indian manufacturers are in a financial tight-spot and the government, unable to provide long-term road map for domestic manufacturing

The interest has been generated because of some reasons as per BRIDGE TO INDIA’s evaluation

Yet, there are structural issues such as long term blueprint for local manufacturing measures to enhance competitiveness that need to be addressed

This interest comes at a very opportune time as most Indian manufacturers are in a financial tight-spot and the government has been unable to provide a long term road map for domestic manufacturing. The government also seems to be dragging its feet on announcing the outcome of anti-dumping investigations. The only noteworthy policy in this area, the domestic content requirement under the National Solar Mission (NSM), has been very poorly thought out and has attracted back lash from project developers and investors.

BRIDGE TO INDIA believes that a combination of the following factors has helped to generate international interest into manufacturing in India:

1) There is a growing consensus that India will have a very large and important solar marketing future.

2) Existing anti-dumping duties and on-going investigations against Chinese manufacturers is prompting a search for local manufacturing opportunities.

3) Easing of over-supply situation and stabilization of prices has kick started a new global investment cycle. Global consolidation and technology upgradation are providing further catalysts.

4) There is a view that India is likely to continue its protectionist policies for promoting use of domestic content and a new government might be more favorable to domestic manufacturing.

However, structural issues such as a long-term blueprint for local manufacturing and measures to enhance competitiveness are yet to be addressed. If the new government is able to address some of these challenges, there will be a renewed hope for domestic PV manufacturing in India.

With some international manufacturers and investors out shopping, it might be time for domestic manufacturers to prep up their books.

The first solar policy in India was released by the Bhartiya Janata Party (BJP) government in the state of Gujarat in 2009. This was soon followed by a much more comprehensive National Solar Mission at the central government level by the United Progressive Alliance (UPA) headed by the Indian National Congress (INC). Both these policies have laid the foundation for the creation of a solar power ecosystem in the country. Today, apart from the NSM at the central government level, 11 Indian states have a solar policy in place (refer). With the general elections underway, BRIDGE TO INDIA is trying to assess which political disposition is more favorable to the solar industry in the country (refer to our first blog of the subject). Today, we are trying to evaluate the experience until now to judge the various state policies based on the political dispensation responsible for it.

On an average, BJP ruled states lead in both signing the PPAs and execution of projects followed by INC and then the regional parties

The Indian National Congress has to be credited with introducing NSM at the central government level

There is a need to improve on the mission and make it more ambitious in terms of its target

Four Indian states introduced their policies when the Indian National Congress (INC) had been in power. These states include: Andhra Pradesh (2012), Uttarakhand (2013), Kerala (2013) and Rajasthan (2011) (Rajasthan now has a BJP government). Cumulatively, these state policies aim to achieve an installed capacity of 4,600 MW across varying time horizons. PPAs for 738 MW have been signed in these states. Of this, a capacity of just 101 MW has been installed.

In comparison, four states introduced their solar policy when the country’s prime opposition political party, Bhartiya Janata Party (BJP), was in power in the respective states. These states include: Gujarat (2009), Madhya Pradesh (2012), Chhattisgarh (2012) and Karnataka (2011) (Karnataka now has a Congress government). Cumulatively, these state policies aim to achieve an installed capacity of 2,000 MW across varying time horizons. PPAs for 1,180 MW have been signed in these states. Of this, a capacity of just 1,050 MW has been installed. Gujarat leads the way with an impressive 860 MW installed, followed by noteworthy installations for 175 MW in Madhya Pradesh.

Regional parties in Odisha, Tamil Nadu, Uttar Pradesh and Punjab have announced state policies with an aim to achieve an installed capacity of 5,825 MW across varying time horizons. PPAs for 414 MW have been signed in these states. Of this, a capacity of just 8 MW has been installed.

From the initial analysis, it is apparent that on an average, the regional parties have been the most ambitious with their policy targets, followed by INC and the BJP. The order for actual signing of PPAs and commissioning of projects has been just the reverse. BJP ruled states lead in both signing of PPAs and execution of projects, followed by the INC and then the regional parties. 80% of all BJP ruled states, 36% of the INC ruled states and 30% of regional party ruled states have a solar policy in place.

Based on past record, it can be concluded that with regards to solar power, BJP ruled states have done better on most counts except their ambition to set targets. Also, amongst the four regional parties that have released solar policies in their respective states, three have allied with the BJP in the past.

In addition to what is happening at the state level, the INC has to be credited with bringing in the NSM at the central government level. The mission was considered ambitious when it was released. Now, there is a need to improve on the mission and make it more ambitious and in line with targets being set by countries such as China and Japan. Whether or not a probable BJP government is able to deliver it, is yet to be seen. To get more perspective on India solar sector dynamics, follow BRIDGE TO INDIA’s blog.

India has begun voting for a new government today. This largest ever democratic exercise will involve up to 815m citizens. Energy and renewables have not featured prominently in the campaigns to date. Most political analysts believe that, come May, India’s primary opposition, the Bhartiya Janta Party (BJP), might come into power. As a thought experiment, we assess the likely effect such an outcome would have on the Indian solar market.

Solar bound to play a large role in India’s solar power sector in the coming years

The MNRE is considering to expand the target for National Solar Mission to 100 GW by 2027

Both parties- BJP and the Indian National Congress- are set to help solar grow in India

The challenges to India’s power sector are many and solar is bound to play a large role in it (see our recent analysis: refer). Consequently, the solar industry’s expectations from a BJP government are high and the BJP has signaled that it recognizes that (refer: link 1 and link 2). In its election manifesto released today (refer), BJP has said – somewhat vaguely – that it would “give a thrust to renewable sources of energy as an important component of India’s energy mix” and also “expand and strengthen the National Solar Mission”.

The Ministry of New and Renewable Energy (MNRE), under the current Congress-led government, is already considering to expand the targets for the National Solar Mission to 100 GW by 2027 or by 2030. Drafting of such a proposal was initiated by the current Prime Minister’s office. However, this plan has not found its way into the Congress’ election manifesto (refer). The Congress manifesto talks about accelerated implementation of the existing 20 GW target and that if the Congress government is formed, it will ensure that the target is met well in advance. The future of solar, given the current mindset, will continue to have its focus on utility scale projects. If a new government is able to pass the 100 GW proposal, it will considerably change the solar landscape in India. This will also result in an enlarged segment for distributed generation.

Both parties vying for power in Delhi are set to help solar grow but it is important to note that achieving the targets being discussed will not be easy. In India, electricity is a state subject, i.e., individual state governments have jurisdiction over electricity regulations and policies. Any central scheme such as a National Solar Mission will need to rely on state governments’ cooperation.

We have often argued that solar can be India’s future: not just an incremental power source at the fringes of the economy, but a real game changer. We wanted to visualize what the potential really is. Our India Solar Potential map below, is the result.

1,000 GW of solar could be built on half the area of the district of Barmer in Rajasthan

1,000 GW could generate 1,500 TWh/ year which is around 1.5 times India’s demand

The map given below shows how India can think big with solar

1,000 GW of solar PV (multi-crystalline modules) would require 16,000 km2. That is a large amount of land, but not nearly too large for India to contemplate. It would cover half the desert district of Barmer in Rajasthan or 3.5% of India’s wasteland (or, about the size of the pacific island of Fiji or 10% of the land holdings of the Catholic Church).

1,000 GW of solar could generate 1,500 TWh per year, around 1.5 times India’s 2013 demand. We assume a capacity utilization factor (CUF) of 17%. At the moment, India uses 220 GW of installed capacity (the majority of which are coal-fired power plants) to generate around 1,000 TWh of power per year. The average CUF of the current plant mix is higher than that of solar. Thus, we would need more installed solar capacity to generate the same amount of power.

