Category: Policies & Regulations

Today, there was a meeting called by Ministry of New and Renewable Energy (MNRE) to discuss their revised plans for 10,000 MW of solar PV projects expected to be tendered in the next few months under National Solar Mission (NSM). These projects will be split between tariff based bidding (3,000 MW) and Viability Gap Funding (VGF) based bidding (7,000 MW).

MNRE claimed that tenders for further 2,500 MW of projects under the same scheme will be announced in the next two months

For the VGF based bidding projects, MNRE has so far received confirmation from states for 2,670 MW of projects

BRIDGE TO INDIA’s opinion is that these allocations might stretch beyond the timelines stated today due to multiple operational reasons

This meeting came close on the heels of a tender already issued by National Thermal Power Corporation (NTPC) for 500 MW in Andhra Pradesh (refer). These projects will be awarded on the basis of tariff based bidding and solar power will be sold by NTPC to power distribution companies on a bundled basis along with thermal power. MNRE officials claimed that tenders for further 2,500 MW of projects under the same scheme will be announced in the next two months.

In addition, central government approval has been obtained for the entire 7,000 MW of VGF projects. As per original plans, these projects were envisaged under NSM (refer) by 2021. MNRE expects to complete project allocations by the end of this financial year.

The entire 10,000 MW of these projects will be tendered on a state-by-state basis, which is a move away from previous rounds of NSM but consistent with previously announced plans. However, several issues around the implementation of the solar parks policy are yet to be resolved (refer).

For the VGF based bidding projects, MNRE has so far received confirmation from states for 2,670 MW of projects: Karnataka (500 MW), Uttar Pradesh (500 MW), Maharashtra (500 MW), Tamil Nadu (500 MW), Rajasthan (250 MW), Gujarat (250 MW), Kerala (100 MW), Uttarakhand (35 MW), Delhi (20 MW), Meghalaya (10 MW) and Lakshadweep (5 MW). This will suffice for first round of 2,000 MW.

To increase participation, MNRE is considering removal of net worth clause for bidding of projects. This is a debatable decision as non-serious developers may bid aggressively. However, there is a deterrent in form of developers having to furnish performance bank guarantee of INR 3 million (USD 50,000)/MW. Additionally, MNRE is considering relaxing the equity lock in period of one year before change in ownership.

If India is able to allocate the entire 10 GW in this financial year, it will be path-breaking from a global perspective. However, BRIDGE TO INDIA is of the opinion that these allocations might stretch beyond the timelines stated today due to multiple operational reasons, including land availability and off-taker willingness to procure power. Actually, it might not even be desirable to allocate so much capacity in such a short duration of time as lack of sufficient bidding interest may lower the competitiveness of the bids. Additionally, there might be issues around ramping up of execution capacity in such a short duration of time. A sudden surge in demand might also lead to higher input costs for developers and a higher VGF/tariff.

It has been more than 100 days since the government of Haryana has made it mandatory for all buildings with an area of 500 sq. yards or more to install solar rooftop systems. Unfortunately, there has been very little progress in the implementation of the policy. A pervasive culture of delays and an expectation that policies are not enforced makes the market very slow to react. Will this well intentioned policy join the fate of so many others and simply be ignored?

The mandatory solar rooftop policy in Haryana is ineffective so far

A lack of information and support from the government hampers implementation

The government itself has not executed any pilot solar installation

Under Haryana’s state solar policy, the government plans to install solar rooftop plants of up to 500 kW on a cluster of public buildings in each district headquarter. Also, private buildings are encouraged to form a cluster and get solar power from IPPs. For individual houses, building owners are to be incentivized through a net-metering policy at feed-in tariff decided by HERC.

The promising policy came about to help Haryana deal with its chronic power shortages. Solar makes a lot of sense in the state. Power tariffs are high, there is a good network of solar installers in the state, Haryana is very power hungry, the Discoms are loss making and cannot invest enough themselves: all factors are in favour for rapid solar adoption.

Till date, however, Haryana has only around 22 MW of utility scale solar installed and no more than 4.8 MW of rooftop solar. 6 MW of utility scale and 1.2 MW of rooftop was installed in 2014. With that, the state has less than 1% of the total solar installed in the country, a low number, especially compared to its 4% share of national power consumption.

