Category: Solar

MNRE has prescribed an annual bidding trajectory of 50 GW renewable capacity until FY 2028. It has further mandated that at least 10 GW per annum of this capacity should be reserved for wind projects. For the current financial year, the government wants tender issuance of at least 15 GW capacity each in the first two quarters and 10 GW each in the subsequent two quarters. These targets shall be split amongst various government agencies like SECI, NTPC, NHPC, SJVN and state PSUs.

The new bidding trajectory comes mainly as the government is keen to accelerate progress towards meeting the 500 GW renewable capacity target for March 2030. Annual capacity addition remains stuck in the 12-15 GW region as against a target of over 45 GW. Outlook for the next two years appears flat. The industry has also been pressing the government for a visible tender trajectory to enable more efficient planning and supply chain management.

This is the second time the government has issued a bidding trajectory – the first one, announced in 2018, had a target of 80 GW new tenders in three years. However, the result of the government trying to push new tenders was far from encouraging. Many tenders were undersubscribed and/ or cancelled owing to poor design, low ceiling tariffs, unrealistic commissioning deadlines, and/ or challenges in obtaining land and transmission connectivity. Even when auctions were successfully completed, DISCOMs refused to come forward to contract purchases or project construction got stuck because of high execution risks, policy uncertainty and low margins.

As the following figure shows, gap between tender issuance, auction and project commissioning has become progressively bigger over time.

Figure: Progress on renewable tenders, MW

Source: BRIDGE TO INDIA researchNotes: Capacity numbers are shown on a cumulative basis from 2016 to YTD 2023. Commissioned capacity excludes open access projects.

The intention behind issuing a bidding trajectory is laudable, but issuing more tenders without fixing underlying problems will only add to uncertainty in the sector. Instead, the government needs to focus on creating demand by using a carrot and stick approach with DISCOMs and other bulk consumers. Investments in new thermal projects, sending a confusing signal to all stakeholders, need to be avoided. Second, various supply side constraints like land, transmission, equipment and financing need to be addressed by creating a stable policy framework. Finally, the competitive bidding process needs to be tightened to ensure that all sides stick to their commitments.

India added 3,761 MW corporate renewable capacity in first nine months of the year, 61% more than in whole of 2021. The numbers are especially pleasing because of a series of recent adverse developments including increase in construction costs, imposition of BCD and ALMM, and high policy uncertainty. The jump has come mainly from spurt in solar open access (OA) capacity addition of 2,608 MW in the first nine months. In comparison, both OA wind and rooftop solar have been struggling with total capacity addition of only 1,153 MW.

Figure 1: Corporate renewable capacity addition, MW

Source: BRIDGE TO INDIA research

OA growth has been led by Tamil Nadu (750 MW) and Karnataka (643 MW) together accounting for 49% of capacity addition in the 9 months to September 2022. These two states have been mainstay of the business for a few years. The major positive is emergence of other bigger states like Maharashtra (386 MW), Gujarat (336 MW) and Rajasthan (203 MW) as growth engines.

OA market resilience can be attributed to two developments. There is a paradigm shift in consumer behaviour with larger corporates driven more by decarbonisation push rather than cost savings. That has made a big difference at a time when costs and tariffs have been inching up. Adoption of net zero and other such pledges like RE100 is leading to pressure to increase renewable penetration as evident from recent deals by Vedanta, Amazon, ArcelorMittal, Adani and Reliance. We understand that Reliance alone plans to install 20 GW captive solar generation capacity by around 2027.

Figure 2: Major renewable OA project announcements

The corporate push, in turn, is giving way to a more favourable policy environment. The central government has taken the lead with new green OA rules, new RPO trajectory until FY 2030, ISTS waiver and relaxation of transmission connectivity procedure. The recently launched green open access portal has already seen 2,210 project applications being approved. Even state governments and DISCOMs, historically resistant to the market, are beginning to bow to consumer demand – Gujarat and Maharashtra being prime examples in that regard. Karnataka, Madhya Pradesh, West Bengal and Punjab have already issued draft policies consistent with green OA rules. Five states including Haryana, Madhya Pradesh, Chhattisgarh, Himachal Pradesh and Punjab have proposed to accept revised national RPO trajectory.

BCD, ALMM and shortage of high efficiency modules domestically still pose considerable short-term hurdles. But to compensate, we expect CERC to effect ISTS waiver for OA projects in the coming few months. That, together with module supply situation easing from H2 2023 onwards, should provide a further boost to the market. We expect the OA market to grow at a CAGR of 25% plus in the next five years.

2022 was an exceptional year in terms of project auctions. There was a double whammy for project developers as they were hit by weak demand from DISCOMs and escalating costs. Total auctioned capacity fell by 47% over previous year to just 9,855 MW, a five year low. There were only 3 auctions over 100 MW between all central government entities aggregating 3,500 MW, down 71% YOY. Slowdown in auctions understandably led to an increase in bid subscription rates and competitive intensity. The three main SECI auctions were over-subscribed by 2.5x, 3.3 and 3.7x. Tariffs inched up only marginally in response despite both solar and wind EPC costs shooting up by a further 25% and 27% YOY respectively.

SECI spent most of 2022 trying to clear backlog of unsigned PPAs, now down to an estimated 7 GW as against 19 GW in early 2021. As a result, ratio of auctions with state offtake increased to 64%, a six year high, due mainly to Maharashtra (3,675 MW) and Gujarat (2,250 MW) filling up the void.

Figure 1: Capacity allocation split by technology and offtake, MW

Source: BRIDGE TO INDIA researchNote: Data excludes cancelled projects.

The impact of weak auction activity was felt immediately in bid tariffs. The trend is best summarised by tariff trends for auctions by Gujarat, which has been a more consistent issuer in terms of tender design and frequency in comparison to SECI and other states. While solar EPC cost increased by 43% between Q4 2020 and Q2 2022, GUVNL auction tariffs increased only by 25% from INR 1.99 to 2.49/ kWh in the same period. Weighted average solar tariff for auctions more than 100 MW increased by 8% in the year over tariffs a year ago. Tata Power (1,674 MW), SJVN (1,133 MW), NTPC (1,076 MW), Fortum (800 MW) and Ayana (740 MW) were the leading project winners.

Figure 2: Weighted average tariffs and EPC cost

Source: BRIDGE TO INDIA researchNote: Data excludes cancelled projects, projects under agricultural schemes and tenders smaller than 100 MW capacity. EPC cost excludes land and transmission connectivity.

It has been a year of learning for the industry. New risks have materialised on every possible front – land acquisition, transmission, equipment cost and availability, interest rates, exchange rates and policy uncertainty. As a result, the relentless optimism of earlier years has given way to a bit more caution and discipline. As we look to the new year, prospects are brightening up on power demand and input costs. Pent up demand is expected to lead to substantial uptick in auctions. And costs have already started trending down. For project developers prepared to be patient and prudent, there could be some attractive bidding opportunities in near future.

Amongst all the travails including land, transmission, cost pressures, delays in equipment supply and policy uncertainty, financing continued to be somewhat of a bright spot for the renewable sector in 2022. The year saw as many as 18 equity investment deals totalling at least USD 3,873 million, up 79% over 2021. In addition, there were 16 M&A announcements with enterprise value exceeding USD 4,539 million, down 17% YOY and 7 offshore debt funding deals totalling USD 2,170 million, down 68% YOY.

We can glean a few noticeable trends by looking at the list of key transactions. Most of the financing activity was focused on power generation assets but manufacturing also attracted some interest. Waaree, Jupiter and Premier raised money successfully for their cell and module plant expansion plans. C&I business continued to attract major interest as shown by recent investments by KKR (Serentica, USD 400 million) and Partner’s Group (Sunsure, USD 300 million). There was even a first-of-its-kind USD 25 million investment by Neev Fund in in Hygenco, a hydrogen venture. Investment interest came mainly from overseas financial investors – including a mix of pension funds, PE funds, sovereign funds and infrastructure funds from across the globe – again proving strong appeal of India’s renewable sector for international investors. But M&A activity was counter-intuitively led by strategic investors including Shell, JSW, Sembcorp and Torrent Power. 