If we turn the story around and look at the solar energy that hits India as a whole, the picture becomes clearer still: the country receives an average of 5.39 kWh of solar energy per square meter per day. This is around 6.5 million TWh per year for the entire land-mass of India, more than 6,000 times the 2013 power demand.

The map is designed to show that India can think big with solar. It would in reality not be advisable to place only one enormous power plant into a single district. More likely, there would be many different sized plants across the country: from the Western deserts to the Deccan plateau and the power starved plains of Tamil Nadu, in thousands of villages and on millions of rooftops. There will be challenges in making this work. The main challenge is that solar power cannot be generated all the time and in an entirely predictable manner. So, if solar were to provide 100% of India’s power requirements, there would have to be storage, which is currently still very expensive. In the absence of storage, large amounts of solar would have to be complemented by spinning reserves and balancing power plants. We are currently working on quantifying the technical challenges and commercial implications of this in more detail. The potential, however, remains huge. And the implementation is possible.

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Download the map by clicking here.

National Solar Energy Federation of India (NSEFI), one of the several solar industry associations in India, has written a letter to the Ministry of New and Renewable Energy (MNRE) suggesting that domestic manufacturers do not have adequate capacity to supply the 375 MW of capacity allocations under the domestic content requirement (DCR) category of batch one of phase two of the National Solar Mission (NSM). This is despite the fact that manufacturers had claimed to be able to meet demand before the bidding process.

NSEFI claims that domestic manufacturers are “unethically” raising module prices now that the bids are over

Indian manufacturers allege that NSEFI has not consulted with them before sending out the letter

HR Gupta from IndoSolar has denied any increase in module prices

NSEFI claims that they are “cartelizing” and “unethically” raising module prices now that the bids have been submitted (refer). The letter also claims that lenders are largely unwilling to offer debt to DCR projects due to a perceived quality issue. With India defending itself in a World Trade Organization (WTO) case against DCR, this is moreover “denting the country’s image severely”.

The federation has suggested that if the timeline for commissioning is extended to 24 months from the existing 13 months, it would allow manufacturers to bridge bottlenecks in production and enable lenders to better establish the bankability of various Indian suppliers.

Indian cell manufacturers allege that the NSEFI has not consulted with them before sending the letter. Based on BRIDGE TO INDIA’s discussions with HR Gupta, Managing Director, IndoSolar and Ajay Goel, CEO, Tata Power Solar, it seems that both manufacturers are not in favor of any extension and are confident that they are in a position to supply the required capacity in time.

The manufacturers argue that their ability to supply in time has been a topic of debate for over a year now and the MNRE has been convinced of their ability to supply before the NSM tender was released. The developers who have opted for the domestic content batch have quoted a Viability Gap Funding (VGF) component based on the same market information as is available now. The funding translates into an additional cost for modules and any risks associated with their procurement at around INR 9 (USD 0.15Wp). The only reason why the government is paying this additional component is to support domestic manufacturing. In that context, developers who have bid for the DCR component need to realize all the constraints, including the fact that they would need to place their orders early enough for the manufacturers to be able to supply in time.

HR Gupta from IndoSolar also denied any cartelization and said that there has been no increase in module prices. They are offering the same prices to developers as they were in December 2013, when developers approached them for term sheets before the bidding.

BRIDGE TO INDIA believes that there is no new information available in the market to warrant a sudden, retroactive change in the terms of the tender. Developers who had bid for the domestic content batch knew what the constraints would be. Even if NSEFI has valid points, these should have been raised before the tender. There is little sense in raising these points now.

In the longer term, a DCR in its current form is unlikely to change the structural deficits in competitiveness of Indian manufacturers. The only comfort that the DCR can provide is some breathing room. This alone cannot be a policy objective. If India wants to have a domestic manufacturing ecosystem for solar modules, it needs to develop a long term strategy for the creation of stable domestic demand and give investors and banks the confidence to invest into solar manufacturing and innovation.

The April 2014 edition of  BRIDGE TO INDIA’s quarterly publication, the India Solar Compass, has been released. Following are some highlights.

• India signs 1,232 MW of PPAs in the first quarter of 2014• India to add 1,065 MW of solar PV capacity in the next financial year• India added 89 MW of solar PV capacity in the last quarter, lowest since Q3 2012

Project Allocations

The highlight of the last quarter (January 2014 – March 2014) was allocation of solar PV projects under batch one, phase two of NSM. ACME, Azure Power and SunEdison emerged as the big winners with 100 MW each. Prominent players who missed out included Green Infra, Tata Power, Mahindra Solar, Welspun (except for 5 MW), Renew Power and First Solar amongst others. The bid levels were broadly as expected although quite aggressive in our view.  Our key takeaways and observations are as follows:

–         DCR has been a failure costing in excess of INR 10 million/MW as local manufacturing has not gained anything meaningful for the long-term.

–         Extremely competitive bidding means there will be too much pressure on costs i.e, poor project quality. Although the Viability Gap Funding mechanism has been a relative success, a more performance focused regime such as GBI is far more favorable in our view.

–         Considerable interest shown by foreign project developers and IPPs is very welcome as it brings more credibility to the market and hopefully, will result in much needed international expertise in project execution and deliverability.

On the state policy front, 482 MW of new power purchase agreements (PPAs) have been signed across four states in the last quarter – 42 MW in Andhra Pradesh (against a target of 150 MW), 80 MW In Karnataka (after a delay of six months), 110 MW in Uttar Pradesh (towards the tail end of the preceding quarter) and 250 MW in Punjab. Another 300 MW of projects are expected to be allocated in UP after general elections in May. Madhya Pradesh expects to sign PPAs for 100 MW solar PV projects in the ensuing quarter.

Capacity Addition

In the first quarter of 2014, we added just 89 MW of new capacity – the lowest since Q3 2012. Out of this, 55 MW has come from three state level projects with the balance 34 MW being primarily driven by captive or third party sale projects relying on accelerated depreciation (AD) and Renewable Energy Certificate (REC) incentives.

–         Rajasthan: 20 MW project by Essel Mining (commissioned on time)

–         Madhya Pradesh: 25 MW project by EDF backed ACME

–         Andhra Pradesh: 10 MW renewable purchase obligation (RPO) project by NTPC

As the REC market has failed to take off, project developers have moved away from selling power to local utilities at APPC (typically INR 2.50-3.00/ kWh, USD 0.04-0.05/kWh) to finding private consumers with tariffs in the range of INR 6 – 9/ kWh (USD 0.1-0.15/kWh). BRIDGE TO INDIA expects this market to grow rapidly as election fever subsides (reducing political pressure to keep tariff increases low) and grid parity is attained across more states.

Distributed Generation

The rooftop market is slowly gaining momentum with Delhi and Kerala (following on from Andhra Pradesh, Tamil Nadu) announcing net metering policies in the last quarter (Delhi policy is still in draft stage). At the central level, SECI continues to provide capital subsidies for rooftop projects – it has allocated 25 MW till date and aims for a further 50 MW during the year.

The policy support to the rooftop segment needs to be much bolder, especially considering its future potential. Based on a study carried out by BRIDGE TO INDIA for Greenpeace, Delhi alone has a rooftop solar potential for 2 GW.

About INDIA SOLAR COMPASS

As part of their extensive research on the Indian solar market, BRIDGE TO INDIA produces a quarterly market analysis report, The India Solar Compass, which provides analyses on the latest developments in the market. It provides key insights on the primary solar market driver of policy, projects and industry. Subscribers include leading international component manufacturers, EPCs, project developers, investors, banks, insurance companies as well as public sector players and international organizations. To download this report, click here.