In principle, the solar policy is clear, straighforward and should be effective. However, in reality, it is lost in the woods. Currently, no relevant power consumer group, be it schools, hospitals, colleges, office spaces, malls or even private bungalows is seriously considering building a rooftop system because of the policy. Why? The reason is lethargic implementation. It is something we have heard many times before in India. But it does not have to be that way. The policy could be implemented better with simple measures.

Currently, there is no guidance from the government to educate people about the minimum technical specifications required and the economic feasibility of a solar system. It would be key to inform and help large power consumers meet their obligations. Also, the lack of financial support (MNRE’s 15% subsidy and the state’s additional 10%), makes it tough for consumers to go solar. The policy like many other policies has been built on the MNRE’s subsidy scheme. This scheme, however, has itself not been implemented: funds are not made available and projects get indefinitely delayed as customers wait for a better deal. As a result of such shortcomings, the impression is created that the government is shifting the responsibility of providing reliable power supply to the consumers itself.

 An effective order for mass adoption of solar rooftops in the state could be:

[1] First start with public buildings, this can be organised (perhaps clustered) by the government[2] Then move to large private entities (industries) and encourage IPPs[3] Finally the residential building owners should be pushed for installations at their own roof

The government currently puts all focus on mandating individual owners to go for solar since that involves less participation from the government’s side. It would be better, however, if Haryana could inverse its approach. It could learn from Gujarat, which effectively implemented India’s first solar rooftop programme.

Ministry of Power (MoP) has proposed amendments to the country’s existing tariff policy of 2005 (refer). Promotion of renewable generation sources has now been added as the fifth objective of the policy. There are three salient features for the solar sector in this proposed amendment:

Renewable purchase obligation (RPO) has been revised to 8% by 2019

Discoms will now be allowed to procure bundled solar power from the existing conventional power generators on a cost plus basis to meet their RPOs

Renewable sources have been exempted from inter-state transmission charge

The increase in RPO target from 3% by 2022 to 8% by 2019 implies an aggregate solar capacity of 69 GW by that time. This is equivalent to solar capacity growth of 87% per annum, which is largely consistent with the 2022 target of 100 GW but is nonetheless extremely ambitious in our view.

Discoms will continue to have the option to buy solar power by allocating capacity through competitive bidding. However, they can now also buy bundled power directly from conventional power producers such as NTPC, NHPC, state power generation companies and private conventional power generators such as Reliance, Jindal and Adani. The amendments propose that all coal-fired power plants installed after a specified date will have to be accompanied by a renewable power plant for at least 10% of their coal generating capacity. Additionally, after receiving consent from off-taker, the existing coal power plants will be allowed to set up solar/renewable capacity for bundled power to be sold on a cost-plus basis. Conventional power generators have an obvious advantage over renewable IPPs in terms of scale and existing evacuation infrastructure. Now, with the added advantage of being able to directly pass through costs for solar on a regulated cost-plus basis, these players might get a significant advantage over renewable IPPs going forward.

Renewable power is also proposed to be exempted from inter-state transmission charges until a further notification by central government. This would encourage a large concentration of solar plants in resource rich states, such as Rajasthan and Gujarat provided the transmission capacity is sufficiently boosted. Green corridors to evacuate renewable power are already in active planning stages.

There is more detail required to back up these policy announcements particularly on enforcement, which is always the weakest element of such policies in India. Also, like most other central government initiatives in the power sector, bringing states on board will be a significant challenge. Overall though, BRIDGE TO INDIA believes that the proposed amendments could be a very good driver for boosting the renewable sector in the country.

The Indian government has upgraded the target of solar capacity from 20 GW to 100 GW by 2022. Of this, 60 GW are to be from ground-based projects. A key bottleneck for achieving this target is suitable land. Many developers believe that the single biggest factor for delay in project execution is the time-consuming process of land identification and acquisition. Even the government’s own plans for creating solar parks, have been put on hold because of challenges in making available the required land. A new, badly needed land acquisition bill is stuck in Rajya Sabha. Is it really that difficult to find a solution for the land acquisition bill?