Table: Key financing transactions in 2022

Source: BRIDGE TO INDIA research Note: For M&A deals, amount shown represents estimated enterprise value except for Apraava, Solar Arise and Inox Wind transactions. Some of the announced transactions may not have been completed yet.

The year was particularly noticeable for poor appetite of the public markets. Inox Green, a wind turbine O&M company belonging to the Inox group, was the only company to successfully complete an IPO worth INR 7.4 billion (USD 90 million). But the IPO just about sailed through and the shares are currently trading below issue price. Waaree abandoned its IPO plans after investors expressed concerns about heavy reliance on government incentives. Vikram’s proposed IPO seems to be stuck for similar reasons. Meanwhile, other listed stocks including ReNew, Azure and Sterling & Wilson also had a poor showing, all trading well below their issue prices as well as relevant indices.

On the debt financing front, things were again mixed. Greenko, ReNew and Continuum raised a total of USD 1.5 billion through overseas green bond issues in early 2022. Avaada and Virescent also raised a total of USD 274 million in domestic bond market but as the year progressed, tightening monetary conditions and greater risk aversion turned markets bearish.

To sum up, it was a year of busy deal making. Strong investment interest is a major positive for the sector. However, there are some worrying signs too. There is an unease because of acute challenges and unviable projects. Some international investors have curtailed their India business, while others have exited the business altogether, leading example: Softbank.

The central government has issued a total of 139 renewable sector related policies and related amendments in the last five years. That number could be multiplied by about 25x to account for multiplicity of bodies including state governments, regulators, nodal agencies and DISCOMs to understand magnitude of policy overload in the sector. It seems that the policy makers have been too busy in constantly formulating and tinkering with the policy framework.

While there is no doubting good intent of the government, such frequent changes are causing anxiety in the market place. The framework is failing in too many respects – shifting and often conflicting priorities, poor design, disjointedness between different arms of the government and disregard for practical considerations. The resulting policy confusion has disastrous consequences as we have seen with increasing frequency in recent times – unviable investments, supply bottlenecks and underperformance over targets.

The following graphic illustrates some case studies showing how key areas of the sector have suffered due to frequent changes on the policy front. Multiple schemes and legislative measures focused at improving DISCOM financial condition have failed to provide any durable relief to investors. The Make in India push has created infinite confusion and constrained supply of equipment. Self-sufficiency in even basic technologies remains a distant dream. On key matters like RPOs, solar parks, open access rules and rooftop solar, the central government has failed to get state governments on board. Policies concerning Renewable Energy Certificates (RECs) and quality standards have been designed and tweaked far too frequently in an ad hoc manner.

Figure: Examples of frequent and ad hoc policy changes

Source: BRIDGE TO INDIA research

The importance of government policy in shaping growth of the renewable sector cannot be overstated. Large land and transmission infrastructure requirement, intermittent power output, rapidly changing technology landscape, new business models and, a need for self-sufficiency in an era of trade wars and geopolitical concerns warrant a deft manoeuvring act on the policy front. And the ask is bound to multiply several fold over time as renewable energy penetration increases and new market mechanisms like carbon markets are developed. It is a herculean task but the government needs to provide policy stability and visibility to counter these uncertainties.

There is little time to lose. The government has set ambitious growth targets but global competition for capital, skills and commodities is intensifying. There is an urgent need to improve quality of policy making. The answer lies in augmenting resources, developing technical expertise and ensuring strong inter-departmental and regional coordination.

Note: Policy is defined in this piece to include regulations.

As we approach end of the year, we will spend the next few weeks reviewing overall progress of the renewable sector and prospects for the next phase. We estimate total renewable capacity (ex-large hydro) to touch 122 GW by December against Government of India’s 2022 target of 175 GW – a deficit of 30%. Solar and wind capacity shortfall is expected to be 34% and 30% respectively. Wind deficit is actually much higher at 52% when measured against capacity expected to be installed between 2015-2022.

The following figure shows annual growth in installed capacity alongside key policy milestones. Wind capacity growth has suffered badly since transition to competitive auctions in 2017. In contrast, solar capacity has grown more consistently but at a much lower than the required rate of about 15 GW per annum.

Figure 1: Growth of renewable sector and key milestones

Source: BRIDGE TO INDIA research

There are five key reasons for such significant underperformance.

Insufficient demand from states25 of the 30 states had FY 2022 RPO targets lower than the central government target of 21.18%. Even the low targets have been rarely enforced by state regulators because of poor financial condition of DISCOMs, intermittency concerns, lack of renewable resource and/ or land at reasonable cost. Amongst the larger states, main laggards are Uttar Pradesh, Haryana and West Bengal.

Figure 2: State RPO targets and compliance for FY 2022

Source: BRIDGE TO INDIA research

Land and transmission bottlenecksInitiatives such as solar park scheme, green energy corridors and renewable energy zones have faced extensive delays and cost overruns. Almost every single utility scale project faces acute land and transmission challenges delaying execution.

‘Make in India’ rush The government’s sudden policy pivot to ‘Make in India’ in 2019-20 with implementation of measures like BCD and ALMM, when there was insufficient domestic capacity, led to large chunks of project pipeline becoming unviable and facing risk of abandonment.

Poor integrity of bidding processExcessive policy focus on reducing cost of renewable power instead of, for example, addressing renewable power’s intermittency issue or facilitating timely completion, has been a major detraction. The overly loose bidding framework has allowed both offtakers and project developers to wriggle out of their commitments with little untoward consequences.

Policy uncertainty in corporate renewable marketImmense growth potential of corporate renewable market has been frustrated by DISCOMs and state regulators with ad hoc policy measures unnerving both consumers and investors.

In absence of policy stability, better coordination at central and state levels, and proactive long-term planning, the sector has been muddling along. But these challenges are going to get more acute over time. A further slowdown is expected in 2023 as MNRE has granted 12 month extension to solar projects facing module availability and price constraints. Urgent lessons need to be learnt to ensure smoother progress going forward.

Module prices have finally started softening. After shooting up by 65% over two years to USD 0.30/ W, international prices have eased off to USD 0.26 on CIF basis for delivery in Q2 2023. The price decline has come, as expected, due to massive capacity expansion across the value chain in China. Global polysilicon capacity, a key constraint, has already increased from about 290 GW equivalent in Q1 2022 to about 350 GW and is further set to cross 536 GW by end of the year and 700 GW by end of 2024. Similarly, global wafer, cell and module capacities are estimated to grow by 50-70% to 800 GW, 750 GW and 800 GW respectively by end of 2023. More than 90% of all these capacities are based in China.

The Chinese solar manufacturing industry is in a boil. After many small players exited the business, new players like Shangji, Shuangliang and Lihao have entered the fray with mega plans. Meanwhile, existing players have been rapidly expanding as well as integrating forward and backwards. And all of them are spending heavily on R&D and investing in new, more efficient n-type technologies. It has become normal for companies to set up new plants with capacities in tens of GW. Example: Jinko, planning to ship 42 GW modules this year, has increased its 2022 wafer/ cell/ module capacity estimates from 40/ 40/ 50 GW to 65/ 55/ 70 GW respectively in just 12 months besides investing in two upstream polysilicon ventures. On the other end of the value chain, Tongwei, a leading polysilicon manufacturer is aiming to grow its capacity over four-fold by 2025 and is also entering module manufacturing business with 25 GW lines.