India has two choices to make. The first choice is: should it actively develop and follow an energy strategy? Or should it continue to sputter along in an ad-hoc manner, with inefficient private investments into back-up infrastructure and with power deficits that inhibit development? The second choice, if India opts for a strategy, is: what should the strategy be? Should it focus on the centralized, fossil fuel-based model or on a smart-grid, renewable-fueled model?

India should build an energy infrastructure on fuel sources with a downward cost trajectory – that are locally available

We are witnessing a period of transformational change in energy. India can leapfrog

Optimism is more warranted with respect to overcoming the challenges of renewables than the challenges of fossil fuels.

To bet on coal, which is currently the mainstream consensus in India, is to accept a number of inevitable consequences. The first is a huge increase in energy imports. This will further corrode India’s energy security and make it dependent on a small number of coal exporting countries as well as the related sea trade routes. It will also put an enormous strain on the current account balance of India, which will in turn add pressure on the Rupee.

The second consequence is the corresponding environmental degradation. This relates to the destruction of habitats through mining as well as to the air pollution from power generation. Delhi has recently been named the most polluted city in the world (refer). A major share of that pollution is from coal-fired industrial production and power generation. While environmental concerns don’t seem to have a high priority by politicians, the example of China shows just how fast that can change. (In fact, as I am writing this, I have a splitting headache and pollution levels are at a record high.)

In addition, there is currently no global or Indian carbon regime in place. However, as the pressures of climate change will increase, so will the pressure on every nation to reduce emissions. If India were to choose a very carbon intensive growth, it will likely come under pressure later – at a point, when it will be much more expensive to change track.

And even if India were to choose to expose itself to these risks and costs and still go for a coal-driven growth model, there is still the question of whether it can actually do it. Over the last years, India’s coal infrastructure has failed to deliver: mining, railway heads and port facilities were inadequate. The resulting fuel shortages have led to under-investment and under-utilization of plants (see charts below).

An alternative to the coal scenario could be to go solar on a massive scale. This would have to be supported by investments into balancing power (gas, pumped hydro, later perhaps storage) and a “smartening” of the grid (metering, demand-side management, etc.). It would be possible. And it would also be better for India. India could build 1,000 GW of solar – enough to generate 1,500 TWh of power or 1.5 times India’s current power requirement – using half the land available in the desert district of Barmer in Rajasthan or 3.5% of India’s wasteland. This is just to illustrate the case. In reality, solar could be on every rooftop across the country as well (see chart below).

Solar might not be the cheaper than coal yet. And storage adds to the cost. However, it will become cheaper in the near future, if not in 5 years, then in 10. And the choices India makes today will have a relevance far beyond the next 10 years. Globally, the energy market is in a transformational stage. India can choose to be at the helm of this development. With its exposed energy supply situation, rising demand and high irradiation, it is ideally suited for solar. Therefore, it should invest its resources into building a new energy infrastructure that will bring long-term energy security, rather than tying itself to power plants that will be inadequate, cost more over time and require India open-endedly spend money on imports. This would not only give the country a great boost of innovation and employment in a new industry (with all the additional economic and social benefits), but would make its economy and its businesses much more resilient to deal with an energy future that will be very different from the current one.

I understand that this is asking for some optimism: will solar costs really come down? Can we manage the grid with high penetration levels of renewables? Can we develop the financing solutions necessary? There are challenges in this scenario. However, there are challenges in every alternative scenario, especially in a coal-dependent one. I see much more reason to be optimistic about solar than about coal. Moreover, success would be entirely in India’s own hands to achieve.

To read part 1 of the blog, click here

To read part 2 of the blog, click here

To read part 3 of the blog, click here

Tobias Engelmeier is the Managing Director at BRIDGE TO INDIA.

Gujarat has restricted industries in the state from procuring power from outside the state through open access as per news reports. This restricts the choice of private industries in Gujarat to either purchase electricity from the state discoms or via on-site captive power plants. This comes as an unexpected move since Gujarat has been on the forefront of power sector reforms in India.

Utilities bemoan that private power purchase agreements (PPAs) are rendering generation capacity of up to 2,500 MW idle

The conflict of interest between DISCOMS and independent power producers has severely limited the uptake of open access in India

BRIDGE TO INDIA believes that India’s open access mechanism must be made truely ‘open’ to all

Utilities bemoan that private power purchase agreements (PPAs) are rendering generation capacity of up to 2,500 MW idle. Utilities are paying up to INR 8,000 crores as fixed/capacity charges to power producers without being able to buy the amount of power it has contracted. They are also concerned about inadequate transmission capacity to import power forcing them to restrict open access purchase from outside the state. While the concerns of the state utilities might be warranted, such a restriction is against the statutory provision of the Electricity Act 2003 that grants open access rights to all consumers who have a demand greater than or equal to 1 MW. This ban may set precedent to other states that grant open access fairly easily (Tamil Nadu) and states like Maharashtra that have traditionally opposed open access.

The power sector reforms were initiated in 2003, but remain incomplete. An important part of the deregulation is open access that allows consumers to tie up with independent power producers by using the state grid by paying a small fee. Ironically, DISCOMS are responsible for granting the open access approvals. This conflict of interest has meant that the uptake of open access has been severely limited in India. Open access forms a very important driver for renewable energy – especially wind and solar. Restrictions on open access can severely limit India’s renewable energy goals. Almost all of India’s wind installations today run on captive/group-captive or on private power sale model. This model has worked well for wind and is also being replicated in the solar industry. Since policy announcements are non periodic, any significant capacity addition that happens outside policy allocations is likely to be via open access mechanism.

BRIDGE TO INDIA has often argued on several platforms that India’s open access mechanism must be made truly ‘open’ to all. This means regulations and costs that have long-term visibility. This is beneficial to the entire power sector in the form of improved investor interest and beneficial to the end consumers in the form of more reliability and greater choice. The Gujarat Government would do good to keep its track record of power sector reforms and revert this decision. Gujarat being a power surplus state should look at using open access to sell the excess generation capacity to other power starved regions, especially in the south.

So far, in its process of industrialization, India has been relying heavily on its own coal reserves and on imported oil (mostly from the Middle East). Attempts to build a strong nuclear industry based on domestic Thorium reserves have so far been unsuccessful. Despite the shale gas revolution in the US, it seems like fossil fuels will become more and more expensive in India. At the same time, the potential for wind and solar is just beginning to be tapped. India is just at the beginning of its industrialization. In order to drive it, should the country develop a predominantly non-fossil strategy to energy supply? And what would that imply? This is part 3, looking at the cost trajectories of fuel sources for India.

To read part 1, click here.

To read part 2, click here.

The cost of oil will rise. The cost of coal will be stable globally but could well continue to rise for India.

The cost for renewables is reducing fast. Wind is already competitive with fossil fuels on the generation side. Solar, on the consumption side.

India’s current energy choices will impact its long-term energy mix

In India, the cost of fossil fuels has been rising significantly over the last years. This was driven by challenges in Indian supply lines (e.g. for domestic coal) and weak infrastructure (e.g. grid and railway bottlenecks). The main driver, however, was global prices. Will this trend continue? I will look at the two main current energy sources for India: Oil and coal. With respect to oil, most experts predict that, despite new unconventional oil finds, the cost of oil production will rise. Most investment into conventional oil has gone into existing fields, where the input to output ratio is becoming ever more adverse. Unconventional oil reserves are more expensive. The question of “peak oil” is blurred by the fact that as prices for oil rise, more reserves can be profitably unlocked. So the question is: how much are we willing and able to pay for oil. Or, as Dr. Richard Miller, formerly with BP, said recently: “We’re like a cage of lab rats that have eaten all the cornflakes and discovered that you can eat the cardboard packets too.” The International Energy Agency (IEA) shows that we will be moving from a production cost band of USD 20-60 per barrel to USD 60-100 per barrel (see chart below).