   While states have committed to participate in the 25 solar park plan (for 20 GW), implementation is a challenge due to land acquisition issues

   Maharashtra’s renewable energy policy is delayed also due to hurdles in land acquisition

   Land acquisition problems could be addressed by fixing a realistic compensation agreeable to both farmers and developers

The Ministry of New and Renewable Energy (MNRE) is well aware about the challenges faced by developers in land acquisition. To fast track the installation phase, the government initially introduced the concept of solar parks. Under this, the government agencies would be responsible for land acquisition and the development of power evacuation infrastructure. The idea is to build 25 solar parks for a total solar capacity of 20 GW. A draft policy has been released in September 2014 by the MNRE for solar parks, proposing a contribution of 50% (or up to INR 2 million) from the central government towards the setting up of solar parks in any Indian state.[1] Following this, the MNRE has prepared a roadmap for installing 15 GW by 2019.[2] However, after six months of waiting, the allocation process has still not seen the light of the day. The main reason is the difficulty in identifying and acquiring suitable land acquisition for the first few parks.

The much-awaited Maharashtra renewable policy that targets 7.5 GW of solar is facing the same challenge with land acquisition.[3] Equally, developers are seeking clarity with respect to land availability for the recent 2 GW tender in Telangana.[4]

All the while, the urgently needed reform of the land acquisition is stuck in parliament.The previous UPA government has made land acquisition very difficult. It has introduced a bill mandating the consent of 70% of farmers (for a public-private partnership project) and the consent of 80% of farmers for private projects. A detailed social impact study has to be performed and the land acquisition process cannot be completed until satisfactory resettlement and rehabilitation have been prepared. It typically takes at least three years for complying with the process.

The present NDA government is trying to relax the norms for priority projects relating to national security, defence and rural infrastructure, including electrification and industrial corridors.[5] But the move has faced a lot of opposition and been labelled “draconian” by opposition parties. Amended land acquisition bill has been passed in Lok Sabha but, it is stuck in the Rajya Sabha (Upper House), where the opposition still has majority.

In my opinion, the situation can be fixed. The focus of the land acquisition bill should be to ensure that the landowners are fairly compensated while processes are not held up too long. It is not about protecting farmers’ rights to farm as some politicians claim. According to the National Sample Survey Organisation, in 2005, 40% of farmers did not want to engage in agriculture.[6] Additionally, the educated children of most farmers also do not want to engage in agriculture. I believe that a significant proportion of the farmers, operating on not so fertile land, would be willing to sell their land. They want a functioning market place as much as solar developers do.

Currently the compensation for land acquisition has been fixed at four times the market value. The trouble with this process is that the “market value” is dictated by the state.[7] Typically, it takes into account historic transactions and not the current trend. The solutions is to develop a mechanism that allows the two contractual parties to settle on a price they are both happy with – without involving the state more than necessary. In addition, the consent clause, the biggest deterrent to land acquisition act, needs to be lowered to, say, 50% to keep the buyers interested.

Though an ordinance has been passed for land acquisition, it won’t drive the market. Professional investors need a legally sound long-term solution. There is a good chance that the land acquisition bill will be passed in the next parliamentary session in a compromised form, more docile that the ordinance.

Mudit Jain is Manager – Consulting at BRIDGE TO INDIA

[1] MNRE, http://goo.gl/O4zn8r

[2] Refer to our blog, “MNRE releases draft guidelines for 3,000 MW solar under NSM” http://goo.gl/D2qird

[3] News article, “Land acquisition bill row delays solar policy nod in Maharashtra”, http://goo.gl/IsxZJX

[4] News article, “Telangana solar power developers seek clarity on land, evacuation issues” http://goo.gl/90Vmz

[5] News article, “Decoded: What changes has the Narendra Modi government made in the Land Acquisition ordinance”, http://goo.gl/doDRfr

[6] News article, “What the states got right”, http://goo.gl/NwjFTc

[7] News article, “Empower, don’t patronise, the farmer”, http://goo.gl/QHKDeS

Net-metering can potentially drive widespread implementation of distributed generation by incentivising end-users to adopt localized power generation through technologies such as solar. In theory, net-metering is the proverbial silver bullet designed to help India achieve greater energy security through generation at point of consumption (distributed generation). In addition to helping consumers reduce their energy bills, it is also supposed to help stabilise the national, regional and state grids, provide financial relief to the distribution companies (DISCOMs) through consumer default risk mitigation and reduction of AT&C losses, and help cut down the per-capita energy footprint. Unfortunately solar adoption through net-metering has not picked up, even in 12 states and union-territories where it has been implemented. Both DISCOMs and end-consumers are reluctant to adopt net-metering. This article is post 1 of 2 on this matter and discusses the consumer side of the issue. [Refer – part 2 – DISCOMs side of the story]

