Category: Policies & Regulations

India added total solar and wind capacity of 2,074 MW (up 70% over previous quarter) in Q3 2018. Total installed capacity reached 61.1 GW on 30 September 2018 – including 23.2 GW utility solar, 3.4 GW rooftop solar and 34.5 GW wind.

Quarterly capacity addition has been highly erratic because of uncertain auction time-table;

The sector faces several challenges related to government policy, transmission infrastructure and financing;

Unaffected by many of these challenges, rooftop solar is growing robustly and is expected to outshine other RE sources by 2022;

Including expected capacity addition in Q4, total RE capacity addition in 2018 is estimated at 9.4 GW. This is down 34% over 2017 and over 50% short of MNRE’s FY19 plan of 20.8 GW. Next year should be much better with capacity addition jumping to about 15.5 GW. But it is expected to fall again in 2020 and unlikely to recover materially in the subsequent few years. These short-term ups and downs are due partly to volatility in auctions time-table. As the following chart shows, project development, tender issuance and auction time-table have been unpredictable for some time now.

Figure: RE capacity addition and tender progress, MW

Source: BRIDGE TO INDIA research

But long-term outlook for the sector is looking decidedly downbeat for other reasons, most of which are internal – MNRE has failed to decisively address GST and safeguard duty issues. It has also blundered with restrictive tariff caps and poor tender design resulting in tenders getting routinely cancelled and/ or undersubscribed. The latest affected tender is SECI’s 50 MW project in Maharashtra, for which there was only one bidder. Adverse movements in INR and interest rates are not helping. Meanwhile, MNRE has extended time allowed for completing projects from 12-18 months to 21-24 months because of transmission capacity constraints. As a result, we believe that India would fall well short of the March 2022 target of 160 GW for solar and wind power unless decisive remedial steps are taken immediately. Our revised best-case capacity estimate stands at 111 GW. One bright spot in the entire RE market is rooftop solar, which is growing faster than our expectations. We believe that this market is growing at a robust 70-80% annually. Largely unaffected by policy uncertainty and not reliant on land or transmission infrastructure, Indian consumers are beginning to exploit full potential of this opportunity thanks to sharp fall in module prices (down 30% in last nine months). We expect rooftop solar’s share of total solar market to jump from about 10% last year to over 40% by 2022.

A recent report by PI Berlin, supported by MNRE, NISE, SECI and KFW, has highlighted major risks facing Indian PV projects – sub-optimal design, inadequate EPC contracts, poor installation and lack of proper maintenance. The study confirms longstanding concerns about poor quality in the Indian solar sector.

There are multiple reasons that explain quality problems in the solar sector in India. Fierce competition in both utility scale and rooftop solar markets has led developers and EPC players to cut costs and compromise project quality. Many developers have a short-term view as they want to sell projects soon after construction and hence, are not committed to delivering long-term performance. Formulation of robust quality standards and their stringent implementation can solve these problems. But the Indian government has been slow to react. A set of quality standards was introduced for the first time on September 5, 2017 but deadline for certification has been extended multiple times from April 16, 2018 to January 1, 2019.

Currently BIS standards for solar equipment are almost identical to IEC standards, which were formulated keeping in mind temperate climates and hence, are not appropriate for harsh climatic conditions in India. We believe that India needs its independent standards suited for local operating conditions. Moreover, there is a need for devising location-specific standards especially with regards to humidity, sand and UV radiation that vary widely across the country. Lead can be taken from a few coastal states, which specify an additional corrosion test, over and above BIS standards, in their solar tenders.

The onus of developing standards and implementation lies collectively with BIS, MNRE and tendering authorities. Although BIS and NISE have already started devising India specific standards, progress has been extremely slow. Given that the BIS committee on solar meets only once in six months and discussion over changes or introduction of new standards takes multiple rounds of such meetings, formulation of new standards typically takes 2-3 years.  Certification and final approval for manufacturers can take another year. Apart from procedural delays, this process suffers from lack of adequate infrastructure and know-how amongst officials. Given the rapid upscaling of the sector, there is a dire need to accelerate the pace at which these standards are formulated and implemented.

The importance of developing quality standards has also become critical in view of new applications and technologies (floating solar, mono-PERC, bifacial modules half cut cells, glass-glass modules) becoming more popular. These applications have their unique requirements – for instance, floating solar plants have higher risk of moisture ingress and corrosion as compared to ground-mounted power plants. It is an opportune time for BIS to devise specific standards for these applications.

Uttar Pradesh conducted auction for its 500 MW utility scale solar tender on 10 October 2018. Winning tariffs came at between INR 3.17-3.23/ kWh (USD cents 4.4). Capacity was won by NTPC (160 MW), Adani (100 MW), Sukhbir Agro, Eden, Solar Arise and Avaada (50 MW each) and Maheshwari Mining (40 MW).

The tender marks the first instance of NTPC participating in and winning a project auction;

DISCOMs are not keen to buy solar power bilaterally from NTPC as tariffs offered by private developers in auctions are significantly lower;

NTPC’s aggressive bidding in this tender is an effort to stay relevant in the solar sector;

The last such auction by Uttar Pradesh – for a 1,000 MW tender in July 2018 – saw winning tariffs of between INR 3.48-3.55/ kWh. This tender was subsequently cancelled because the DISCOMs felt that the tariffs were too high. Tariffs have fallen in the latest tender because of clarity about safeguard duties and steep fall in module prices in the intervening months. But the new tariffs are still over 30% higher than tariffs in the recent Gujarat auction. Might Uttar Pradesh cancel this tender too? We do not believe so. The state has lower radiation, higher land prices and much worse DISCOM ratings in comparison to Gujarat, so the difference is justified. Moreover, public sector giant, NTPC, is a major winner this time and any cancellation talk would be unthinkable.

Indeed, the most interesting facet of this tender is NTPC’s foray into project auctions. To the best of our knowledge, it is the first time that NTPC has participated in and won a competitive auction. The move marks a radical departure from the company’s usual business – where PPAs are negotiated bilaterally with the offtakers and it earns a cosy regulated return of 15%.

We believe that NTPC has been forced to abandon its preferred formula because of DISCOMs’ unwillingness to pay higher tariffs to the company. Private developers are able to outcompete the company with their aggressive financial engineering and procurement tactics. As a result, NTPC has had to cancel most of the projects tendered by it on an EPC basis. The company has an ambitious target of developing 15,000 MW of solar capacity by March 2022. It has another target of getting 28.5% of its total energy from RE sources by 2032. But as on 30 June, 2018, total RE portfolio stood at only 930 MW (870 MW solar, 50 MW wind and about 10 MW small hydro), a mere 2% of its total capacity.

NTPC’s participation in the Uttar Pradesh auction is a bid to stay relevant in the rapidly transforming power sector. This formula, however, requires a different business paradigm. And despite a major advantage over private developers – it has direct recourse to state government in the event of a DISCOM default – we are not sure if NTPC could (or should) compete with private developers.

SECI has again extended bid submission date for the 10 GW integrated project development and module manufacturing tender. Revised date is 12 November, 2018. This is the fifth such extension after another round of poor response from the industry. We understand that many developers and 5-7 Chinese module manufacturers are keen to participate in the tender. But the conditions are punitive and they have been arguing for relaxation on several grounds.