For the same reasons and taking into account growing global demand especially in Asia, the US Energy Information Administration (EIA) assumes a rising long-term cost trend for oil with only a five year impact of US unconventional tight oil (see chart below).

On coal, the EIA says that an “upward trend of coal prices primarily reflects an expectation that cost savings from technological improvements in coal mining will be outweighed by increases in production costs associated with moving into reserves that are more costly to mine.” As with oil, the growth in demand and the fact that there are few new reserves that can be accessed cheaply means that the price will go up. Technology improvements are softening this trend but cannot reverse it. The amount of energy needed to extract and deliver usable fossil fuels to the economy is ever rising. The productivity of the energy economy is declining. Over the past years, coal prices have globally remained fairly stable (see chart below, data from the IEA World Energy Outlook 2013). However, in India, they have gone up. The Ultra Mega Power Projects (UMPPs) that were planned in the 1990 and are still mostly not commissioned, originally offered power tariff of INR 1.5 to 2/kWh. They are now nearer to INR 3/kWh, because of rising fuel costs.

Renewables, on the other hand are becoming cheaper. Solar has made the biggest leap in the past years as modules and other components become more efficient and production costs are fall as a result of learning, innovation and scale (see chart below). The same happens with wind power. The potential for generation of renewable power in India is almost unlimited. India could install around 1,000 GW – equivalent to around four times the current peak power demand – of solar PV power plants on around 16,000 square kilometers of land, the equivalent of half of the desert district of Barmer in Western Rajasthan or 0.5% of India’s total land mass. There is no other technology that offers the same theoretical potential to service India’s long term power requirements. For wind, the Shakti Foundation, in a detailed technical assessment, estimated the potential for on-shore wind at 80m hub height and 25% capacity factor to be more than 300 GW. There have, as yet, been no reliable assessment at all for off-shore wind potential, but given India’s long coast line of 7,500 km there will be ample scope although with significant financial, technical and environmental challenges.

In addition to the favorable cost curve of renewables, they have the theoretical potential to meet India’s power requirements without relying on imported fuels. Fossil fuels, on the other hand, are getting more expensive and there is no credible long-term strategy for a reliable and sufficient supply. The current Indian infrastructure and institutional mindset is set for a continuing fossil fuel expansion (especially coal and oil). In the short term, that is seen as the only option. However, it is not a viable medium term strategy for the country. Renewables, on the other hand, come with a number of challenges – foremost their intermittency.

The important thing is that the energy infrastructure (grids, plants, railways, ports, etc) India decides to build today and the consumer behavior (mobility concepts, efficiency in products, building codes, etc.) it now encourages will determine the long-term energy generation and consumption patterns.

Tobias Engelmeier is the Managing Director at BRIDGE TO INDIA.

Last financial year (April 2013- March 2014), the Ministry of New and Renewable Energy (MNRE) had received a budgetary allocation of INR 15.2 billion (USD 250 million) for various renewable energy programs. However, there was a mid-term course correction due to India’s high current account deficit situation and the actual disbursement ended up to be only INR 4.4 billion (USD 72 million). As predicted by BRIDGE TO INDIA (refer), this caused the subsidy disbursements for rooftop solar to come to a grinding halt and resulted in many EPC companies (channel partners) shelving their rooftop solar plans as no new project sanctions were being provided.

The funds allocated to the MNRE have been cut significantly

EPC and project development companies whose business model depended on the central rooftop subsidy scheme have been the worst hit

The rooftop subsidy scheme has more or less been taken over by the bidding based rooftop allocations being carried out by SECI

Now, in February 2014, as the outgoing Indian government announced its interim budget ahead of the elections due next month, the talks about the budgetary allocation for giga-watt scale projects dominated the news (refer). However, what people missed was the fact that the funds allocated to the MNRE have been cut significantly again.

For the upcoming financial year (April 2014 to March 2015), the finance ministry has taken the actual disbursements from last year as a standard and set the disbursement target for the MNRE at just INR 4.26 billion (USD 70 million) (refer). This means that new approvals under the subsidy based rooftop solar market are unlikely to be re-initiated.

Many EPC and project development companies whose business model depended on the central rooftop subsidy scheme have been the worst hit. Even though new project approvals came to a halt last year itself, companies were told that the financial crunch would soon be resolved and the market will take off again. However, this is not likely to be the case.

The only hope for this segment of the market is that the new government, as it comes to power, will present a new financial budget that might give more allocations to the ministry to carry out its programs.  However, the chances of that too might not be very high.

Various state policies such as Kerala, Tamil Nadu, Andhra Pradesh and Uttarakhand have recently announced their rooftop solar policies. All these policies depend on the MNRE funds for a part of their incentives. In that context, the lower budgetary allocations might lead to some of these policies also getting shelved. Overall, this is likely to have a negative impact on the rooftop solar market in India in the short term.

To look at the positive side of things, the rooftop subsidy scheme has more or less been taken over by the bidding based rooftop allocations being carried out by the Solar Energy Corporation of India (SECI). Three phases of the scheme have already resulted in an allocation of around 25 MW of rooftop solar capacity. New allocations for a capacity of 50 MW this year are being planned.

Also, several state governments have also announced their net-metering policies that are expected to increase non-subsidized adoption of solar power in some parts of the country where the commercial and industrial tariffs are comparatively high. With parity fast approaching for various power consumers in India and the ‘subsidy overhang’ having receded, it might be better for the MNRE to announce an end to the capital subsidy mechanism rather than allowing the market to deteriorate further because of false hope.

Instead, the MNRE should focus on working with states to ensure better regulations for interconnectivity that will allow a smoother adoption in the parity driven market.

If India industrializes and quadruples its energy consumption to over 2 billion tons of oil equivalent per year, it needs to come up with a more thought out energy strategy than just the current “more of everything, whenever available”. Three countries comparable in size to India have been prominent in formulating and executing energy strategies. These are the US, Germany and China. This is part 2, looking at what India can learn from other countries. Read part 1 here.

The US benefits from a large shale gas boost – but India does not have the same reserves

Germany is a pioneer in transitioning from conventional to renewable energy, but faces many challenges

China has built a large coal-based, centralized infrastructure, but at the expense of import dependence and pollution

In the US, the most striking aspect of the energy market is the shale gas and tight oil revolution. It has lead to falling energy costs and the current process of “re-industrialization” this brings about. According to an estimate, the US currently saves as much as USD 200bn per year on oil and gas imports and has created 2m new jobs in the energy industry – in addition to the jobs created through the development of its industry as a whole. Globally, it has changed the economics (and geopolitics) of oil and gas by reducing the cost of LNG and keeping a lid on oil prices. There is a danger for the US economy that the shale gas high will not last long and that the subsequent fall will be even harder. On the other hand, the country could use the windfall gain to invest into a sustainable energy infrastructure based on renewables.

While India will benefit from a softening of global gas and oil prices as the US will likely stop importing, it will be difficult to follow the US lead. India also has shale gas reserves, but they are likely far less. In addition, there are regulatory and technological hurdles to extracting them.