With such large-scale new capacities coming online, prices have started moving downward. The trend is expected to accelerate next year. Infolink, a Chinese consulting company, expects mono-grade polysilicon prices to halve to USD 20/ kg by end 2023. However, decline in cell and module prices is expected to be more modest for multiple reasons. Downstream manufacturers, under financial pressure for some time now because of shrinking margins (high polysilicon costs) and large capex needs, are hoping to use this period to shore up their profitability. Moreover, they are intent on pushing out new n-type products at higher prices (and margins) and it is likely that a significant portion of spare p-type capacity would be phased out restoring some sort of balance on demand-supply front. There are also still concerns about COVID cases potentially disrupting supply and pullback of preferential electricity tariffs in Inner Mongolia province after Yunan and Xinjiang earlier this year.

Figure: P-type mono-crystalline module and polysilicon prices

Source: BRIDGE TO INDIA research, Infolink

We expect China module prices to decline to about USD 0.22/ W by end 2023. Cell prices are likely to be stickier in comparison. For the Indian market, relief would be even more gradual because of BCD and inadequate manufacturing capacity. Domestic module prices should maintain their 25-30% premium over imported modules falling to about USD 0.28/ W over the same time period.

After more than a decade of exceptionally benign macro-economic environment, the global financial markets are facing greater disturbance and volatility. With natural steady state of the economy shaken first by COVID and now the Ukraine war, a domino effect is in play affecting inflation, cost of capital and exchange rates across countries. Inflation has soared to recent highs due to a combination of factors including increase in oil & gas and other commodity prices, trade wars and supply side disruptions. Monetary tightening by central banks has led to interest rates spiking up around the world. The 10-year Indian gilt yield has widened to 7.4% since touching a low of 5.9% last year. The Rupee has been falling sharply against USD, now down 11.5% since January 2022 and an annual average of 4.6% over last ten years. Yields on USD-denominated green bonds, the mainstay of debt financing for larger project developers, have more than doubled in last six months to 10-11% levels.

The last decade was unprecedented in macro-economic terms – extremely low inflation and interest rates on account of ample monetary easing by central banks and shift in manufacturing to China. But now that the economy has turned, the investors are in a state of panic. There are concerns about mounting deficit and leverage at both sovereign and corporate levels. There is greater risk aversion and migration of capital to safe havens further compounding volatility in asset prices and risk premia.

Figure 1: Exchange rate and bond yields

Figure 2: Annual changes in inflation indices, %

Source: S&P Global, RBI, BRIDGE TO INDIA research

For the renewable sector, timing of these developments coming on top of increase in equipment costs, supply side blockages, BCD on solar cells and modules, ALMM, transmission line stay order in Gujarat and Rajasthan besides the usual policy uncertainty in open access and rooftop solar markets is far from favourable. Project financial models have long done away with any contingency for macro-economic parameters. On the contrary, project developers have been building overly optimistic assumptions on inflation (5% or less), interest (8% for Rupee debt) and exchange rates (limited hedging, 3% annual depreciation). We estimate combined effect of adverse movements in macro-economic parameters at around 15-20% of project value.

Table:  Impact of recent macro-economic developments on renewable project values

Note: Inflation impact excludes increase in price of core products like solar modules and wind turbines.

The macro-economic tide has added to the aggravation caused by sector specific issues. There are some signs of commodity price easing but it seems fair to assume that overall geo-political and economic volatility is here to stay for some time. The industry needs to re-calibrate its approach to macro-economic risks and build sufficient buffers to guard itself.

Finally, we wish all our subscribers a joyous Diwali with lots of happiness and good health!

The Delhi High Court has rejected a petition filed by the Distributed Solar Power Association, an association of C&I market focused project developers and EPC contractors, to delay ALMM implementation for open access and net-metered rooftop solar projects beyond 1 October 2022. Separately, MNRE has clarified that ALMM would apply only to open access and net-metered rooftop solar projects submitting their first application for project approval from 1 October 2022 onwards. Bizarrely, however, it has exempted behind-the-meter systems from ALMM requirement. The ruling makes ALMM applicable to more than 98% of solar sector spanning all government tendered projects (bid submission after 9 April 2021), open access and net metered rooftop solar projects (submitting initial project approval application from October 2022 onwards).

Total ALMM approved module manufacturing capacity has more than doubled to 20.2 GW across 66 companies in the last 12 months. Leading approved names include Waaree (4.8 GW), Vikram (2.0 GW), Adani (1.7 GW), Goldi (1.5 GW), Renewsys (1.2 GW), Premier (1.2 GW) and Emmvee (1.0 GW). But a quick scan of the approved list shows that a significant portion of the approved capacity is sub-scale and/ or technologically obsolete:

48 of the approved companies have manufacturing capacity of less than 200 MW each and totalling 3 GW.

13 companies with total manufacturing capacity of 3.8 GW make only modules rated at less than 400 W when the latest international models are rated at 700 W plus.

20 companies with total manufacturing capacity of 1.4 GW make only multi-crystalline modules. Only 7 companies make bifacial modules – Vikram, Premier, Adani, Waaree, Renewsys, Goldi and Emmvee.

No cell manufacturing capacity has been approved as yet.

Figure: ALMM approved manufacturing capacity

Source: MNRE, BRIDGE TO INDIA researchNote: The figure shows only select companies with new approved capacity of more than 200 MW.

Despite the increase in approved capacity, there are not enough modules available in the market. Actual domestic production in the 12 months to June was estimated at only 5,644 MW. There is a dearth of high quality products and the manufacturers are calling the shots. MNRE has so far refused to grant ALMM approvals to overseas manufacturers although that policy is seemingly under review following concerns about high prices and limited availability of domestic modules (USD 0.38-0.40 cents/ W). Even if MNRE reconsiders its stance, the international manufacturers face another practical problem. The entire process of BIS and ALMM certification usually takes more than 12 months. By the time they are likely to get ALMM approvals, respective models would have been outdated because of rapid advancements in technology.

ALMM is an ill-conceived policy, helping neither the domestic manufacturers, who already enjoy formidable protection from imports because of 25-40% BCD, nor the project developers and consumers. The policy has ended up creating needless bureaucratic red tape for no benefit. It needs to be binned immediately.

BRIDGE TO INDIA estimates that the country added 2,520 MW rooftop solar capacity in the 12-month period to June 2022, up 44% YOY. Based on the latest data compilation exercise, total rooftop solar capacity is estimated to have reached 10,221 MW, 17% of total solar capacity in the country. But growth was uneven across consumer segments – residential and commercial segments registered marked slowdown in the face of sharp cost rises while the industrial segment saw a boost as companies rushed to beat BCD and ALMM implementation deadlines.

(Micro) industrial segment leads the way

Installation costs jumped sharply in Q2 2022 due to BCD levy and increase in component and execution costs across the board. We estimate current costs at INR 52/ W and 73/ W for industrial and residential systems respectively, up by about 30% in comparison to levels a year back. Inevitably, there was a negative impact on the market as contractors passed cost increase to consumers, who deferred purchase decisions. But industrial consumers and installers took advantage of the duty-free window up to March 2022 to bring forward purchase decisions. Most of the growth seems to have come from smaller industrial installations, typically less than 500 kW in size and somewhat unaffected by net metering policy uncertainty. Q1 is also a typically busy period for such consumers keen to claim depreciation benefit by the end of the financial year.

Figure 1: New installations by consumer segment, MW

Source: BRIDGE TO INDIA research

Further slowdown in OPEX model

The OPEX model continues to lag rest of the market, a direct consequence of shift towards relatively smaller industrial and residential consumers. OPEX share of C&I activity fell to only 13% in H1 2022, a six year low. Part of the reason for this slowdown is that some historic leaders like CleanMax, Cleantech and AMP are creating a market void by consciously prioritising open access business over rooftop solar in push for higher volume and faster growth.