The theory of combining two disparate parts of the value chain – manufacturing and project development – does not stack up;

Few companies want to be present in both manufacturing and project development;

The government is betting big on this tender to the detriment of other schemes and sector initiatives;

The two main changes being sought by the industry are increase in ceiling tariff (from INR 2.75/ kWh) and relaxation in cross-liability structure. There are some other areas of concern including high performance guarantees (combined INR 4.7 billion (USD 64 million) for manufacturing and project development) and stringent implementation period (two years) and minimum capacity utilisation (50-60% in the first two years) for the manufacturing component.

We continue to maintain that the integrated tender design is poorly conceived. In theory, developers can bid extra tariff for generation to cross-subsidise their investment in the challenging manufacturing business. But the low ceiling tariff does not leave much allowance for this. And most potential bidders – Softbank and Adani are the only two parties possibly interested in both components in our view – do not want an integrated play. The peculiar tender design is forcing them to consider complicated joint-venture arrangements, which could unravel down the line.

On its part, the government seems to have (wrongly) committed itself fully to the tender. SECI and MNRE are seriously looking into the industry concerns and it remains to be seen what concessions would be made. In fact, progress on all other tenders has been suspended while this tender is in the pipeline. But we see very low odds of a successful outcome. The developers are forced to be defensive in response to rising interest rates, falling Rupee and transmission capacity constraints. The DISCOMs want cheap power. And module manufacturing in India remains a tough proposition as highlighted again by the news of JSW reversing its decision to enter the business.

Central Electricity Regulatory Commission (CERC) has issued its final decision in response to appeals filed by Adani and Azure against NTPC and SECI respectively for ‘change in law’ compensation claims arising from GST implementation. It has opined that implementation of GST constitutes ‘change in law’ as defined in the respective PPAs. It has also ruled that project developers can claim compensation if they can provide precise details of all goods and services procured by them specifically for each project together with relevant invoices and an auditor’s certificate. Importantly, CERC has opined that the developers should be compensated for their extra financial outlay through an immediate one-time settlement by power procurers rather than through an upward adjustment in tariffs. But it has somewhat incoherently refused any compensation for increase in O&M costs as O&M outsourcing has been deemed a voluntary “commercial decision” made by the developers.

CERC’s decision is welcome but it still leaves a lot of ambiguity for developers;

The developers are appealing further to CERC to allow compensation through upward tariff adjustment;

A final decision on tax rates is still awaited from the Ministry of Finance in view of the inconsistent rulings by different state tax authorities;

CERC’s verdict comes after the Ministry of Power directed CERC to approve ‘pass through’ impact of all change in law events within a month of petition filing date. CERC decision is highly desirable. However, it still raises many doubts and a final solution may be many months away – state governments and DISCOMs may actually wait for a final decision from individual state regulators, who may take a different view. Moreover, as evident from the CERC ruling, the DISCOMs have taken the view that any decision in respect of PPAs is not binding on them if they are not party to it. So, a separate process may have to be undertaken for power sale agreements between DISCOMs and SECI or NTPC.

Expecting SECI and DISCOMs to make upfront payments is also unrealistic because of their precarious financial position. Although the amounts involved are relatively small – compensation is expected to be about INR 500,000 (USD 6,849) per MW – they are likely to argue inability to pay and/or delay payments. SECI would wait for corresponding payments from DISCOMs under its power sale agreements (PSAs) before paying out to the developers. The developers can anticipate these problems and we understand that they are appealing further to CERC to allow compensation through upward tariff adjustment, as also recommended by the Ministry of Power.

There is yet another major uncertainty associated with GST, which is applied at different rates – typically ranging between 5-28% – to various goods and services used in solar projects. A 5% concessional rate is applicable to ‘solar power generating systems,’ but many state tax authorities have taken a different and inconsistent view. Uttarakhand is the only state to endorse the 5% rate. Maharashtra, Rajasthan, Andhra Pradesh and Karnataka have taken the view that 18% rate is applicable to solar plants. The industry has been seeking urgent clarity from the Ministry of Finance in this regard.

GST has been a major pain point for the industry and it is unfortunate that we are still far from a solution despite more than fifteen months having elapsed since its implementation.

Total utility- scale solar and wind installed capacity reached 58 GW on September 30, 2018. Solar and wind capacity individually stood at 24 GW and 34 GW respectively. 

9874

Figure: Total solar and wind capacity on September 30, 2018

Last 12 months were notable for exponential surge in tender announcement. 46 GW of solar and wind tenders were announced in between October 2017- September 2018. 14 GW of utility scale solar and 8 GW wind projects were under various stages of execution on September 30, 2018. 

Figure: Top 10 players based on projects commissioned between October 2017 and September 2018

ReNew, Adani and Acme are the top three developers with installed capacity of 3.7 GW, 2.0 GW and 1.8 GW respectively, whereas Acme, ReNew and Azure take the lead in pipeline capacity (2.4 GW, 2.1 GW and 1.9 GW respectively). Canadian Solar (9.4% market share), JA Solar (6.6%) and Trina Solar (6.4%) were the top three module suppliers in the year. Domestic manufacturers’ combined market share increased marginally to 14.8% (12.2% last year). Chinese suppliers are beginning to dominate the inverter market also. China-based Huawei (16.3% market share) and Sungrow (14.9%) have emerged as the largest players replacing ABB and Japan’s TMEIC. Turbine market continues to be dominated by Gamesa (31.4%) and Suzlon (26.3%) constituting more than 50% of the total market share.

Although, Indian RE market has grown spectacularly over last four years, previous 12 months have seen several ups and downs. The tender activity for both solar and wind has gone up, but installation is slipping because of various operational and policy implementation issues. The sector growth is facing challenges from safeguard duty imposition, ceiling on bid tariffs, tender cancellation, falling rupee and higher interest rates.

BRIDGE TO INDIA’s latest edition of India RE Map – September 2018 contains other information on state-wise, policy-wise, player-wise progress of the Indian solar and wind market (download it here for free).

Spot prices for power on the energy exchange in India touched an all-time high of INR 17.61/ kWh (USD cents 24) last week. Average daily price on October 1, 2018 shot up to INR 7.64 (USD cents 11), about 150% higher than average for last year. Trading volumes have also simultaneously shot up by about 18% over last year.

The price spike owes largely to short-term supply and demand side issues;

States are reluctant to buy solar power despite it being amongst the cheapest sources of greenfield power;

Sustained solar demand beyond 10 GW per annum is dependent on finding a cheap solution to the intermittency problem;

Spot prices are ultimately a barometer of power demand-supply balance. Post monsoons, around September-October, wind and hydro power supply typically starts waning whereas demand sees a cyclical upturn. Prices therefore usually spike up in these months due to short-term aberrations rather than any fundamental long-term trends. This is an annual saga and thermal power should ideally be able to pick up the slack easily because of excess capacity. But the coal supply chain is highly constrained and rather unhelpfully, supplies run low at around this time of the year. Surge this year has been larger than expected as there is some discernible hardening in power demand in the recent months – 2018 YTD demand has increased y-o-y by 6%. Fall in wind power output also appears to be larger in comparison to last year.