In Germany, the story is different: The country is half way into its “Energiewende” – a transition away from nuclear (and, in theory, coal) and towards renewables (especially wind and solar). Renewables already provide over half of the country’s installed power generation capacity and at peak times, more than half of the power consumed. However, there are significant challenges: the cost of power in Germany is high and rising, endangering German export industries. Renewables contribute partially (not wholly or even mainly) to this. In addition, the rise in renewables has ironically led to an increase in lignite coal production as a cheap balancing source and undercut more climate friendly gas power plants. However, a deeper look reveals a much more positive picture: Germany has created millions of jobs and become a technology leader in this promising industry. It is also in the – admittedly painful – process of creating one of the most dynamic and efficient power markets in the world, where generation, consumption, balancing and spinning reserves as well as storage are adequately incentivized. It also makes Germany, a country with insufficient own energy resources, significantly less dependent on imports.

Germany has made a political choice to shift from coal and nuclear to renewables and from centralized to distributed generation. It has done so under conditions of a stable power demand that was fully met. The main driver was to go green and reduce carbon emissions. In India the situation is entirely different: the main driver for its interest in renewables is to generate power as fast as possible and to do so at viable rates. The grid is weak and there is a power deficit, which encourages distributed generation, for which renewables are well suited. India is still at the early stages of development and not so path-dependent. It can choose what kind of energy infrastructure it wants to build. It can learn from German mistakes with respect to fitting renewables into a larger energy infrastructure through, for instance, incentivizing balancing power and spinning reserves.

China is perhaps most easily comparable with India as it shows how a rapidly developing country can solve its energy bottlenecks. It has decided to build a centralized energy infrastructure based mainly on coal through the largest investment program in the field ever seen. It was stunningly successful in this. However, the costs of success are high. China has become highly dependent on energy imports. Pollution is a major concern and the country is coming under ever more pressure with respect to its carbon emissions. As a result of these imbalances and in order to meet its continuous demand growth, China is now increasingly looking at large scale renewables development. It also has some of the largest shale gas reserves in the world that it wants to tap.

India could attempt to follow the Chinese example and try to rapidly expand its fossil power generation and grid infrastructure. There are, however, two fundamental questions: Can India really deliver on large infrastructure projects as well as China has done? And where will India find the foreign exchange necessary to buy all this coal? India is already running a substantial and unsustainable trade deficit, putting huge pressure on the Rupee.  And even if India should succeed in doing so, it will likely just end up exactly where China is now: with too much import dependency and pollution.

Tobias Engelmeier is the Managing Director at BRIDGE TO INDIA.

So far, in its process of industrialization, India has been relying heavily on its own coal reserves and on imported oil (mostly from the Middle East). Attempts to build a strong nuclear industry based on domestic Thorium reserves have so far been unsuccessful. Despite the shale gas revolution in the US, it seems like fossil fuels will become more and more expensive in India. At the same time, the potential for wind and solar is just beginning to be tapped. India is just at the beginning of its industrialization. In order to drive it, should the country develop a predominantly non-fossil strategy to energy supply? And what would that imply? This is part 1, looking at the energy requirements of India.

India’s per capita energy consumption is still only a fourth of the global average

If India were to consume at the global per capita average, it would need to add the equivalent of the entire European Union’s annual energy consumption

Procuring such amounts of energy will be very difficult for India, given its limited resources and difficult geostrategic location

India is still a largely unindustrialized country. I am convinced that it needs to industrialize on a vast scale, comparable to China, to lift its citizen out of poverty and provide the millions of jobs needed for its young and growing population. This will require an equally vast surge in energy supply.

Currently, an Indian citizen consumes only about one-fourth of the amount of energy of a Chinese citizen. This is well below global average and, of course, far less than inhabitants of developed countries consume (see chart 1 below). India currently consumes 563 MTOE of energy. If the country would – on a per-capita basis – consume the global average, this would rise by a factor of 4 and an additional 1,613 MTOE (the equivalent of the demand of the entire European Union) to 2,176 MTOE. For the power sector alone, this would mean an additional 1,000 GW of installed capacity. If India were to have the same consumption as the US, energy demand would even increase 15-fold (see chart 2 below). Over the past 10 years, India’s economic growth has been driven by the service industry, which is less energy intense than manufacturing. This will likely change in future as India needs significant growth in manufacturing to provide the required jobs.

It is currently quite unclear, where even a four-fold rise in energy supply could come from, let alone the amount required for lifting India to the level of developed economies. India’s internal resources are limited. Coal is available but of low quality. More and more power plants rely on coal shipped from abroad (South Africa, Indonesia, Australia). India needs to import over 90% of its oil and gas. Pipelines from Central or West Asia need to cross unstable or hostile countries such as Afghanistan or Pakistan. India’s neighbor in the east, China, is as energy hungry and competing for fuel sources. In the international markets, the developed countries have the advantage of existing relationships and infrastructure. So where does that leave India?

The next part of the blog will look at what India can learn from other countries that are comparable in size.

Tobias Engelmeier is the Managing Director at BRIDGE TO INDIA.

The state government of Jammu and Kashmir (J&K) has signed a Memorandum of Understanding (MoU) with the Ministry of New and Renewable Energy (MNRE) to set up 7,500 MW of solar power projects in the state(refer).

The report on ‘Desert Power India 2050’ claims that if 5% land (in Ladakh region) is used for solar- it would installation of 38.2 GW of solar power

The reports envisages a National Desert Mission that could be undertaken by the MNRE and Planning Commission of India

Even if the mission were to become reality, Ladakh would be one of the last to get an ultra-large scale power plant

The genesis for this project is most likely based on a report (Desert Power India 2050 – Integrated Plan for Desert Power Development) published by the Power Grid Corporation of India Limited. The report is on the feasibility of using wasteland desert areas in India for installing large wind and solar power projects.

This report claimed that Ladakh region in J&K has 11,177 sq. km. of wasteland area and if 5% of that can be used for solar, it would allow for an installation of 38.2 GW of solar power. The report envisages a National Desert Mission/ Policy in the future that could be undertaken by the MNRE and Planning Commission of India to set up 300 GW of renewable capacity in the desert regions of Thar, Rann of Kutch, Ladakh and Lahul & Spiti. Such a plan would require balancing reserve requirements of 68 GW from concentrated solar power with storage, pumped hydro storage and other storage options such as grid-scale storage and flywheel. New transmission infrastructure with a capacity of 216 GW would also be required. Such a plan would require investments to the tune of INR 43.8 trillion (USD 714 billion) until 2050.

However, it is important to note that any such plan is still only a ‘plan’ and no concrete steps have been taken in the direction of realizing it.

Even if a National Desert Mission was to become a reality, Ladakh region will be one of the last to get an ultra-large scale power plant due to adverse geographical conditions and terrain where the construction of a project and its related transmission infrastructure will be particularly challenging even as compared to other desert regions such as Thar in Rajasthan and Rann of Kutch in Gujarat.

Until then, it should just be seen as an illustrious announcement of an outgoing Minister for New and Renewable Energy for his home state.

On the 28th of January, the Chief Economist of BP and lead author of the “BP World Energy Outlook”, Christof Rühl, gave a talk at the Delhi think tank Observer Research Foundation (ORF) on the major global and Indian energy trends. His main takeaways were: there is enough energy to meet demand, prices will rise, the climate will suffer. I think that the main source of error in the forecast lies in its linearity, based on the past. There is no account of transformational changes. His future forecast is still very much dominated by centralized infrastructure and fossil fuels. I disagree with that.

Global demand growth will be driven by Asia. As China’s is slowing down, India’s will rise fastest among the BRICs. There is no real strategy for meeting it.