Figure 2: C&I installations by business model, MW

Source: BRIDGE TO INDIA research

Tata Power racing ahead

Perhaps the most glaring trend in the market is aggressive growth of Tata Power, who is capitalising on booming demand and weak competition. The company is a rare example of a big brand corporate showing clear commitment to rooftop solar with systematic investments in distribution and logistics infrastructure. It has also benefitted from relatively easier availability of modules owing to its presence in the manufacturing business. The company has consistently gained share over the last five years in an otherwise highly fragmented market – growing to 15.7% in EPC business and 16.9% in OPEX business. A late entrant in the OPEX business, it is now ranked third behind only Amplus and Fourth Partner.

The latest numbers again point to rooftop solar market resilience and strong growth potential notwithstanding mounting policy pushback and commercial pressure. MNRE has refused to consider extension in ALMM requirement beyond September 2022 for net metered installations but extended phase-II residential subsidy scheme until March 2026. Looking ahead, we expect weakness in the next 6-12 months before there is relief from inflationary pressures and improvement in module supply.

Corrigendum: Module PLI 2 to benefit fully integrated manufacturers

MNRE has finally released details of module manufacturing PLI tranche 2 worth INR 195 billion (USD 2.4 billion). The budget has been split into three categories based on backward integration by the bidders. Separate PLI rate, completion time and local value addition requirements have been specified for the three categories.

Table: Different bid categories

Note: Actual PLI rate would be derived from a grid comprising a range of module efficiency and thermal coefficient parameters.

Companies shall be selected on the basis of a bidding process based on three criteria in decreasing order of importance: module efficiency, local value addition and manufacturing capacity. Minimum module efficiency is specified as 20.50%. SECI is expected to issue a detailed RFS document outlining details of bidding process shortly. Minimum bid size is 1 GW, while the maximum is 10 GW including capacity awarded in tranche 1. Like in tranche 1, PLI shall be paid annually for actual production volume up to 50% of awarded capacity for first five scheduled years of operations. Actual payment amount shall be weighted by local value addition factor of 0.73-1.00 plus another tapering factor of 1.4, 1.2, 1.0, 0.8 and 0.6 over five years respectively.

There are some notable changes from tranche 1 scheme. The PLI rate has been cut sharply from INR 2.25-3.75/ W to a maximum of INR 2.20/ W. Successful bidders will need to set up separate facilities for recycling of solar waste although any details are missing in this regard. They will also need to source at least 20% of their power requirement from renewable energy sources. If they fail to adhere to quoted efficiency and local value addition parameters but still meet the minimum scheme requirements, the PLI amount would be reduced by 25% for the respective year.

Our calculations suggest that tranche 2 can support about 52,000 MW of manufacturing capacity – 24,000 MW fully integrated, 16,000 MW wafers-modules and 12,000 MW cells-modules.

Reliance and Adani are expected to be the biggest beneficiaries. Both companies are already in advanced stages of finalising plans for upwards of 10,000 MW polysilicon-module capacity. First Solar should also be placed well in the first category. It is possible, however, that the first two categories would be undersubscribed, while the third category would be oversubscribed with interest from Tata Power, Vikram, Waaree, Premier, Emmvee, ReNew, Jakson and Avaada.

We estimate effective subsidy amount at only about 2.5-5.0% of expected revenues, which seems insignificant in the context of strict bidding requirements and associated risk of penalties. On the other hand, it is unclear why any subsidy is necessary when there is a massive tariff barrier against all imports. Such incentive schemes restrict competition and potentially delay adoption of new technologies. This money could be deployed far more productively in domestic R&D efforts, speeding up storage deployment and expanding the transmission system.

Amazon has announced its first foray in utility scale renewables in India with an innovative deal structure. The company, running a large data centre in Telangana, has signed three long-term solar PPAs for a total capacity of 420 MW with ReNew (210 MW), Brookfield (110 MW) and AMP (100 MW). The projects would be built in Rajasthan, connected to the inter-state transmission grid and registered with the International Renewable Energy Certificate (I-REC) registry. Amazon would retain I-RECs for its own use to help achieve its goal of reaching RE 100 by 2025 but sell entire ‘brown’ power’ output on the exchange.

Telangana has been refusing to grant open access connectivity for past few years and VPPA structures are still not viable as CFD instruments are not permitted in India. These constraints forced Amazon to turn to a modified VPPA structure, which allows it to get assured bulk supply of I-RECs while complying with the principle of ‘additionality.’ We understand that the PPA price is around INR 2.85/ kWh. To achieve a net I-REC cost of INR 0.30/ kWh (USD 4 per REC), consistent with recent trading trend, the company would need to realise average power sale price of INR 2.55/kWh. This is a bold call in view of the solar power output profile.

The Amazon deal comes around the same time as many other project developers have expressed willingness to develop projects on a ‘merchant’ basis. At least three developers including ReNew, NTPC, NHPC are already setting up merchant power plants. Serentica, a newly incorporated project development platform by Sterlite Power, is also keen on the idea.

Merchant power became a dirty word in India about ten years ago after about 40,000 MW thermal capacity, developed without PPAs, became financially distressed (no coal linkage, no buying interest from DISCOMs, low prices on the exchange). The turnaround in sentiment has now come about for two main reasons. Most importantly, investment appetite is soaring again even as the DISCOMs remain reluctant to sign PPAs. The extremely competitive nature of auctions has forced developers to consider other options. On the other hand, recent power demand growth has surprised on the upside. Constrained supply has led to exchange prices shooting up – average conventional Day Ahead Market prices have recently doubled to about INR 6.00/ kWh, a near 100% increase over prices during 2017-2020.

Figure 1: Average conventional Day Ahead Market prices, INR/ kWh

Source: Indian Energy Exchange, BRIDGE TO INDIA research

Development of merchant capacity is conceptually beneficial for the sector leading to an increase in transparent, exchange-based trading of power. However, the timing is not favourable with capital costs at near 5-year highs. Projects developed at current capex levels would not be competitive in the long run. There are significant additional risks for investors. Most lenders, having burnt their hands in the past with merchant thermal projects, are not comfortable taking market risk. We therefore expect only the largest, most well capitalised developers with strong banking relationships to venture down this path. An even bigger potential risk is uncertainty in intra-day demand and prices. As solar penetration increases (India’s FY 2030 solar target is 280 GW against average expected demand of about 250 GW), daytime prices are likely to trade ever lower. The widening divide in hourly prices is illustrated in the following figure.

Figure 2: Average hourly prices on conventional day ahead market, INR/ kWh

Source: Indian Energy Exchange, BRIDGE TO INDIA research

National Solar Energy Federation of India (NSEFI), a solar industry association, has warned that about 25 GW of solar projects are facing risk of abandonment due to severe cost hikes over last two years. According to NSEFI, tariff for these projects needs to go up by about INR 0.50-0.80/ kWh for them to become viable. The industry is lobbying with the government for various relaxations including BCD waiver, ALMM deferral and extension in scheduled COD. Given the seriousness of the issue and its potential impact on the sector, MNRE seems sympathetic to the requests and is considering appropriate relief to be granted.

The core problem, of course, is the relentless increase in module prices and other capital costs since July 2020. Even excluding BCD, total EPC cost (ex-land, transmission and soft costs) has shot up by 20% and 49% over last 1 and 2 years respectively. Module prices are staying firm at about USD cents 27/ W. While freight rates and some commodity prices have eased from their highs of about six months ago, the fall has been negated by 8% depreciation of INR against the USD. The sharp fall in module costs as predicted by most analysts has not materialised because of continuing supply side disruption and increasing power cost in China plus surge in global demand. We expect costs to stay elevated for another 3-6 months before improvement in upstream supply side leads to gradual softening next year.