As the factors driving increase in traded prices are primarily short-term, they do not, unfortunately, herald any likely increase in demand for solar power. In fact, the states are reluctant to buy solar power despite prices falling to all-time lows. We have maintained for some time now that one of the biggest challenges for solar power in India is relatively weak growth in power demand (and competition from abundant thermal power). DISCOMs have enough contracted supply and thermal power plants are still operating at low PLFs of about 62% only. With up to 60 GW of financially stressed thermal plants likely to see a debt resolution in the coming months, thermal power output may actually see a boost keeping solar demand subdued for another 2-3 years.

Variable RE penetration in some of the largest power consuming states (Tamil Nadu, Gujarat, Karnataka and Andhra Pradesh) is beginning to touch or even cross the critical 20% mark. DISCOMs need more firm power to meet incremental demand particularly for their evening peak loads. The key to creating sustainable and robust demand for solar is to solve the intermittency challenge.

Tamil Nadu Energy Development Authority (TEDA) has released a draft solar policy for comments. The draft policy envisions a total installed capacity of 8,884 MW by 2022; 40% (3,553 MW) of this capacity is expected to be added by rooftop solar systems. Key proposed provisions in the policy are:

Gross as well as net metering proposed to be allowed; group metering and virtual net metering have also been proposed;

No cap for rooftop solar systems on electricity exports to the grid;

Connected PV load at distribution transformer level enhanced from 30% to 120%;

Open access charges such as wheeling, banking and cross subsidy surcharges to be exempted for solar power;

Feed-in tariffs for solar energy storage, designed to incentivize injection into grid at peak hours;

Enforcement of Energy Conservation Building Code (ECBC) norms on mandated buildings; solar energy usage targets for public buildings, streetlighting and water supply installations;

10% of government vehicle fleet to be converted to solar powered electric vehicles;

The draft policy contains significant incentives for rooftop solar and open access solar. Rooftop solar has slowed down in Tamil Nadu and the state has lost its leadership position of late. Thus far, only residential and small commercial consumers were allowed to apply for net metering connections. Now, it is proposed to allow all consumer categories to obtain a net metering connection. We have heard many complaints in implementation with regard to timelines. Applications are often rejected or delayed indefinitely. Approvals can take anywhere between three to six months. The new policy proposes to cut down time required for meter installation to three weeks from the date of receipt of application.

The draft policy proposes use of bi-directional meters only for new connections from April 2019 to enable households to be ready for future rooftop solar adoption. It also proposes that municipalities and local urban bodies shall provide property tax waivers to domestic building owners who install rooftop solar plants.

The draft policy is progressive and tries to address many of the issues plaguing the solar power sector in Tamil Nadu. But given Tamil Nadu’s past record, it remains to be seen if execution can be effective. Increasing distribution level penetration would require infrastructure upgrades with significant upfront investment. Unless implementation issues are addressed, the policy is unlikely to translate to positive outcomes for the solar sector in Tamil Nadu.

Hongkong’s CLP Group has agreed to sell 40% equity stake in its Indian subsidiary, CLP India, to CDPQ, a Canadian pension fund. Meanwhile, Engie has also offered a 50% equity stake to STOA, a French institutional investor, in its wind business in India. These are just two recent examples of international strategic investors mitigating their India investment exposure.

International strategic investors are drawn to India by the large market size but find operating environment incompatible with their low-risk approach;

The willingness of financial investors to pay huge premiums for RE assets is aiding (partial) withdrawal of strategic investors;

For India, the waning interest of strategic investors is a huge loss;

CLP India is one of the largest international utility investors in India with operational assets of about 3,000 MW comprising 1,975 MW of coal/ gas, 100 MW solar and balance wind. After initially focusing on thermal power plants, the company has been reorienting itself towards RE by building FIT-based wind projects (pre-2017) and acquiring development phase solar projects from Suzlon. Notably, the company has so far refused to participate in any auctions.

CLP and Engie are not the only international investors to reduce their exposure. Previously, Fortum sold a majority stake in its 185 MW solar portfolio to UK Climate Investments (40%) and Elite Alfred Berg (14%). EdF has entered into a 50:50 JV with SITAC, an Indian developer. Singapore based Sembcorp – with a total operational portfolio of 900 MW – is also looking for a partial exit through listing of its Indian business.

Figure: Leading RE developers in India

Source: BRIDGE TO INDIA research

India is potentially a very attractive market for the deep pocketed utilities from around the world. It is the third biggest RE market in the world and signatory to Paris climate accord. Power demand is increasing at a healthy 5% per annum against a decline in their home markets. Project allocation process is transparent. But unfortunately, the attractions are offset by countless operating and regulatory environment challenges – cumbersome land acquisition, lack of transmission infrastructure, GST and safeguard duty related uncertainty, poor payment record of DISCOMs etc. Tender cancellations are unnerving. Most importantly, despite their lower cost of capital, the strategic investors are unable to compete with more adventurous Indian developers, who often make speculative and aggressive assumptions when bidding. That means it is almost impossible to earn target risk-adjusted returns.

In conclusion, the high-risk market environment is putting off strategic investors. They are pacing cautiously and prudently managing their risk. It helps that the financial investors – pension funds, sovereign wealth funds and PE funds – are willing to pay a handsome premium for (quality) RE assets. For India, their waning interest is a huge loss. It badly needs their patient capital, robust quality approach and superior technology.

The Ministry of Power has proposed a number of progressive ideas for the electricity sector in the form of draft amendments to the National Electricity Act and National Tariff Policy. Proposed amendments include obligating DISCOMs to supply 24X7 power, a new penalty mechanism for non-compliance with renewable purchase obligations (RPOs), penalties for PPA violations, tariff rationalization and elimination of tariff cross-subsidies in three years. The new proposed amendments follow several rounds of earlier drafts which included other fundamental reform measures including separation of content and carriage, elimination of tariff subsidies and renewable generation obligations for all thermal power generators.

The proposed amendments are highly desirable but simplistic – they do not address key reasons for many of the underlying failures;

The reform timetable is unclear because of impending general elections;

India needs urgent power sector reform but it remains an elusive goal for the foreseeable future;

The proposed amendments are radical in many respects and conceptually sensible for the most part. However, the proposed mechanics are highly dubious and almost impossible to implement. For example, the proposal to obligate DISCOMs to ensure 24X7 power supply is planned to be implemented through annual assessment of adequacy of their future long-term power procurement arrangements against expected annual demand. Forcing DISCOMs to enter into long-term PPAs is highly undesirable in our view. Instead, the thrust should be on creating a vibrant and liquid short-term trading market.

The other fundamental shortcoming in some of the new plans is that it is not clear how they would be implemented. For example, the underlying problem with RPOs is that they have not been enforced by regulators because of DISCOMs’ poor financial condition, and as a result, the renewable energy certificate (REC) market has never really taken off. If there is no enforcement, the proposal to levy fixed penalties of INR 1-5/ kWh, instead of relying on REC mechanism, would suffer the same fate.