Energy import will shift from North America to Asia. India will become highly import dependent.

Emissions will far exceed safe limits. There is no political will to price carbon. Coal-to-gas shifts are best suited to mitigate according to BP.

Every year, BP publishes the ‘Statistical Review of World Energy‘ and the ‘Energy Outlook‘ (this year the ‘Energy Outlook 2035’). These are key publications on the global energy scenario, comparable to the International Energy Agency’s (IEA) ‘World Energy Outlook‘ and the US Energy Information Administration’s (EIA) ‘International Energy Outlook‘. Christof Rühl, the chief economist of BP, has given a very interesting tour-d’horizon lecture at the ORF on the Energy Outlook 2035. (See here the prior analysis of Lydia Powell from ORF.)

Global energy demand growth is slowing to 1.5% per annum. There are two main reasons for this: Europe’s absolute energy demand is falling. It is unlikely that it will ever surpass its 2006 peak as efficiency gains outpace slow growth. Secondly, “China is over the industrialization hump” according to Mr. Rühl. The incredibly rapid build-up of coal-fired power plants between 2000 and 2010 is tailing off. China now needs to find less energy intensive growth options. If not, growth will falter. In either case, its energy demand growth will slow down significantly.

In India, the picture is different. In a continent that drives demand growth, it is the main contributor. It will likely see an energy intensive ‘industrialization’ phase as the only way to provide enough employment to its vast and growing young labor force. Until 2035, BP forecasts a demand growth of 132% (compared to 71% in China and the non-OECD average of 69%). This is an annual rate of 4.3%, 2.8% above the global rate.

According to BP, fossil fuels, which currently make up 92% of India’s energy mix, will in 2035 still provide 87% of the energy (compared to a global average of 81%). BP forecasts that India will continue to rely, like China, heavily on coal as its dominant fuel. India and China will together account for 87% of the global growth in coal demand and in 2035 account for 64% of total coal demand. Coal will cover 66% of India’s energy requirements and 70% of power generation. (The share of oil will fall, as growth will be driven by power generation for industry rather than the transport sector – part of a global trend.)

I personally fail to see how this is possible. Here, the global view of an economist like Mr. Rühl, clashes with the realities of the energy industry in India. India is consistently failing to build large-scale coal mining, transportation and power generation infrastructure as well as the required evacuation grids.

BP projects that in 2035 renewables will make up around 10% of India’s energy mix. In the power sector, that will mean a total growth of 539% (the fastest of any energy source, but from a small basis). While that sounds impressive, it is not enough. As I have argued in several earlier blog pieces , India’s future, by default rather than strategy will be in renewables and distributed generation.

In terms of energy security and trade, the world is changing significantly. Unconventional gas and oil exploration will make the US – for the last decade a major importer of energy – self-sufficient. In 2035, the US will produce 101% of its energy needs. Globally, shale gas will be an important ancillary source of energy, but it will not be a silver bullet. In 2035, the US will supply 20% of natural gas globally or 100 Bcf/d.

Asian demand, at the same time, is rising fast. As a result, global energy trade routes are realigning. This will have many and complex implications on international relations, trading infrastructure and pricing. In 2035, BP projects that India will account for 7% of global energy demand (China 27%). To meet that, energy imports will rise by 163%. Coal imports will increase by 85%. India will then have to cover almost half of its energy requirements from imports. This will pose enormous risks to energy security. India will be dependent on highly volatile international prices (for instance for imported coal) that will have a huge impact on the current account balance. It will also exacerbate India’s volatile geostrategic position between energy hungry and often less-than-friendly neighbors.

For the climate, the picture looks bleak. Under the BP forecast, goals to limit climate change to 2 degrees are failing by a long margin. Total carbon emissions will rise by 29% – rather than decline. This is driven by non-OECD countries, which will contribute almost three quarters of emissions by 2035. On a per capita level, non-OECD emissions will be around half of OECD emissions. In India emissions from energy demand are forecast to increase by 117%.

The main challenge, according to Mr. Rühl is the high carbon intensity of GDP. While the world is making good progress on reducing the energy intensity of GDP (through more energy efficient growth models), the energy used is still too carbon intensive. He suggested that the key lever is a coal-to-gas switch: “a 1% coal-to-gas switch would have the same effect as an 11% growth in renewables.”

India is currently operating under the paradigm that carbon is not priced. As the global pressures of climate change will increasingly come to bear, this might change. If carbon is priced, India will have a further incentive to move away from coal. A coal-to-gas shift might help here, but it would increase further India’s reliance on imports. (Mr. Rühl is pessimistic on India’s non-conventional gas potential.) More realistic, India would focus on improving energy efficiency – and building up renewables.

My main takeaway on the BP forecast and Mr. Rühl’s talk was that there is a fundamental dilemma in looking at the future, particularly the energy future. The world is likely at a turning point at which the energy economy will change fundamentally. A ‘business as usual’ scenario as described by BP is therefore unlikely to be true. (Just think of the US ‘shale gas revolution”, which nobody saw coming.) At the same time, it might be the best forecast we can come up with, as the nature of the transformational change ahead is very difficult to predict. According to BP, “India’s energy mix evolves very slowly”. This has been true in the past. In the future, it is not an option. I know this quote by Albert Einstein is vastly overused, but it just hits the nail on the head: “We cannot solve our problems with the same thinking we used when we created them.”

Tobias Engelmeier is the Managing Director at BRIDGE TO INDIA.

A recent report by GTM Research claims that new global capacity addition announcements can bring about a turning point in the PV supply-demand dynamics in 2014 (refer). The report concludes that there are definite signs the balance between supply and demand in the PV market has not just been restored, but it is beginning to emerge that there is a very real possibility of a supply shortage in the offing. If this conclusion is to be believed, then the constant cost reductions in the solar PV markets, at least in the short term, might become a thing of the past.

There has been an upward correction in module prices in India

Competitive bidding mechanism and global oversupply ensured that the module costs in India are one of the lowest globally

Large international suppliers are shifting their focus away from India toward other emerging markets

In India, we have already seen an upward cost correction in module costs in 2013, primarily due to the depreciating rupee. It is only the dramatic cost reduction in inverter costs (for central inverters) in India in 2013 that have provided some cushion.

Module costs in the Indian market have been extremely competitive. The competitive bidding mechanism in the country along with global oversupply ensured that modules costs in India were one of the lowest globally. In the last two years, lower margins in the Indian market, state level policy uncertainties and a delay in the allocations under the National Solar Mission has led many large international suppliers to shift their focus away from India and towards other emerging markets. Therefore, any upward cost correction globally, especially one which is driven by an uptick in the global demand, is likely to have a higher impact on the module costs in India.

In such a situation, tariffs fixed for several private PPAs, allocations in states such as Andhra Pradesh and Karnataka and the open category bids under the NSM (that would have an average levelized tariff of around INR 6.50/kWh (USD 0.105/kWh)) might find it difficult to absorb any significant upward movement in module prices through the course of this year.

This risk, coupled with any currency volatility, can play a dampener for new capacity additions in the Indian market.

The year 2013 was a comparatively good year for the global solar market. While 39 GW of solar was installed globally in 2013, India, which got off to a good start two years back, is now facing a tough time achieving its 1.1 GW target set for the current fiscal year (2013- 14). China alone installed 12 GW in 2013 with Japan and the US tied at around 4 GW each. In terms of future targets, China has set an ambitious target of 35 GW by 2015 (20 GW utility scale and 15 GW distributed). In comparison, the National Solar Mission (NSM) target of 20 GW by 2022, does not look as ambitious anymore.