Net-metering is crucial for India if it wants to achieve energy security by 2022

Improvement in inverter technology and innovation in financial incentives is required for large scale adoption of net-metering

While technological improvements will enable market growth, financial innovations will drive the growth

There are two main reasons for the disappointing adoption of net-metering by the consumers: the tariff structure (a policy matter) and grid-reliability (a technical concern). Both issues are relevant for the residential, commercial and industrial segments. In this post, I have focused on the residential segments since it exemplifies the issues well.

Reason 1: Tariff structure (a policy issue)

Net-metering allows customers who generate their own electricity from solar to feed unused electricity back into the grid and be compensated for that. If the energy supplied by the consumer to the grid (selling) is at a special, usually higher, tariff rate than the one at which electricity is bought from the grid (buying), then it is called a “feed-in-tariff”. However, if the selling and buying are at the same tariff-rate (usually the buying rate), then it is called net-metering. And herein lies a problem.

Residential (and agricultural) tariffs are purposefully and artificially kept low (through subsidy) to influence the voters (e.g. Delhi elections). The actual average tariff rate varies widely in each state ranging from approximately Rs. 2.8/unit in Chhattisgarh to Rs. 6.15/unit in Maharashtra for MSEDCL consumers. In the highest consumption slab, they can even reach Rs. 11/unit in certain states. Residential rooftop solar PV systems today, on the other hand, produce electricity at a fairly constant cost across the country of approximately Rs. 10/unit – reducing yearly as system prices drop.

Thus a net-metering customer in Chhattisgarh will have to sell electricity at a loss of almost Rs 7/unit. Only residential customers in the highest consumption of some states benefit as they can sell at a profit and recover their investment within a few years.

DISCOMs recover the revenue lost due to subsidy for residential and agricultural users by levying extra charges on the commercial and industrial segments. If one removes this “cross subsidy” then the tariff rates will become more realistic and net-metering for all users will make more financial sense.

However, since there is no sign of change in vote gathering mechanisms and thus removal of cross subsidy in the near future, feed-in-tariff comes across as a possible solution. Unfortunately, feed-in-tariff is just not possible in India is because of the simple reason that the DISCOMs are in financial deficit – they have no money to pay the users. Lack of viable financial incentives is, thus, restricting end customer’s adoption of net-metering.

For net-metering to make financial sense, the solar industry, its financiers and the Indian government will have to introduce innovative financial incentives (may be such as tax-credits) to make choosing solar through net-metering easier for consumers.

Reason 2: Grid reliability (a technical issue)

One of the key requirements for any energy source to connect to the grid is the availability of “anti-islanding protection”. Anti-islanding protection is a way for the inverter to shut itself off and stop feeding power into the grid, when it senses a problem with the power grid, such as a power outage. This requirement is crucial because when problems arise with the power grid, it is assumed that workers will be sent to deal with it, and the power lines need to be completely safe – i.e. not have electricity flowing from all the nearby PV grid-tie systems – so that the workers can fix them without putting their lives in danger.

Most of the states in India, unfortunately, suffer from frequent power outages, mostly due to load shedding rather than problems in the grid’s infrastructure. Thus when the grid shuts off, the solar PV inverter will also turn off completely, preventing the owner from using the generated energy for themselves. With high unreliability of the grid, a lot of the electricity generated by the solar PV system will be wasted. This is a key reason for consumers to adopt solar with net-metering.

The anti-islanding protection is an essential safety feature that cannot be removed. Thus, the solution is technological innovation. Inverter manufacturers will have to make their inverters capable of cutting off the connection to the grid in case of grid failure, while still being able to operate (acquire reference voltage) and provide solar energy for use. If such a provision is available then net-metering customers can still use their grid-connected PV systems even during power outages.