Two interesting facts – minimum tariff for all projects commissioned since January 2021 other than for two projects commissioned by Enel and Avaada is INR 2.48; and minimum tariff for a project commissioned with state offtake other than Gujarat is INR 2.73 in the same period. A simple modelling exercise shows that if module prices fall by 25% ceteris paribus, tariff of about INR 2.50 is barely acceptable for projects with AAA offtake (central PSUs and Gujarat).

Therefore, simplistically assuming INR 2.50 and 3.00 as tariff viability thresholds for projects with AAA offtake and other offtake respectively, 24,739 MW of pipeline is deemed unviable. The chart below shows that Adani, Azure, ReNew, NTPC and Acme have the biggest pipelines of such projects.

Figure: Solar BOO project pipeline

Source: BRIDGE TO INDIA researchNote: Figures exclude hybrid projects.

So what should MNRE do? We believe that it should provide partial relief on BCD and ALMM but hold firm on scheduled COD. The Ministry of Finance has already ruled out grandfathering protection from BCD. But instead of letting projects rely on change-in-law compensation, which is inadequate and likely to be resisted by the DISCOMs, equivalent relief should be provided either in the form of budgetary support to projects auctioned before 9 March 2021. Such relief would be consistent with the policy and address the biggest financial risk to pipeline projects. The government should also waive requirement to comply with ALMM by two years although this measure is unlikely to make any material difference. ALMM is a flawed policy made worse by shoddy implementation and the domestic manufacturing capacity needs time to ramp up adequately.

Any relaxation on scheduled COD front, however, would be contentious and undesirable in our view. It would be contrary to the spirit of competitive bidding guidelines and detract from future bidding discipline. The government has already granted multiple time extensions owing to COVID, supply chain disruption and the Supreme Court order on transmission lines. Taken together, these measures are expected to revive about 10-12 GW of projects.

Against all industry expectations, module prices continue to move up and show no sign of cooling down. Mono-PERC cell and module prices are currently reported at USD cents 16/ Wp and 29/ Wp, up 18% and 16% YOY respectively. There is relentless cost pressure from the upstream cycle – polysilicon prices have moved to USD 34/ kg, up 33% YOY. Cost of various ancillaries such as aluminium frames, EVA, silver and aluminium paste is also buoyant as EVA, aluminium, copper and silver prices have increased by 200%, 11%, 10%, 9% YOY respectively. The only exception is PV glass, down 42% YOY.

Source: BRIDGE TO INDIA researchNote: Cell and module prices are shown on CIF basis.

Despite excess manufacturing capacity across most of the solar supply chain and rapid ongoing capacity expansion by Chinese majors, supply chains across the country are choked due to Covid-induced lockdowns and curbs on power consumption. Price inflation is also helped by a sharp uptick in global demand subsequent to the Ukraine war and jump in oil & gas prices. Global module demand this year is expected to reach 220-225 GW, an increase of almost 25% over last year. China, already a leader by big margin, wants to upscale solar capacity addition from about 50 GW to 80 GW per annum in a bid to cut emissions. The European Union wants to more than double solar capacity addition to over 50 GW per annum as it seeks to reduce dependence on Russian gas. Similar order of increase is expected in the US, UK, Australia, LATAM and India.

There are also some fundamental structural changes underway in the solar manufacturing industry explaining part of the price increase. China, the dominant supplier, is beginning to keep a central oversight of manufacturing activity in a bid to cut emissions and avoid overcapacity. Provincial governments are withdrawing power tariff incentives to manufacturers. Majors like LONGi, Jinko, Trina and Risen are integrating backwards, accelerating investment in n-type technologies and consolidating their grip on the industry – top 5 companies now account for two-third of production volume. Moreover, they seem willing to cut production rather than drop prices to maintain profit margins.

Prices are widely expected to soften in early 2023 as polysilicon capacity more than doubles over the next 12 months and some supply chain constraints ease off. Some Indian developers believe that module prices could even crash to as low as USD 18 cents. We believe, however, that the fall would be much more gradual and lower, perhaps to around 22-24 cents, for the reasons stated above.

In India, about 18-20 GW of new cell-module capacity is expected to come onstream by end 2023 between Reliance, Adani, Tata Power, ReNew, Premier, Avaada and a few other players. But most of this capacity is expected to be set aside for captive consumption. In any case, India made modules, expected to be priced at a premium of about 15-20% over imported modules, are unlikely to ease pricing pressure.

Overall, the news is not great for project developers. Module prices are not only staying up for longer but also becoming more volatile. The project developers need to get used to the new market reality.

Note: In view of accelerating pace of changes in the module market, BRIDGE TO INDIA has released a new quarterly report titled India PV Module Intelligence Brief. For enquiries, please write to us at market.research@bridgetoindia.com.

In the last three years, there have been a total of 33 M&A or private equity transactions exceeding USD 100 million in size in the renewable IPP business. Total investment value of these deals is estimated at USD 12 billion indicating strong lure of the sector. Investors include companies of all hues including oil & gas major (Total, Shell and GPSC), PE funds (Blackrock, Actis, Brookfield, KKR, Mubadala), pension funds (CPPIB, CDPQ, OMERS) and IPPs themselves.

Table: Key M&A and private equity transactions since May 2019

Source: News reports, investor presentations, BRIDGE TO INDIA research

With some notable exceptions (Adani Green, Tata Power), valuations have typically hovered around 9x EBITDA. We estimate that these valuations are equivalent to SPV level post-tax equity IRRs of sub-9% for the incoming investors. At a fundamental level, this return is inadequate even for a ‘de-risked’ portfolio with central government offtake and 1-2 years of operational track record. We are in uncharted territory particularly with long-term resource availability and operational performance risks. But easy liquidity has depressed returns across the market and pushed up valuations on purely technical grounds. Whether this is a satisfactory level of return depends on many other factors.

A case could be built for paying entry premium in a fiercely competitive and rapidly growing sector with multi-decadal growth prospects. In particular, the financial investors – the most dominant investor class – are happy to just get a seat on the table. Investors also seem willing to pay a premium for organisational learning and expertise in building and operating projects besides accounting for accretive option value arising from emerging businesses like storage and green hydrogen.

On the flip side, utility scale project development is a highly commoditised business with open source, easily accessible technology and operational expertise. Moreover, with new business won mainly through fiercely competitive auctions, the possibility of earning premium returns is likely to remain remote. On the contrary, returns are being progressively squeezed. Ability of relatively new players like Ayana (total portfolio including under construction assets 2,367 MW), O2 (1,330 MW), AMP (969 MW), Axis (854 MW), UPC (620 MW), Aljomaih (450 MW), Evergreen and Solarpack (300 MW each) to ramp up the business neatly buttresses these arguments.

We believe that the valuation cycle has peaked. As central banks tighten liquidity and supply side restrictions eat into returns, investment sentiment is set to moderate over the next few years.

Pace of tender issuance and auctions has now stayed weak for over two years. Since touching a peak of 38,026 MW and 29,240 MW in 2019, tender issuance and auctions have averaged at annualised levels of 28,742 MW and 19,072 MW respectively. In the first four months of 2022, only 1,875 MW capacity was awarded. The slowdown is mainly because SECI has been prioritising tying up its huge backlog of auctioned projects with DISCOMs. The backlog is estimated to have reduced from about 19 GW back in late 2020 to about 4 GW now. It has issued only one tender of note in 2022 so far – a 1,200 MW ISTS wind tender (tranche 13). In contrast, direct tender issuance and auctions by states has picked up. States have issued new tenders aggregating 7,351 MW capacity so far in 2022 outpacing central government tenders (2,090 MW) for the first time in many years.

Figure 1: Tender issuance and auction, MW

Source: BRIDGE TO INDIA researchNote: Tender issuance figures exclude cancelled tenders.