The pathway to implementation also remains uncertain. The electricity act amendments need to be approved by the Parliament and individual states. But there is little likelihood of any progress in the coming winter session or even next year due to general elections due in May 2019. The tariff policy is, in any case, non-binding and hence unlikely to be adopted by states.

We agree that there is an urgent need for Electricity Act amendments. The Indian power sector is undergoing a major transformation and needs a completely new framework. The government has shown good intent but actual reform remains elusive for the foreseeable future.

Haryana Electricity Regulatory Commission (HERC) has recently issued regulations that  exempt solar power plants from transmission/wheeling charges, CSS and additional surcharge for 10 years from date of commissioning. The waivers are applicable for an aggregate capacity of 500 MW. The state’s current installed capacity stands at merely 68 MW.

As open access (OA)-friendly states like Karnataka and Madhya Pradesh have reversed favorable policies over the last year, Haryana is likely to be the next stop for developers active in the OA market. The state is a win-win proposition both in terms of financial attractiveness. We expect that the cost of OA solar power in the state will work out to around INR 2.60-2.80/ kWh cheaper than grid power. 

9474

Figure: Landed cost of power from different sources for industrial consumers, INR/ kWh

Notes:

Grid tariff includes variable energy charges, fuel surcharges and electricity duty. It does not include fixed (demand) charges.

Tariff for OA solar power is assumed at INR 4.00/ kWh and tariff for OA conventional power is assumed at INR 3.50/ kWh.

OA power accounts for 17% of total C&I power consumption (19 billion kWh) in the state.

Figure: Power supply for C&I consumers in Haryana

Setting a 500 MW limit for policy incentives is a desirable move. While driving capacity installation in the short-term, it will avoid burdening the state DISCOMs with unreasonably large capacity additions (as seen in Karnataka).

Developers and some aggregators have bought/leased land close to sub-stations in anticipation of upcoming demand.  We understand that applications for evacuation permits have been made for more than 2,000 MW so far. HAREDA is in the process of formulating a guideline to shortlist applications. It is expected that preference will be given to developers with proof of land availability and financial strength.

BRIDGE TO INDIA has prepared the India Solar Open Access Market 2018. This report provides an in-depth analysis of the market, historic growth and future projections, drivers and challenges, segmentation by location and business models, policy framework along with detailed state profiles. To know more, click here.

SECI has made several amendments to its RFS for the integrated project development and module manufacturing tender. The big change is reduction in manufacturing capacity from 5 GW to 3 GW. MNRE received strong representations from the private sector with most companies not happy with the integrated tender design or with the ratio of project development and manufacturing capacity. Accordingly, focus on manufacturing has been reduced – revised minimum bid size is 2 GW of project development capacity combined with 600 MW of module manufacturing capacity.

The tender conditions are highly restrictive and complex;

Although there is no operational links between manufacturing and project development aspects, there are cross-penalties for delays and/ or underperformance;

We believe that this is the wrong formula for supporting domestic manufacturing;

Unfortunately, not all changes are positive. Ceiling tariff has been revised downwards to INR 2.75 (US 3.9 cents). The manufacturing capacity still needs to be fully integrated from polysilicon onwards but is required to be fully operational within 2 years as against 3 years under the original RFS. The requirement to locally source all major raw materials, other than polysilicon, has been relaxed but new restrictions have been included for capacity utilisation (50-60% in the first two years) and technology (module efficiency must be minimum 19-20%). Time period for development of project capacity has also been reduced from 4 years to 3 years – 40% capacity should be operational within 21 months and balance 60% should be operational in another 15 months.

Overall, it remains a peculiarly designed tender with a very complex structure. Although there is no operational connection between manufacturing and project development, there are cross-penalties for delays and/or underperformance.

The rationale for the peculiar tender design is that developers can, in theory, bid extra tariff on generation to subsidise their investment in the relatively unattractive manufacturing business. But that logic is defeated by the government’s general unwillingness to accept higher tariffs.

Moreover, few players have the willingness and capacity to participate in a tender of this scale/ complexity. Other concerns for potential bidders include large minimum investment of about INR 90 billion (USD 1.3 billion), aggressive time scale for implementation and weak market outlook for module manufacturing business. Several developers and module manufacturers are exploring joint-venture possibilities but the challenges are still formidable.

It is difficult to see how proposed revisions would attract enough bidding interest. We believe that the government is tying itself into knots and a solution to promote domestic manufacturing remains way off. Another pre-bid meeting is scheduled for September and we suspect more revisions are in store.

702 MW of new utility scale solar power generation capacity was commissioned in Q2 2018 taking total installed capacity to 24,941 MW on June 30, 2018. Capacity addition was 11% below our estimate and 60% below the scheduled commissioning target. It was also 82% lower than actual capacity addition in the previous quarter. Accordingly, we estimate total utility scale solar capacity addition in 2018 at 7,082 MW, 17% lower than in 2017. Including rooftop solar, total 2018 solar capacity addition is expected at 8,352 MW, 48% lower than MNRE’s original target for the year.

Slow progress can be attributed to slowdown in tender issuance and auctions about two years ago (Jul-2016 – Jun-2017) and on-the-ground operational delays;

The delays are seen across different types of tenders, states, sponsor groups and irrespective of solar park availability;

If the government is serious about achieving the 100 GW target, it needs to take immediate and decisive action on multiple fronts.

Figure: Utility scale solar capacity addition, MW

Source: BRIDGE TO INDIA research

The fall in capacity addition can be attributed to two main reasons – there was a significant slowdown in tender issuance and auction completions about two years ago (Jul-2016 – Jun-2017). That slowdown is showing up in projection completion progress now. Second, projects are being significantly delayed for both genuine and not-so-genuine reasons. Delays of 6-12 months seem common across the board. Curiously, the delays are seen across different types of tenders, states and sponsor groups and irrespective of solar park availability. Completion of land acquisition and transmission in 12-13 month timeframe – as allowed until recently under the PPAs – is extremely challenging particularly in states such as Karnataka, Maharashtra and Uttar Pradesh. But we believe that in many cases, delays are deliberate and specific to developers – they have either failed to raise financing in time or chosen to delay operational progress possibly because of increase in module prices in H2-2017 and/or safeguard duty risk.

Our estimates for 2019 and 2020 capacity addition are also about 30% lower than MNRE’s annual targets. Slow progress and wide-spread delays should ring alarm bells for the government. It has listened to the developers and allowed them an extended completion timeline of 18-24 months for new tenders further stretching schedules. But if it is serious about the 100 GW target, it needs to take immediate and decisive action particularly in addressing the land and transmission challenges.

https://bridgetoindia.com/backend/wp-content/uploads/2013/06/delhi-rooftop-2-e1535100287741.png||https://bridgetoindia.com/backend/wp-content/uploads/2018/08/RE-Weekly-27-8-18.png

In an encouraging move for prospects of domestic battery manufacturing, two government run institutions — Indian Space Research Organization (ISRO) and Central Electrochemical Research Institute (CECRI) — have announced plans to transfer their cell manufacturing technology to private companies. Various private players including Exide, Suzuki (with Toshiba and Denso) and Cummins have also announced plans to set up integrated battery manufacturing facilities in India.