Delays associated with state solar policies and roll-out of phase II of NSM has resultd in sluggish capacity additions in the current fiscal year

Moving forward, prospects of solar capacity additions do not look gloomy

To keep the momentum going states and center need to work cohesively towards a more sustainable capacity addition roadmap

India has installed only ca. 550 MW of grid connected solar in the current fiscal year (until January 2014). More importantly, around 200 MW of the 550 MW projects have been from non-policy projects. Thanks to Gujarat, in the previous two years India has comfortably achieved its targets.

The key reasons for the sluggish capacity addition in the current fiscal year have been the delays associated with the state solar policies and the delay in roll-out of the phase II of the National Solar Mission. Draft guidelines for Phase II of the NSM were released in December 2012 but the final call for bids came only in the last quarter of 2013 after facing a delay of almost a year. The PPA signing process has also been delayed in states including Andhra Pradesh, Tamil Nadu and Karnataka.  In addition, setting a bad precedent, the commissioning of projects has been delayed without any penalties in Rajasthan, Karnataka and Madhya Pradesh.

Moving forward, prospects for solar capacity addition in the country do not look as gloomy. The allocation process for NSM phase II batch I is currently underway and the PPAs are expected to be signed in April 2014. New projects are also being executed in Karnataka, Andhra Pradesh, Uttar Pradesh and Punjab and are expected to be commissioned in the next one year. As a result, the next fiscal year (2014- 15) is expected to be better. To keep the momentum going and ensuring demand through the year, the states and the center need to cohesively work towards a more sustainable capacity addition roadmap.

On 21st February 2014, Solar Energy Corporation of India (SECI) opened the financial bids for the allocation of solar PV projects under batch one of phase two of the National Solar Mission (NSM). A total of 122 project bids were received from 58 developers. The lower the VGF sought, the higher the chances of success. Four bids – those by PMP Auto Components, Zandu Realty, Golden Crystal and Green Energy Wind – were cancelled as they did not meet the techno-commercial criteria. The bid by Moser Baer was cancelled as the bank guarantee was not provided.

Most developers opted for Gujarat or Rajasthan during the bidding session for allocation of solar PV projects

Some notable bidders who probably will not get projects are First Solar and Renew Power

In total, the government will likely pay a VGF of INR 4.02 billion

As expected, most of the developers have opted for locations in Gujarat or Rajasthan. The highest and lowest Viability Gap Funding (VGF) under the domestic content requirement (DCR) category were INR 13.5m (USD 0.23m) by Swelect (10 MW) and INR 24.99m (USD 0.47m) by IL&FS Renewables (10 MW). The lowest and highest VGF sought for projects outside the DCR were INR 1.7m (USD 28,300) by Gujarat Power Corporation Limited (10 MW) and INR 24.9m (USD 4.7m) by Madhav Infra (10 MW).

Based on the final tally, under the non-DCR category, 15 project developers are expected to be invited to sign power purchase agreements (PPAs) for 24 projects, totaling 375 MW. The average project size per developer would be around 25 MW. The highest winning bid under the non-DCR category is INR 13.5 m (USD 0.23m). Prominent developers that are likely to be allocated projects are Acme, SunEdison, Azure, Hero Future Energy and Belectric.

Under the DCR category, 15 project developers are expected to be invited to sign PPAs for 21 projects, also totaling 375 MW. The average project size per developer would also be around 25 MW. The highest winning bid under the non-DCR category is INR 24.5m (USD 0.4m) by Tata Power Solar. Other prominent developers that are likely to be allocated projects are SunEdison, SolaireDirect, Azure Power, Waaree, IL&FS and Hero Future Energies.

Some notable bidders who probably will not get projects, include US-based module supplier First Solar and Goldman-Sachs backed Renew Power. Leading Indian developer Welspun missed the mark by only INR 65,000 (USD 1,083).

In total, the government will likely have to pay a VGF of INR 4.02 billion (US $64.78 million) to cover all the allocations under the open category and INR 7.49 billion (US $120 million) to cover all the allocations under the DCR category. The extra INR 3.47 billion (US $55.9 million) is being provided by the Indian government to help support sale of Indian modules.

While most developers opted to keep their projects in a single location, SunEdison bid for most of their projects in different locations: Madhya Pradesh, Rajasthan, Gujarat and Tamil Nadu. The actual figures for the allocations and VGF will only be determined after the PPAs have been signed. We expect that to happen in the first week of April.

The Kerala State Electricity Regulatory Commission (KSERC) has announced its draft net metering policy titled, ‘Draft Kerala State Electricity Regulatory Commission (Grid Interactive Distributed Solar Energy Systems) Regulations, 2014’. Stakeholders are invited to provide comments on or before 28th of February 2014.

The net metering policy is by far the best consumer oriented net-metering policy

The highlights of the commercial, technical and procedural details are given below

The policy prescribes a penetration limit of 50% which is significantly higher than the 15% limit in Delhi and 30% in Tamil Nadu

Kerala’s net metering policy is by far the best consumer oriented net-metering policy. It is open to all consumers across the state unlike Tamil Nadu’s net metering policy that is limited to residential consumers, or Andhra Pradesh’s policy that is limited only to consumers that have three phase connections. The policy, similar to Uttarakhand’s net metering policy, allows third party ownership models. This is expected to attract a lot of interest from developers that look at third party ownership models. The highlights of the policy are:

Commercial details

The policy does not set an upper cap on amount of energy that can be banked. The net metering policies of Delhi and Tamil Nadu – both suggest a maximum cap of 90% of the consumer’s energy requirement in a calendar year. The policy also prescribes that the DISCOM shall pay the consumer the Average Pooled Purchase Cost (APPC) of INR 1.99/kWh for the excess energy injected onto the grid after the banking settlement – a first in India. This is perfect for consumers that want to capitalize on excess rooftop space. No longer shall such consumers be limited by the maximum energy that can be injected on to the grid.

This policy has a first of its kind ‘sharing concept’ wherein a consumer that has several premises across the state, can install a solar plant on one location and wheel the excess power to the other locations. Although, this entails a wheeling charge of 5%, this is a perfect opportunity for IT companies, textile mills and other retail outlets that may have multiple locations in the state. This way, the consumer can optimize on the ideal rooftop space and minimize installation and maintenance cost.

From the DISCOM’s point of view, all energy generated from solar plants registered under this policy shall be considered to meet the DISCOMs Renewable Purchase Obligation (RPO).

Technical details

The policy limits system sizes to 3 MW

The policy suggests the following grid connectivity voltages across different solar system sizes

The connection voltages are as follows:

System size of 5 KW or under to be connected at 240 V (single phase)

System size of 100 KW or under to be connected at 415 V (three phase)

System size of 3 MW or under to be connected at 11 KV

From a technical perspective, this policy prescribes a penetration limit of 50% of every distribution transformer capacity. For instance, if a certain locality has a distribution transformer capacity of 1 MVA, then 500 kW of solar capacity shall be approved on a first-come-first-serve’ basis. This limit is significantly higher than Delhi’s limit of 15% and Tamil Nadu’s limit of 30%.

Procedural details

The policy mandates the DISCOM to grant connectivity within seven days provided there is enough capacity on the distribution transformer. If not, then the DISCOM is required to upgrade the transformer with two months. This seems highly unlikely. Questions such as who bears the cost of the upgradation are not addressed in the policy. It is very likely that the DISCOM will oppose any upgradation unless adequately compensated for.