Main states issuing direct tenders include Gujarat (2,955 MW awarded capacity since 2020), Maharashtra (2,686 MW), Madhya Pradesh (1,275 MW), Punjab (286 MW), Uttar Pradesh and Kerala (200 MW each). It makes eminent sense for Gujarat, a standout state for its highly rated DISCOMs and impeccable payment track record, to issue its own tenders. The state has attractive solar and wind resources, and attracts strong bidding interest from developers.

For most other states, the case for issuing direct tenders is less clear cut. A plausible positive is boost in local economic activity, job creation and tax revenues from intra-state projects, but tariffs in state auctions (excluding Gujarat) continue to come in at about 10-30% higher over central tenders. Competition is relatively low in these auctions as many developers stay away over DISCOM bankability concerns and curtailment risk. Uttar Pradesh, Andhra Pradesh and Punjab have tried to renegotiate tariffs in the last three years. State auctions in the last two years have been dominated by select PSU (NTPC, SJVN) and private Indian developers (ReNew, Tata, Adani and Azure).

Figure 2: Weighted average tariff for solar projects, INR/ kWh

Source: BRIDGE TO INDIA research Note: Data for this figure excludes tenders smaller than 100 MW capacity, cancelled projects, and tenders issued by Gujarat DISCOMs.

With SECI’s backlog of previously auctioned projects expected to be cleared in the next few months, procurement activity should bounce back shortly. We understand that the government is undertaking a comprehensive review of bidding framework in light of poor progress on the execution front and ongoing power supply crisis.

BRIDGE TO INDIA estimates that new rooftop installations in 2021 touched a record high of 2,196 MW, up 62% over previous year. As of December 2021, total rooftop solar capacity is estimated at 8,988 MW, 18% of total solar capacity in the country. The increase came mainly from the residential segment, which contributed 746 MW in new installations (34% market share), an YOY increase of 108%. These numbers are highly encouraging, coming after 2 years of market decline, and in face of several acute challenges including 7% annual capex increase, modules shortage and net metering policy uncertainty in many states.

Strong residential demand The residential market, one of the most under-penetrated segments of the renewable sector, has been gaining momentum over last couple of years with steady improvement in implementation of MNRE’s revamped subsidy scheme. Recent relaxation of the scheme whereby consumers can choose any installer rather than being restricted to installers empanelled by state governments or DISCOMs should also help going forward. MNRE has so far sanctioned subsidy for 3,162 MW capacity (scheme target 4,000 MW), out of which 1,252 MW capacity has already been installed. Gujarat leads in total tender issuance (2,200 MW) as well as total installations (992 MW). It recently issued a 1,000 MW tender, the largest residential rooftop solar tender so far. We expect the market to accelerate further with total capacity crossing 10 GW by about 2027-28.

Figure 1: New installations by consumer segment, MW

Source: BRIDGE TO INDIA research

CAPEX trumps OPEX in the C&I marketGrowth in the corporate market has been muted in comparison. The larger consumers and solution providers seem to have shifted focus to open access projects in push for volume. And while high capex cost is a deterrent for many consumers, self-financed market is growing robustly. Share of the OPEX model has now been falling for three straight years.

Figure 2: C&I installations by business model, MW

Source: BRIDGE TO INDIA research

No sign of consolidation in the marketThe market remains keenly fragmented across regions, consumer segments and business models. Larger utility scale players like ReNew, Azure and Statkraft have exited the OPEX business but there seem few players able to grab the opportunity. Exceptions include Fourth Partner and Amplus in the OPEX business, and Tata Power, which has made impressive gains in both business models.

Figure 3: Leading players by installed capacity in 2021

Source: BRIDGE TO INDIA research

Hostile policy environment is affecting growthMaharashtra continues to be the leading state for C&I installations (254 MW capacity addition in the year), followed by Gujarat (173 MW), Rajasthan (138 MW), Andhra Pradesh (122 MW) and Karnataka (107 MW). The impact of regressive policy actions can be clearly seen in slowing market growth in Uttar Pradesh and Karnataka.

Figure 4: Annual capacity addition in major states, MW

Source: BRIDGE TO INDIA research Note: Data excludes residential installations.

The short-term market outlook is clouded by many factors. Firm module prices and BCD may deter customers although there is some evidence of leading installers having stockpiled modules. Need to comply with ALMM, deferred by six months to October 2022, is also a major source of uncertainty. Our estimate is that the market would grow by about 10-15% over last year, led again by the residential segment.

The Ministry of Power has issued a green hydrogen policy. The policy was much anticipated post Indian government’s commitments at COP 26 as green hydrogen is seen as a very promising route to decarbonisation. The policy focuses mainly on provision of renewable power for hydrogen production. DISCOMs ‘may’ sell renewable power to hydrogen producers at a price equivalent to actual cost plus ‘small margin.’ For open access procurement, the policy has provisions for 15-day single window connectivity approval, one month banking and ISTS charge waiver for 25 years for projects commissioned by June 2025. It also envisages location of hydrogen production plants in renewable energy zones or dedicated manufacturing zones developed by the government as well as setting up storage bunkers at port sites.

The policy fails to address most key areas for development of a green hydrogen ecosystem;

Providing cheap renewable power, a critical requirement for reducing cost of green hydrogen, would be a major problem;

Immediate priority should be to nurture domestic technology and infrastructure development capabilities through R&D investments, subsidies and tax breaks;

Overall, the policy fails to address most key areas for development of a green hydrogen ecosystem – technology, manufacturing capacity, infrastructure for transportation and storage, demand creation and cost reduction. In the run up to the policy release, the government had made various provisional announcements – green hydrogen purchase obligation of 20-25% for fertiliser and petroleum sectors by 2030, Viability Gap Funding (VGF) for heavy mobility sector and a PLI scheme for setting up 10,000 MW per annum electrolyser manufacturing capacity. The Ministry of Power had also talked about setting up a target to develop 5 million tonnes per annum of production capacity by 2030 and an aim to reduce cost of green hydrogen by about 80% to INR 75/ kg (USD 1/ kg) in the next four to five years. The policy is notably silent on all these aspects. Most substantial elements of policy – relating to grid power cost and open access power procurement – fall under the purview of state government agencies, which remain fiercely resistant to growth of open access market. It seems unlikely that they would change their stance for green hydrogen. So what gives? Playing catch up on solar and battery manufacturing, the government is under pressure to scale up green hydrogen. But the challenge of supporting a nascent technology with limited production capacity worldwide and high cost must not be underestimated. It is a classic chicken-and-egg problem. Setting consumption targets for industrial users can be counter-productive in absence of route to economical procurement. We believe that instead of adopting ambitious targets, the government should focus on nurturing an all-round ecosystem through R&D investments, subsidies for pilot projects and seeding infrastructure development.

Leading corporates are increasingly adopting RE 100 pledges to decarbonise their businesses in response to demands from investors and consumers. There are now eight Indian companies alongside many international companies operating in India that have signed up to RE100 pledge.

Rooftop solar and open access are the only two mainstream choices for renewable power procurement;

Corporate renewable can be a critical pillar for sector growth and decarbonisation of the economy;

Consumers can make incremental progress by dovetailing their demand pattern with renewable power output profile and exploring solutions like energy efficiency, storage and solar thermal power;

But the consumers simply have no pathway to 100% RE in the current market and policy framework. Available choices remain limited mainly to rooftop solar and open access, which account for 93% of total corporate renewable business at present. And both these routes face severe restrictions. While rooftop solar is constrained by availability of suitable onsite space, open access remains partially or wholly inaccessible due to denial of approvals or project capacity/ banking restrictions in most states. For an average consumer with 24×7 operation, these two routes can therefore meet typically only about 30% of total power requirement. In Karnataka and Gujarat, where open access wind is viable and project approvals are forthcoming, renewable power share may go up to about 50-60%. All other available options – green power exchange, renewable energy certificates (RECs) and green tariffs – are either too expensive or riddled with cost, liquidity, policy and reliability constraints. These routes can therefore be used only as part of a supplementary sourcing strategy on an opportunistic basis.