CECRI has already signed an agreement with RAASI Solar Energy, a solar EPC company, to transfer its indigenously developed cell manufacturing technology and jointly develop battery packs for solar projects as well as electric vehicles (EVs) for three years. During this time, RAASI is expected to set up a 1 GW manufacturing facility in Tamil Nadu. ISRO also plans to transfer its cell manufacturing know-how for commercialization to private sector players on a non-exclusive basis. Despite uncertainty around possibility of commercialization of technology and ISRO’s strict eligibility criteria, its recently concluded pre-qualification conference received high market interest with more than 130 companies participating in it.

Learning lessons from the problems faced in solar module manufacturing, the Government of India has made a good start, albeit a little late in our view. China has already taken the lead and is expected to gain a 70% market share in global battery manufacturing by 2021. At present, China, Japan, USA and South Korea together account for 92% of total international battery manufacturing capacity.

So far, India has no notable capacity and a number of steps need to be taken to ensure that India doesn’t miss the manufacturing bus again. First, as scale of operations plays a critical role in battery manufacturing, the government should incentivise creation of domestic demand in both grid storage and consumer applications such as EVs. The inconsistent policy stance on EVs and changing targets of the government is not a good start. As per International Energy Agency (IEA) estimates, India had only 6,800 EVs at the end of 2017, 0.35% of the global fleet. On the other hand, China, which is promoting EVs through a combination of restrictions on internal combustion engine (ICE) vehicles and with its new energy vehicle credit system, has 50% share in the global EV fleet. On stationary energy storage front also, the government is yet to launch the much talked about National Energy Storage Mission, which is expected to give a boost to energy storage and battery manufacturing in India.

Second, continued investment in R&D is a must. The sector is bound to see rapid technological developments, which may render some of the existing technologies obsolete very soon. Third, investment in setting up testing facilities should be scaled up. Although there are various small-sized private companies operating in this space, there is a need to ramp up capacities of testing labs and putting in place a one roof solution for all testing requirements. The need to send cell and/or battery samples for testing to different places for different tests is a time consuming and a costly affair for manufacturers.

SECI has cancelled 2,400 MW of the 3,000 MW solar tender for which an auction was completed about three weeks ago. Capacity was won by Acme (600 MW, INR 2.44/ kWh), Azure (300 MW, 2.64), Canadian Solar (200 MW, INR 2.70), Adani (300 MW, INR 2.71), ReNew (500 MW, INR 2.71) and SoftBank (1,100 MW, INR 2.71). All bids other than Acme’s have been rejected. This cancellation comes in the wake of other recent cancellations by Uttar Pradesh (1,000 MW state tender, winning tariffs of INR 3.48-3.55) and Gujarat (500 MW state tender, winning tariffs of INR 2.98-3.06). Meanwhile, SECI has also cancelled a 2,000 MW pan India wind tender, which was undersubscribed because of developer concerns around transmission capacity.

It is not logical for procurement authorities to cancel auctions when winning tariffs are well below the ceiling tariffs;

Unrelenting focus on price is detracting from the government plans and overall vision for RE sector;

Procurement authorities run the risk of turning developers away if tender cancellations are not curbed immediately;

The reason given for all the solar tender cancellations is that the winning tariffs were deemed to be too high by MNRE and/or the DISCOMs. But the winning tariffs in the SECI tender were well below the ceiling tariff of INR 2.93 (there was no ceiling tariff in other tenders). Ceiling tariffs are supposed to be approved by power purchasers in advance to ensure that winning tariffs are acceptable to them. Logically, therefore, the reason given for tender cancellation does not make sense. Additionally, it is clear that MNRE and SECI have been acting in haste to issue as many new tenders as possible without seeking due purchasing commitments from DISCOMs.

So far in 2018, auctions have been completed for 12,570 MW of solar projects. Almost one-third of this, 3,900 MW capacity, has been cancelled. The cancellations are obviously a setback to the government’s growth plans for RE. We believe that increasing tender cancellations is a damaging development for other reasons. It shows growing mismatch between expectations of procurement authorities and project developers and indicates a likely fractious relationship between the two over potentially troubling issues including safeguard duty, transmission infrastructure, grid curtailment etc. More importantly, if this trend persists, developers are bound to lose confidence in the sector. The lesson for MNRE and SECI is clear in our view. Rather than relentlessly issuing new tenders, they need to follow a more orderly project development process in close coordination with DISCOMs, Power Grid Corporation and other agencies to avoid such incidents.

Procurement authorities rightly require developers to provide bank guarantees and other documentary evidence to ensure their commitment. But developers also spend considerable time and effort in participating in tender processes. Shouldn’t they be compensated every time an authority backs out of a tender for no valid reason?

Indian government appears to be working on a new scheme to support domestic manufacturing. The scheme involves procuring 12 GW of new project capacity using domestically manufactured modules over next four years. Power from these projects will be bought exclusively by public sector units for their own consumption. If implemented, it will be the government’s DCR 2.0 scheme. The previous scheme fell afoul of WTO guidelines and the new scheme has been designed specifically to avoid that fate.

Convincing public sector consumers to buy expensive power and managing open access challenges will not be easy;

The vast array of policy ideas and schemes in circulation is creating confusion in the sector;

Both manufacturers and developers are lobbying hard for a favourable outcome and adding to uncertainty;

We are not convinced about prospects of the new scheme. Public sector entities may not actually agree to buy expensive power. Who will bear open access regulatory risk and cost of using the grid? Setting aside these reservations, DCR 2.0 is the fourth or fifth policy idea mooted by the government in the last year to boost domestic manufacturing. A new manufacturing policy has been talked about for some time but there is no clarity on that yet. Capital subsidies and interest rate grants have been proposed but we believe that these are ruled out for now because of funding constraints. SECI has called bids for a 5/10 GW integrated manufacturing and project development tender and it remains to be seen how it will be received in the market. There has been some progress finally on safeguard duty implementation but here again, a final decision is still awaited.

In short, there are many jumbled policy ideas and schemes on paper but no meaningful action yet. Meanwhile, domestic manufacturers are struggling to stay afloat while project developers are anxious because of uncertainty around safeguard duty implementation. Both sets of players are also unhappy with the final DGTR recommendation on safeguard duty and lobbying furiously for a more favourable decision.

We spoke to a number of stakeholders to discuss their reaction to the ongoing announcements. Everybody agrees that the government is serious about supporting domestic manufacturing. Beyond that, there is plain confusion on mechanics and timing of different schemes. We heard many contradictory ideas about prospects of different schemes as well as their impact on different players across the value chain. As we concluded in our recent blog, the industry should brace for an extended period of uncertainty on this front.

India has made tremendous progress in renewable energy in the last four years. Solar sector, in particular, has grown rapidly with India becoming the third largest international solar market after China and the USA. Both by total installed capacity and annual capacity addition, India is now amongst the top five renewable countries in the world. The industry is understandably upbeat about the future as shown by our third renewable industry CEO survey, which saw participation from 42 private company CEOs. 70% of these CEOs are optimistic or extremely optimistic about their future business prospects.