Barely two weeks ago,  after being challenged by the Tamil Nadu Spinning Mills Association and Tamil Nadu Electricity Consumers’ Association, the Appellate Tribunal for Electricity termed the state’s Solar Purchase Obligations (SPOs) as illegal. Tamil Nadu had an original and rather innovative plan to drive the demand for solar power through procurement obligations on the large consumers in the state. The decision to term SPOs as illegal had the potential to stop the implementation of the state’s solar policy in its tracks.

Tamil Nadu to tweak the implementation of its policy by shifting the onus of demand creation from SPOs to RPOs

The earlier SPO mechanism would have helped make solar more market driven

In the long run, it would be difficult to keep imposing RPO requirements on distribution companies that are already under financial stress

However, Tamil Nadu has now proposed to tweak the implementation of its policy by shifting the onus of demand creation from SPOs to Renewable Purchase Obligations (RPOs). The state has drafted guidelines to increase the solar RPO from 0.5% to 2% for the next two years. This RPO is usually applicable on all obligated entities, i.e., the distribution companies, open access consumers and captive power producers. However, the current draft only makes the RPO mandatory for the distribution companies for the time being. As a stay was granted by the courts on a batch of writ petitions filed by the open access and captive consumers, this means that for now, the demand will only come from the distribution companies. If the draft (refer) is accepted, Tamil Nadu will have the highest solar specific RPO (as a percentage) in the country. The new requirements will create enough demand (approx. 400 MW of solar PV) to cover most of the projects that have been waiting to sign PPAs under the earlier allocation process that has been dragging along for more than a year now.

Now that the RPO will be applicable directly on the distribution companies, the process would work just as it would have under any other state policy and the complication of the distribution company only acting an intermediary would be removed. This new development raises hope for fast tracking the signing of PPAs and making them more bankable through a legally sound off-take. However, this will increase the financial burden on the distribution companies who will presumably have to pass on the impact of the obligations to the same power customers who opposed a direct obligation on themselves.

The earlier SPO mechanism was an innovative tool that could have helped make solar more market driven and would have helped bring in several innovative business models. It would have lifted the financial burden from the distribution companies and would have helped create a market place for solar at the consumer level, where the cost differential between solar and the grid tariff was not very large to begin with.

In the long run, it will be very difficult to keep imposing high RPO requirements on distribution companies that are already in a financial stress, not just in Tamil Nadu but across India. The current turn of events might be a gain for the short term, but perhaps not for the longer term. Nevertheless, the effort of the Tamil Nadu state government to continue to try and make solar work in the state must be lauded.

On 29th January 2014, associates from the newly organized Solar Power Developers’ Association (SPDA) met Dr. Farooq Abdullah, Minister of New and Renewable Energy (MNRE), and Tarun Kapoor, Joint Secretary MNRE, for the first time to discuss and examine critical issues from the perspective of the project development and investment community in India. For this meeting, SPDA was represented by associates from Welspun, Azure Power, Green Infra and BRIDGE TO INDIA. These were the main topics discussed:

Incoherence in state level allocations and targets vis-à-vis the national policy

Unrealistically low capital cost estimates for solar PV by CERC for the FY 2014-15

Need for green corridors

Impact of possible anti-dumping duties on the on-going NSM bids

Incoherence in state level allocations and targets vis-à-vis the national policy

The developers pointed out that the state level allocations are not in sync with the national mission and not all states have taken initiatives to help meet their share of targets. As per the NSM targets, state level projects should account for a capacity addition of 5.4 GW. Over and above that, 3.6 GW capacity is to be allocated by Center through phase two of the NSM until 2017. Associates from the SPDA pointed out that several states are not serious about promoting solar power and for those that have policies, often, the allocation mechanism is not well thought-out, leading to delays and cancellations. Dr. Farooq Abdullah acknowledged the issue and proposed to involve the Prime Minister’s Office to initiate formalized co-ordination with the states. Also, the Joint Secretary pointed out that a template for a sample bidding document for procurement of solar power has been submitted to the Ministry of Power. This could help to standardize, professionalize and streamline to the allocation processes in the states.

Unrealistically low capital cost projections for solar PV by CERC for the FY2014-15

The Central Electricity Regulatory Commission (CERC) has recently released a tariff order (refer)which estimates the capital cost for solar PV in India at INR 61.2 million/MW (USD 1 million/MW or EUR 724,000/MW) for the financial year 2014-15. The CERC estimate is significant as it likely forms the baseline for any upcoming solar auction processes. Developers alleged that it has two inconsistencies: (i) the calculations consider module prices from imported equipment that faces a risk of imposition of anti-dumping duties, and (ii) the depreciation of the INR in recent months (and the risk of continuing volatility) is not adequately reflected. The minister acknowledged that this needs to be looked into and the impact of currency depreciation should be accounted for, if not already done.

Need for green corridors

Developers cited the example of wind projects in Tamil Nadu, where evacuation infrastructure constraints often force wind projects to stop supply of power. Developers fear that solar projects under the NSM might face similar issues in Rajasthan, causing financial losses and eroding the viability of projects. Investment into green energy corridors that allow for transmission of power over long distances is perhaps the best way to avoid such a scenario.

Impact of possible anti-dumping duties on the on-going NSM bids

The impact of possible anti-dumping duties on the ongoing allocation process was also taken up. Any such duty poses a significant risk to the bids currently submitted. In a clear message, the MNRE informed that based on their discussions with the Ministry of Commerce (the ministry responsible for the investigations), it is highly unlikely that these allocations will be impacted by the ongoing anti-dumping investigations.

SPDA promises to be the only functional investor and developer focused platform for the discussion issues critical to the development of the solar sector in India. SPDA plans to meet at least once in every two months and provide discussion forums for stakeholders from the government, financial institutions and regulatory bodies.

In Tamil Nadu (TN), the Solar Purchase Obligation (SPO) order, mandating HV power consumers to buy 3-6% of solar power, has been set aside by a TN appellate tribunal on technicalities. To that extent, the judgement is a temporary win for the consumer bodies TNECA and TNSMA. The cornerstone of the judgement is that there was poor coordination between the various state and regulatory bodies, primarily the TN government, the state utility (TANGEDCO) and the electricity regulatory commission (TNERC). This is apparent from the following tribunal observations.

TNERC issued the SPO order at the behest of the TN government without any independent analysis and in breach of its duties. The SPO order contradicted RPO regulations and instead of imposing both RPO and SPO at the same time, TNERC should have amended the RPO regulations

TNERC issued the SPO order without any regard for state solar capacity or consequential impact on issues such as banking of power, transmission and wheeling charges, cross-subsidy surcharges (CSS), etc

The SPO order was discriminatory as it applied only to HT and LT consumers, and not to TANGEDCO, in violation of RPO regulations

The ruling is a serious setback for the TN market, for which the SPO was the main short term driver. The judgement is final and the TN government will now have to go back to the drawing board with its solar policy. PPAs for 690 MW of LOIs for solar projects will likely not be signed. This is a sorry end for a policy initiative that was bold but flawed.

As the Tribunal noted TNERC did not consider detailed implications of the SPO order rendering it difficult to implement and open to disputes. However, none of the grounds on which the decision has been based is insurmountable.It is obvious that TN is facing a severe power crisis and there is strong political will behind greater thrust on renewable energy. We believe that this is eminently sensible, particularly, in a radiation rich state such as TN.  And while the policy makers, in their haste, may have stepped on a few banana skins, they will ultimately get their act together and implement the SPO regime, admittedly with a time lag of possibly 1-2 years.  But by that time, we should be approaching grid parity, hopefully.  And who knows, we may not even need SPO then!

We recall Mahatma Gandhi’s famous quote, “First they ignore you, then they laugh at you, then they fight you, then you win.”