Figure: Estimated capacity of different procurement routes, December 2021, MW

Source: BRIDGE TO INDIA research Note: REC capacity has been estimated based on trading volume in FY 2020.

Most of the problems stem from the convoluted grid tariff structure and the need to preserve financial interests of DISCOMs. However, it is becoming increasingly untenable to deny access to renewable power for these archaic reasons. By delaying reform and denying access to renewable power, the policy makers are not only perpetuating sector distress but artificially suppressing growth of the renewable sector and delaying progress on decarbonisation. They are also potentially blocking Indian businesses from staying competitive in the global marketplace, where replacement of fossil fuel sources is seen as an essential business competence.

MNRE has shown some belated willingness to support the corporate renewable market by waiving inter-state transmission charges and liberalising open access route. But these measures are largely cosmetic in absence of more pressing sector reforms and DISCOM support for growth of this market.

In the meantime, the old dictum, ‘necessity is the mother of invention,’ could be helpful for consumers and project developers alike. Consumers can make incremental progress by managing their demand pattern, wherever possible, and exploring solutions like energy efficiency, storage and solar thermal power. There is also an opportunity for a more robust engagement effort with the central and state governments on policy advocacy. The project developers have an attractive opportunity to move beyond commoditised solutions and offer more complex, higher value solutions.

MNRE has expanded scope of the ALMM policy by bringing open access and rooftop solar projects under its purview. As per an order released last week, all open access and net-metering based projects applying for approval from 1 April 2022 onwards may procure only modules approved under ALMM policy.

The ambiguous order has created confusion in the already struggling distributed renewables market;

So far, MNRE has approved only 10.9 GW of module manufacturing capacity and nil cell manufacturing capacity under the policy;

ALMM is a flawed policy concept as it restricts competition, promotes inefficiency and increases costs for consumers;

MNRE has clarified in the past that only Indian manufacturers would be approved under ALMM. But utility scale solar projects bid before 9 March 2021 – 42,491 MW of pipeline – would continue to import modules as they are exempt from both ALMM and BCD. The policy scope has therefore been widened to open a new demand source for domestically manufactured modules.

There are, however, some major discrepancies in the MNRE order. The meaning of “apply for open access” is not clear since open access projects require multiple approvals from different agencies. The lead time of 2.5 months given to such projects is also inadequate as some projects may have already procured, or be in advanced stage of procuring, modules particularly as the Basic Customs Duty is expected to kick in on all imports from April 2022 onwards. Finally, rooftop solar systems are installed in many alternative configurations (gross metering, net billing, or non-grid connected) without net metering benefit. Exclusion of such systems from policy coverage seems to be an oversight. The MNRE order has left a trail of confusion and we expect to see a series of amendments and clarifications in the coming months.

There is another fundamental issue with the new order. So far, MNRE has approved 38 module manufacturers with total manufacturing capacity of 10.9 GW under the ALMM policy. No cell manufacturing capacity has been approved yet. In any case, total estimated domestic cell manufacturing capacity of 3.5 GW is highly insufficient to meet market demand. Commencement of commercial operations by new cell and module manufacturers is expected to take minimum 2-3 years. It is therefore not possible for project developers to comply with the ALMM policy during this period.

Table: Approved module manufacturers under ALMM policy

Source: BRIDGE TO INDIA research

The government has already undertaken a series of measures to promote domestic manufacturing – BCD, domestic content requirement for PSUs, agricultural solar and residential rooftop solar, Production Linked Incentives, manufacturing-linked project development tender, and tax rebates. In the backdrop of such extensive multi-faceted support, the ALMM policy is irrelevant. Moreover, the government’s intent to deny approvals to foreign manufacturers or creation of a walled garden, is akin to a tax on consumers. It restricts competition, promotes inefficiency and increases costs for consumers. If the policy continues to be implemented in its current form, it also runs the risk of international trade litigation and retaliatory measures by other countries.

Trading of Renewable Energy Certificates (REC) resumed on 24 November 2021 after a suspension lasting over 16 months due to a legal tussle over regulated prices. The first trading session saw an enthusiastic response on the back of huge pent-up demand with over 3.5 million RECs traded, out of total accumulated inventory of 8.6 million. Total traded volume was split 9:91 between solar and non-solar RECs at prices of INR 2,000 and INR 1,000 respectively. Interestingly, C&I consumers accounted for 69% share of total purchases on the Indian Energy Exchange, one of the two exchanges trading RECs.

Stricter RPO enforcement is leading to high demand for RECs and may push the prices further up;

High REC prices and limited availability should eventually push obligated entities to procure more renewable power;

We expect the REC mechanism to be eventually amalgamated with other market mechanisms as part of a larger carbon trading market;

Trading had been suspended since June 2020 when some power producers challenged a CERC order removing floor and forbearance prices of INR 1,000 and INR 2,500 respectively. APTEL (Appellate Tribunal of Electricity) has set aside CERC’s order citing that the latter had not complied with stipulated consultation process.

Detailed state level information is not available but we believe that only four states including Karnataka, Rajasthan, Andhra Pradesh and Telangana were Renewable Purchase Obligations (RPO) compliant in FY 2020. Lax RPO enforcement by state regulators, a historic problem, is getting fixed slowly but surely. Recently, Punjab regulator asked the state DISCOMs to clear their RPO shortfall of 562 million kWh by procuring necessary RECs by March 2022. Similarly, Uttar Pradesh regulator imposed a hefty penalty of INR 15 billion (USD 200 million) on the DISCOMs for RPO shortfall of 14.6 billion kWh in FY 2021. Indeed, the Draft Electricity Act Bill, now tabled in the winter session of the Parliament, is proposing additional penalties of up to INR 2.00/ kWh for failure to meet RPOs. Trading momentum should therefore continue at least until March owing to massive RPO backlog.

However, the mechanism is beset with two fundamental problems. One, there is simply not enough supply of RECs as most renewable projects pass associated ‘green attributes’ directly to offtakers. Only 4% of total renewable power capacity is registered for RECs is only 4.5 GW, about (see chart below). Solar’s share in this capacity is only 21%, explaining higher demand and prices for solar RECs.

Figure 4: Capacity addition under REC mechanism, MW

Source: REC Registry of India

Two, there is still no uniform RPO trajectory across the country. States are free to set their own targets irrespective of central government guidance and COP commitments. Even the national trajectory, currently set until only March 2022, needs to be extended.

Looking further ahead, it is a matter of time before REC prices are fully liberalised. CERC should be able to do away with floor and forbearance prices after following a due consultation process. The change would be consistent with the Ministry of Power’s recent recommendations on reforming the REC mechanism. But there is need for a more ambitious overhaul. RECs should be made fungible with other market mechanisms including Perform, Achieve and Trade (PAT) scheme and Energy Saving Certificates (ESCerts) to establish a homogenous and efficient carbon trading market consistent with the new COP deal.

COP26 concluded on 13 November, 2021 with bitter disappointment. The conference was expected to provide a firm roadmap for cutting carbon emissions after the tentative goals agreed in Paris in 2015. But there were no binding commitments on emissions or phasing out fossil fuels, nor any conclusion on global emission standards or any agreement on climate financing from the developed countries.

A deal on carbon trading is being touted as one of the few significant achievements. The new unified ‘rules-based’ global carbon market is meant to allow countries and companies to partially meet their climate targets by buying credits from other countries (arising from their larger than expected emission cuts or carbon sinks). However, it is a complicated deal and seems far from perfect. About 320 million credits, each equivalent to a tonne of CO2, issued since 2013 may still be traded – diluting effectiveness of the initiative. India could be a major beneficiary because of its large accumulated stock of credits but the scheme implementation and enforcement framework is still far from clear.