Growth has, however, brought in its wake a shifting set of challenges as validated by the survey results. A headline finding of the survey is that the March 2022 target of 175 GW is likely to be undershot by a considerable margin. The industry expects India to have total solar and wind capacity of only 118 GW as against the government target of 160 GW. The real disappointment lies in rooftop solar, where expected capacity is only 10 GW against a target of 40 GW. This is a reflection of two factors in our view – one, the rooftop solar target itself is wrongly calibrated. Two, the government has failed to grasp policy requisites for this market. Despite falling costs, it continues to rely on costly and inefficient capital subsidies rather than directing attention to educating consumers and helping them to make the right decisions.

Another interesting finding pertains to the use of competitive auctions in the sector. The government has reasons to be pleased that auctions have halved the cost of renewable power in just three years. Indeed, both solar and wind power are now by far the cheapest new sources of power with current prices in the range of Rs 2.40-2.80 per unit. That has spurred demand from DISCOMs as well as bulk energy consumers such as railways, IT companies and auto ancillaries. The flip side of fiercely competitive auctions is that the urge to win at any cost has led to aggressive bidding. There have been persistent fears that tariffs have gone down too far, too fast and the survey results support that view. 70% of the participants believe that bidding is “irrationally aggressive.” The government needs to build safeguards in auction mechanisms to ensure that projects are delivered on time, quality is not compromised and the banks are not saddled with NPA’s as seen in other sectors.

Falling solar power cost owes partly to falling module prices and, in turn, rise of China in the global module manufacturing business. India, like much of the world, is heavily reliant on Chinese manufacturers, who have aggressively scaled up capacity and invested in R&D to account for more than two-thirds of the global supply. Indian manufacturers are unable to compete with their Chinese counterparts and that is fuelling tension between domestic manufacturers and project developers. The survey confirms that proposed safeguard duty on import of solar cells and modules poses the biggest challenge to the sector. Moreover, a majority of the participating CEOs believe that India would continue to meet more than 70% of its requirement from imports in the foreseeable future. This assessment shows that relying on trade barriers is not a satisfactory solution. Focus should instead be on creating more business-friendly environment – simplification in labour laws and other bureaucratic hurdles, lowering power cost, improvement in workforce skills – for improving domestic manufacturing prospects.

Amongst states, Gujarat wins by fair margin on ‘ease of doing business.’ Karnataka is the overwhelming favourite for open access market when most other states are in the negative territory. Madhya Pradesh leads in rooftop solar but most other states do well in this market. States are vying with each other to build more renewable capacity and they have much to learn from each other by way of sharing best practices and success stories.

The survey also reveals that uncertainty in overall policy environment, poor financial condition of DISCOMs and land acquisition are the main challenges facing renewable energy. The conundrum here is that the government has been rather enthusiastically framing new policies. But despite a plethora of new schemes and policies governing every aspect of the sector, uncertainty prevails. Constant tinkering, poor design and implementation have failed to produce results.

For example, it is unrealistic to expect businesses to commit to manufacturing investments when the policy environment is so volatile – changing repeatedly from financial incentives to assured demand, to safeguard duties and now, back to assured demand. And therein lies the key to realizing the sector potential. Creating a stable policy environment is the need of the hour for attracting private investments.

There have been some bold announcements coming out of MNRE in the last few weeks. It has claimed that India aims to achieve total RE capacity (excluding large hydro) of 227 GW by March 2022. It has also announced that the government plans to launch a single 100 GW solar manufacturing-cum-storage-cum project development tender to accelerate progress in the sector. Other new initiatives recently announced include 5-10 GW of integrated module manufacturing capacity, 10 GW floating solar capacity, 10 GW hybrid wind-solar capacity, 30 GW offshore wind (by 2030) and a USD 20 billion solar pump scheme.

The new plan warrants annual RE capacity addition to go up to a mind-boggling 40 GW and is completely detached from reality;

Our balanced case forecast for total RE capacity by Mach 2022 is only 125 GW;

By announcing such radical schemes, MNRE may be trying to deflect attention from recent problems and shore up confidence in the sector;

India’s total installed RE capacity as of March 31, 2018 was only 69 GW – the new plan therefore warrants annual capacity addition to go up from 10-12 GW in the last few years to a mind-boggling 40 GW. We believe that the new MNRE plans are completely detached from reality. Amongst other things, India simply doesn’t need so much new power. Power demand growth is fairly benign at about 4.5-5.0%, equivalent to incremental demand of about 8-10 GW per annum. There is excess capacity in the country with more than 75 GW of thermal power plants running at load factors between 20-50%. Moreover, NTPC and other state generators continue to add 5-7 GW of new coal-fired capacity every year.

Second, there are huge challenges in availability of land, transmission and even financing for the revised scale of capacity addition. Many tenders are already being delayed and timelines extended for project implementation because of transmission system constraints. The solar park scheme is facing major delays. DISCOM finances also remain stretched despite UDAY scheme.

Our forecast for total RE capacity, taking into account overall power demand-supply situation as well as various supply side constraints, is only 125 GW by March 2022. This forecast is also consistent with the findings of our recent RE CEO survey.

So what explains the new plans? We believe that upcoming state and central government elections and wider macro-economic challenges are leading the government to announce ever ambitious plans. In particular, MNRE has been under persistent pressure over the last year due to a series of issues including tender slowdown, GST, customs duties and safeguard duties. We can only speculate that the new MNRE administration is trying to deflect attention from these problems to shore up confidence and raise optimism in the sector.

Gujarat government has cancelled the 500-MW state tender, for which an auction was held just four weeks ago. Capacity was won in this tender by Kalthia Engineering (50 MW), Gujarat State Electricity Corporation (150 MW), Acme (100 MW) and Azure Power (200 MW). Reason for cancellation has been cited as winning tariffs, between INR 2.98 – 3.06/kWh, being “on the higher side”. In the same week, the state cancelled another tender for short-term purchase of 2,000 MW of conventional power again because the prices (INR 4.97/kWh-INR 8.00/kWh) were deemed to be too high.

The cancellation shows a huge disconnect in the expectations of DISCOMs and power generators;

Developers need higher tariffs to compensate for growing risks but government authorities do not seem to appreciate viability challenges facing the sector;

Gujarat move raises the risk of more tender cancellations and legal disputes in future;

The 500 MW solar tender was issued in February 2017 and offered no relief from safeguard duty to developers. Given that the impact of 30% duty is estimated at about INR 0.40/ kWh, the final winning tariffs were actually rather attractive for the DISCOMs. The cancellation shows a huge disconnect in the expectations of DISCOMs and power generators. We believe that tariffs had fallen too far in the last year despite an increasing number of cost challenges and risks (GST, increase in module costs, steel and aluminium prices, import duties etc) faced by developers.

Projects with sub-INR 3.00 tariffs face serious viability challenges and a real risk of abandonment. It was to be hoped that increase in tender issuance would ease competitive pressure on developers and offer financial respite for long-term health of the sector. But the state authorities including DISCOMs seem to be detached from financial reality. Indeed, MNRE and other authorities have informally indicated multiple times that any increase in tariffs will not be tolerated.

The heavy-handed attitude of DISCOMs and arbitrary cancellation of tenders is a very negative development. It raises the risk of more tender cancellations by other DISCOMs and would potentially slow down project allocations even further. The developers, on their part, face increases in bidding cost, which would in the end need to be passed back to the DISCOMs. The cancellation is also a reminder of how MNRE’s proposed change in law relief for duties may come unstuck because of uncooperative DISCOMs and protracted legal disputes.

Gujarat’s move to cancel the two tenders is all the more surprising as the state is dealing with a power crisis. Because of a commercial dispute, two thermal IPPs have suspended 3,000 MW of power supply to the state. But the DISCOMs are not willing to listen and learn. The state has a renewable purchase obligation (RPO) target of 15.65% by 2020-21 and plans to buy 7,000 MW of new renewable capacity in the coming years. It would need to soften its attitude towards private developers to achieve its targets

On paper, the solar parks policy is excellent. It tackles the two major issues of land acquisition and evacuation, reducing developer risk. In theory, this should bring down the cost of solar power. However, after seeing the costs released for the recently announced solar parks in Andhra Pradesh, Rajasthan, Gujarat and Karnataka, most developers are of the opinion that they could have quoted lower tariffs had they been allowed to bid for projects outside the park. Now, this is despite the fact the states are receiving a substantial central grant of 50% (or up to INR 2 million per MW) for developing this park infrastructure.

High charges for solar parks can make solar power more expensive by between INR 0.16/kWh – INR 0.36/kWh

Cost of leasing land inside the park is turning out to be more expensive that buying the land outright and creating own evacuation infrastructure

The policy itself is useful but the key reason behind this failure is inefficiencies in implementation and the Solar Park Implementation Agencies (SPIA) structure

The concept is that a Solar Park Implementation Agency (SPIA) in each state is responsible for land acquisition and infrastructure development, including evacuation. Developers are then expected to invest into and develop individual solar projects on top of the solar parks infrastructure.

BRIDGE TO INDIA analysis shows that the recently announced solar park charges by the various SPIAs will end up being counterproductive to the objective of reducing costs.

The charges announced for solar parks are high as compared to the stand-alone cost for developers to acquiring land and arrange evacuation infrastructure themselves within the same state. Ideally, the solar park lease should be cheaper but it is not.

Fig. 1: Increase in cost of solar power for projects installed inside the park vis-à-vis outside (INR/kWh)

Based on BRIDGE TO INDIA calculations based on applicable costs in the state. Project cost and return expectation has been assumed same for project being executed inside and outside the solar park

The purpose of creating solar parks is being defeated with such high charges. It does not make sense that the cost of leased land and common evacuation infrastructure with central government subsidy is turning out to be higher than the cost for private land acquisition and individual evacuation infrastructure. There is clearly huge inefficiencies that are getting built into the process. One possible solution to this could be perhaps to bid out execution of solar parks to private entities.

3753

Table 1: Applicable solar park charges (as on 21st September 2015)

Various state IPAs

The poor financial health of India’s power distribution companies (DISCOMs) is deemed to be the weakest link in the Indian power sector and a huge headache for project developers.  It is not just critical for the revival of the power sector but also for the health of public sector banks. Recent estimates by CRISIL suggest that poor progress on tariff reforms and high AT&C losses have cost led to accumulated DISCOM losses of INR 3.75 trillion (USD 56 billion). To put this in perspective: this is equivalent to around 2.7% of India’s GDP.

Central government wants states to issue bonds for raising funds at 8.5-9% to refinance power firms’ current high-cost loans (13-14%)

In return for reforms, central government will offer funds from schemes such as the Integrated Power Development System and Deen Dayal Upadhyaya Gram Jyoti Yojana

The long term growth prospects of the solar sector are contingent upon the financial health of the DISCOMs

In a positive and much needed development, India’s power minister Piyush Goyal recently clarified that the central government cannot be a bailout bank for debt-ridden DISCOMs and that states will have to find their own way out of the crisis (refer). Instead, the central government sees its role as limited to nudging state governments into reforms using a carrot and stick approach. In line with that, the central government is proposing that state governments push through urgent reforms to improve the financial situation of the DISCOMs. Some of the reforms proposed are: i) states should issue bonds for raising funds at 8.5-9% to refinance high-cost loans (13-14%) of DISCOMs; ii) cut the aggregate technical and commercial losses to 15% (currently the average is above 25%; in some states like Jharkhand (42%) and Uttar Pradesh (32%) it is even higher), and; iii) ensure 100% metering and keep the heavily subsidised farm sector on a separate grid.

The carrot offered in return for reforms is funds from schemes such as the Integrated Power Development System and Deen Dayal Upadhyaya Gram Jyoti Yojana. These funds could be linked to the performance of states on reforms.

The root cause for past failures to stabilise DISCOM finances lies in heavy and often short-sighted political interference, leading to – amongst other things – unsustainably low power tariffs. In turn, DISCOMs have always banked on the state and central governments to bail them out at regular intervals. With the central government now refusing to give ad hoc funding to DISCOMs, the pressure to reform is rising.

In face of a looming power sector crisis in the country, there is an urgent need to raise power tariffs and remove inefficiencies. In the short term, solar power might benefit from a power crisis. However, in the long term, the growth of the solar sector is closely linked to the health of the grid, DISCOM finances and the overall economy. As with most other pending reforms, the states seem to be at the steering wheel and not the central government. We hope that economic sense and mature politics will prevail over short term political gains and populism and result in the much awaited power sector reforms.

Other announcements

Last week, the Solar Energy Corporation of India (SECI) announced a Viability Gap Funding (VGF) based allocation of 500 MW in Maharashtra and 250 MW in Gujarat (refer). Also, NTPC announced a new EPC tender for 750 MW in Andhra Pradesh (refer).

One group in India that has so far not shared the enthusiasm about the country’s solar ambitions is utilities. Their immediate concerns relate to how the transmission and distribution grid is used and paid for. At a more fundamental level, they are wondering about whether the growth of solar will restrict or change their role in India’s future electricity system. While some DISCOMs have been more proactive, viewing solar as an opportunity, others have been dragging their feet. This has been a key determinant of whether or not solar has take off in different states. Andhra Pradesh is one of the most solar enthusiastic states in India – but the state’s DISCOM is now challenging that. The Eastern Power Distribution Company of AP Limited (APEPDCL), has petitioned the state electricity regulatory commission, APERC, to review exemptions from wheeling charges for renewable energy (refer).

Andhra Pradesh was a leading state in announcing a waiver of wheeling charges and has since been followed by several others

Regulatory changes after the investment has been made can be very damaging to the investment climate. The petition in Andhra Pradesh is a reminder of the uncertainties of the business.

BRIDGE TO INDIA supports fair compensation for use of infrastructure but that should not be confused with seeking to protect distribution monopolies

State DISCOMs impose wheeling charges on the use of their transmission infrastructure. A waiver from wheeling charges is an incentive for the renewables sector, essentially a subsidy. APEPDCL argues that it is currently losing revenue due to such waivers and will have to bridge the revenue gap by hiking tariffs for non-solar customers. For this reason, it has asked for the waiver to be scrapped. We expect many more such challenges to solar in India.