As a growing economy with rising emissions and heavy dependence on coal, India was under heavy pressure to make concessions at the conference. The Prime Minister made five promises:

Expand total non-fossil fuel based energy capacity to 500 GW by 2030

Meet 50% of energy requirement from renewable sources by 2030 (previous target 40%)

Reduce total carbon emissions by 1 billion tonnes from now until 2030

Reduce the economy’s emissions intensity by at least 45% by 2030 over 2005 levels (previous target 33-35%)

Achieve net-zero emissions status by 2070

While many stakeholders have at least publicly lauded these statements, we find the vagueness and non-effectiveness of these promises disconcerting. Reference to ‘energy’ in the first two promises is a definite mis-statement – the reference ought to have been to ‘power’ instead. More significantly, India is set to undershoot the 2022 renewable power capacity target of 175 GW by a significant margin. Before coming up with ever more ambitious goals, there should have been a clear assessment of various issues plaguing the sector and a comprehensive plan for addressing those. In absence of such methodical planning, the promises appear hollow.

The deadline of 2070 for reducing net emissions to zero is worthless and insincere. Fifty years is simply too long a period to have any material benefit when the environmental need is so dire. GHG emissions must fall by 45% from 2010 levels by 2030 for global warming to be contained within 1.5°C above pre-industrial levels. In contrast, UNFCC predicts emissions to rise by 14% in the business-as-usual trajectory. The available emissions allowance to stay within 1.5°C temperature rise of 400 billion tonnes is being eroded by more than 10% every year.

It is often argued that alongside other developing countries with a relatively small quantum of historic emissions, India has a right to keep burning fossil fuels for its economic growth. But the situation is grim. Rather than delaying its net zero commitment to 2070, it would have been preferable if India had adopted a target of say, 2050, contingent on the developed countries fast tracking their commitments to 2035, and definitive financial support.

India has lost a valuable opportunity to take a leadership role in climate negotiations and prepare its businesses and citizens for a low carbon economy.

SECI has issued a first of its kind standalone battery storage tender for 500 MW/ 1,000 MWh capacity. Tendered capacity is split into two projects of 250 MW/ 500 MWh capacity each to be set up in Rajasthan near Fatehgarh inter-state transmission substation. Projects would be awarded on the basis of a flat availability based fixed charge quoted as INR per MW. Curiously, SECI is proposing to contract only 70% of project capacity. Balance capacity is expected to be utilised by project developers for meeting their internal needs or selling to other system users.

Key terms of the tender are listed below:

Agreement term would be 12 years and the developers are required to transfer project ownership to SECI at the end of the term.

Land would be provided by transmission utility or SECI on a lease basis.

Developers may bid for both projects subject to fulfilment with eligibility criteria.

L2 winner would need to fall within L1 price plus 2% to be eligible to win capacity.

Projects are expected to be completed in 15 months from the date of the agreement.

100% transmission charge waiver would be available for project life if at least 50% of input power is sourced from renewable sources.

Most other provisions including eligibility criteria, delay and performance shortfall penalties, curtailment compensation, payment security mechanism, change in law mechanism etc are similar to provisions in renewable project tenders. While the tender claims to be technology agnostic, technical specifications seem designed for Li-ion batteries. The specifications, however, are onerous and would need to be relaxed: two operational cycles per day, annual degradation of 2.5% on a linear basis, minimum roundtrip efficiency of 85% exclusive of auxiliary power consumption and minimum annual availability of 95%.

Fatehgarh has been chosen as the project location as it has the largest transmission capacity for renewable projects – 14 GW of solar projects have been given connectivity approval so far (only 550 MW commissioned at present). Leading developers with projects connected at Fatehgarh include Adani (5,000 MW), Azure (2,500 MW) and ReNew (1,900 MW).

SECI claims that it has obtained buying interest from DISCOMs but has not confirmed names of any interested offtakers. With ancillary services and some of the other use cases for storage not developed yet in India, primary applications for these projects would be to balance and smoothen renewable power output profile, meet evening peak demand and comply with Deviation Settlement Mechanism regulations. As the batteries may be charged with any power source, it should also be possible to store cheap thermal power at late night for usage in peak morning hours. However, expected effective tariff of around INR 8.00/ kWh raises question mark over acceptance to the DISCOMs.

For the developers, 30% untied capacity would be a tough proposition particularly because of the relatively large project size. It is difficult to anticipate market demand and prices in a nascent sector with evolving regulatory framework and declining cost curve.

We believe that the government’s top objectives for battery storage right now should be to nurture an ecosystem and learning for all stakeholders through pilot installations while minimising investor risk. To that end, the tender size should be cut back drastically to, say, 200 MW/ 400 MWh, and further split into 4-5 projects. The government should also offer capital subsidies to reduce cost for early adopters and get storage projects off the ground.

Following up on its mega announcement in June, Reliance Industries (Reliance) has completed a series of acquisitions and investments heralding its entry in the clean energy sector. The company has: a) acquired 100% stake in Norway-headquartered solar panel manufacturer REC for an enterprise value of INR 58 billion (USD 771 million); b) bought a 40% stake valued at INR 28 billion (USD 372 million) in Sterling & Wilson, one of the world’s largest solar EPC and O&M companies; and c) announced strategic tie-ups with technology companies spanning grid storage, silicon wafer and electrolyser manufacturing.

REC is an integrated polysilicon-module manufacturer with a production capacity of 1.8 GW per annum. The company, one of the first to commercialise PERC and heterojunction technologies (HJT), is regarded as a pioneer in module manufacturing. Inability to compete with Chinese manufacturers on cost – manufacturing operations are split between Norway (polysilicon) and Singapore (cells and modules) – has restrained growth. But with trade protectionism rising and wide-ranging concerns about reliance on Chinese imports, business prospects are looking up. REC is considering plans to set up a 2 GW manufacturing plant in France and a 1 GW plant in the US.

The India-based Sterling & Wilson has expanded aggressively into 24 countries around the world including Middle East, Americas, Europe, SE Asia and Australia. Its business portfolio includes over 11 GW of commissioned and pipeline solar EPC capacity, 8.7 GW of O&M capacity and recent forays in wind-solar hybrid, storage and waste-to-energy sectors.

Other investments/ tie-ups entail relatively young companies with breakthrough technologies under development:

USD 144 million investment in Ambri, a US-based grid energy storage company working on alternatives to lithium-ion technology with more resilient batteries that can store power for up to 24 hours;

USD 29 million investment in Germany’s NexWafe, with a proprietary technology to produce ultra-thin low-cost monocrystalline silicon wafers by going directly from gas phase to finished wafers;

Cooperation agreement with Denmark’s Stiesdal, to make hydrogen electrolysers using Stiesdal’s innovative technology at a significantly lower cost than other prevalent methods and collaborate in development of other technologies for offshore wind energy, fuel cells, and long duration energy storage.

This week, Reliance also gave a first peek into its tangible plans. It is planning to set up a fully integrated 20 GW module manufacturing plant and commission a 3 GW solar power generating capacity for producing 400,000 tonnes of green hydrogen for captive use at its Jamnagar refinery and petrochemical complex. The company has already sought transmission connectivity for a 500 MW solar project.

The scale, breadth and pace of these deals are breath-taking. Reliance has (rightly) identified access to best-in-class technology as a key plank of its business plan. And it is using its deep pockets for acquisitions and strategic tie-ups to cut the lead time required to become an end-to-end player. All boxes to guarantee success – financial might, access to latest technology, scale, integration, large captive market, larger domestic market and favourable policy – are ticked off.

Reliance’s entry into the clean energy sector will bring down costs for consumers and accelerate overall growth. But its plans must be unnerving for some of the existing players. The company seems poised to disrupt manufacturing and installation businesses.