Andhra Pradesh was one of the first states in India to announce a waiver of wheeling and some other open access charges for captive use/private sale of power from utility scale solar projects. This decision was hailed by the solar industry and similar policies with full or partial waiver of various open access charges were announced in Karnataka, Madhya Pradesh, Tamil Nadu, Punjab, Uttarakhand and Punjab. The trend so far was towards expanding this model. The central government, for instance, has proposed changes to the National Tariff Policy 2005 to allow free interstate transmission of renewable power.

With falling solar prices and rising grid power tariffs solar power has become an attractive choice for more and more customers. This has prompted several developers to look at private solar parks and other such business models seriously. According to BRIDGE TO INDIA’s project database, over 100 MW of off-site, private sale of power sola projects have been built. Many developers are currently looking at such opportunities through the solar parks being built in Madhya Pradesh, Telangana, Rajasthan, Tamil Nadu and Andhra Pradesh.

A key concern investors and especially banks have had with such projects has been the longevity and stability of waivers from various charges announced as part of ambitious state policies. Despite grand vision statements, actual regulations can change quickly and in India, they are almost never protected by a ‘grandfathering’ clause (refer). Regulatory changes after the investment has been made can leave investors in a lurch. The petition in Andhra Pradesh is a sharp reminder of such uncertainties.

BRIDGE TO INDIA is of the opinion that DISCOMs should be fairly compensated for use of their infrastructure. However, this compensation should not be used to shut out new entrants and maintain monopolies. If states want to provide such incentives to the solar sector, then DISCOMs should either be allowed to pass these costs on to other customers or the government should compensate them for it.Otherwise, similar policies in other states, especially policies such as Karnataka’s 10 year waiver on wheeling and other charges, will not be sustainable. So the issue needs to be addressed keeping in mind the interests of all stakeholders. It is equally important, however, to build investor trust in the Indian market and from that perspective, overturning any policy for existing projects should be a strict no-no.

Last week, the Cabinet Committee on Economic Affairs, chaired by the Prime Minister formally gave its approval for stepping up India’s solar power capacity target to 100 GW by 2022 (refer). The press release included some bold policy ideas to achieve the goal. They include: making 10% rooftop solar mandatory under a scheme to be formulated and announced by the Ministry of Urban Development (this is still an idea that may or may not become a policy) and setting up industrial parks for manufacturing solar PV components. Apart for the new policy targets, the cabinet also gave its approval for implementing 2 GW of utility scale projects under a viability gap funding mechanism (refer). This is a part of the 7 GW to be allocated by SECI.

India’s cabinet approves the 100 GW solar plan

A provision for mandatory renewables for buildings is planned

There will also be industrial parks for manufacturing solar components

The most noteworthy point in the press release is the proposal for amendment in building bye-laws for mandatory provision of roof top solar for new construction and 10% renewable energy provision for end-customers under the new scheme of Ministry of Urban Planning. It is an interesting proposal and, in this post, we discuss some of its pros and cons.

Mandatory rooftop solar is not new to India. Similar policies have earlier been formulated by the states of Haryana and Tamil Nadu. In 2012, Tamil Nadu unveiled a solar policy, under which large power consumers (with a connected load of above 11 kVA) were asked to meet a share of their power consumption from solar. However, a year later, this obligation was challenged by the Tamil Nadu Electricity Consumers Association in court on the grounds that there was already a general renewable energy obligation upon commercial consumers, as per a Tamil Nadu Energy Regulatory Commission (TNERC) order of 2010. The rooftop obligation was dismissed by the courts and the plan as aborted.

Subsequently, Haryana has made it mandatory for all buildings with an area of 500 sq. yards or more to install solar rooftop systems of a minimum size of 1 kW or 5% of their power requirements, whichever is higher. The deadline for meeting the requirements is September 2015. In all likelihood, there will be large scale non-compliance to this mandate. The primary reasons for non-compliance is that the other aspects of the policy are not being effectively implemented. A central and state government subsidy has been announced but it is not available. Net-metering exists on paper but the process for providing interconnection has not yet been streamlined. In fact, hardly any permissions have been provided for net-metering. Over and above these challenges, the short timelines provided for publicizing and enforcing the mandates has created a situation where the public has not taken them seriously.

Last week, India’s Ministry of New and Renewable Energy (MNRE) released a new policy designed to encourage unemployed youths and farmers to install renewable energy plants (refer). The idea is to increase employment as well as power generation. The government has set a very ambitious target of installing 20 GW of solar capacity through this scheme. 40 GW more is supposed to come from utility scale plants and another 40 GW from rooftop plants. To put these numbers in perspective, India’s current solar capacity stands at 4 GW.

BRIDGE TO INDIA feels that the policy will be difficult to implement

It seems improbable that many unemployed youths or farmers will be able to raise capital for this

Commercial banks will also be wary of providing any financing to applicants with little or no solar experience on a non-recourse basis

The core driver of the policy is a grant from the central government of INR 5 million per MW, initially for a total capacity of 9,500 MW. It is not clear how MNRE will fund this aggregate grant of INR 47.5 billion. Each project is to be 0.5-5.0 MW in size. These projects will be split between states based on their Renewable Purchase Obligations (RPOs) (see table below). The scheme is proposed to run for seven years to achieve the overall target of 20 GW. Apart from solar, this policy is open for other renewable sources such as wind, small hydro and biomass.

The Proposed state-wise allocation is as follows:

The MNRE has written to the states for formal acceptance of the allotted capacity. If any state government does not wish to participate in the scheme, its capacity will be distributed between other states.

The state governments will be responsible for identifying the beneficiaries, setting up tariff structure for power purchase agreements (PPAs) and providing basic training to the beneficiaries (the cost will be borne by the central government) for running the solar projects.

The beneficiaries are required to hold a majority stake in the projects and will be allowed to bring in partners for up to 49% of the equity. Apart from the central assistance, state governments are free to provide additional financial incentives in the form of capital subsidy or interest rate subvention. This might well be needed.

Can the policy fly? We have serious concerns. Firstly: how will an unemployed youth or farmer find money to invest – equity requirement in the projects is expected to be around INR 20 m/MW (assuming a debt to equity ratio of 30:70). After adjusting for the central incentive of INR 5 m/MW and possible infusion from partners, beneficiaries will still have to arrange for roughly INR 5 m/MW. It seems improbable that many unemployed youths or farmers will be able to raise that kind of capital. Additionally, commercial banks will also be wary of providing any financing to applicants with little or no solar experience on a non-recourse basis.

The second key question revolves around off-take. The cost of generation and finance for small -scale plants will be substantially higher than that for larger developers. To make such projects viable, DISCOMs will have to offer tariffs of around INR 6.50-7.00/kWh. Given that many of the DISCOMs are in very bad financial health, their enthusiasm will likely be limited.

BRIDGE TO INDIA is of the opinion that this scheme is fundamentally flawed and will be difficult to implement. The government is trying to mix two very different policy goals – more employment and more power – in a very unimaginative manner and it will fall short on both accounts. It would be better to invest more into building the technical skills India’s young need to make the overall solar story a success. If India’s solar market will continue to grow as fast as it currently does, it will provide plenty of new employment opportunity.