Conclusion

In essence, consumers are seeking better incentives and a resolution of technical obstacles before they invest in residential solar PV systems. Policy makers, meanwhile, are coming up with multiple mechanisms to incentivize net-metering adoption from both sides to help DISCOMs improve their financial health and to enable a reliable energy supply. Unfortunately, this is just one side of the story. DISCOMs are wary of net-metering for various reasons. Policy makers are working hard to convince them to accept it as a viable solution. This convoluted state of affairs is, unfortunately, working against net-metering and India’s progress to achieve energy security. In the next post I will cover why DISCOMs view net-metering unfavourably. In the meantime, I hope that the solar industry will find solutions to the issues covered in this post.

Gayrajan Kohli is Senior Manager – Consulting at BRIDGE TO INDIA

On 1st April 2015, the Southern Power Distribution Company of Telangana Limited issued a request for selection (RfS) and a power purchase agreement (PPA) for allocating 2 GW of solar PV (refer). This follows the state’s successful allocation of 500 MW late last year and places Telangana right at the top of Indian states with respect to solar. No other state has allocated 2.5 GW till date. Even the central government allocations have not yet reached that mark. So far, India has only built 3.5 GW of solar.

The allocation process is aggressive on both the benchmark tariffs and the allocation capacity

After the announcement in Telangana, Tamil Nadu, Karnataka and several other states are expected to announce their new allocations

Indian states are now likely to be on the driving seat for the next 12 months

Projects will be allocated through a simple reverse bidding process. The benchmark tariff, which is the highest tariff that a developer can bid at, is INR 6.45/kWh (10.4 US cents) for projects below 8 MW and INR 6.32/kWh (10.2 US cents) for projects above 8 MW. A capacity of 500 MW has been reserved for projects below 8 MW. There will be a separate bid evaluation for the two categories. Minimum project size is 2 MW. The upper limit is only determined by the evacuation capacity at the relevant substations. This can reach as much as 450 MW in one of the districts (details are provided in the RfS document).

The allocation process is aggressive (perhaps too aggressive?) on both the benchmark tariffs and the allocation capacity. Incidentally, the benchmark tariff for the smaller project category is the same as the lowest tariff received by the state in a previous allocation late last year in a bid submitted by First Solar. Such an aggressive approach may be justified in light of the great demand. The previous bidding process for 500 MW was heavily over-subscribed with bids for 1,850 MW. In addition, the state has seen additional interest outside of the previous bidding process.

As central government allocations under the National Solar Mission keep getting delayed (refer), states are now taking the lead. This is something that BRIDGE TO INDIA has been predicting in prior posts. Read this article to get our overall perspective on where the new utility scale opportunities will lie.

Even on the distributed solar front, as the central government takes its time to decide on the future role of subsidies and incentives for rooftop solar, state governments are taking a lead. Last month, Maharashtra released its draft net-metering guidelines and Uttar Pradesh finalized its net-metering policy. Except Gujarat, Jammu & Kashmir, Bihar, Jharkhand and six of the seven north-eastern states, all Indian states now have released draft or finalized net-metering guidelines.

The 2 GW of planned allocation in Telangana and new expected allocations in Tamil Nadu, Karnataka and several other states will likely keep the states in the solar driving seat for the next 12 months. The first feedback on developer interest in Telangana’s aggressive allocation process will come in on 10th April 2015 at the planned pre-bid meeting

Over the past several months, we had the impression that central government-led allocations would be the preference of the new government and that the role of the states would be limited to setting up the infrastructure of solar parks and procuring solar power. The central government would make that power cheaper for the state utilities either through bundling it with coal power or through Viability Gap Funding (VGF). This perception is now changing as the central government-led allocations lose steam due to delays in setting up the solar parks and a lack of funds for VGF.

The document for implementation of 15 GW by 2019 has been released on March 9, 2015

 As nothing concrete has been proposed so far, BRIDGE TO INDIA does not expect new allocations based on such a mechanism any time soon

Several states namely Telegana, Karnataka, Tamil Nadu, Maharashtra and Gujarat has announced their plans with respect to implementation

A revised document for the implementation of 15 GW by 2019 (refer) has been released today (9th March 2015). Initially 3 GW planned were to be allocated by March 2015 under the bundling mechanism. Now only 1 GW will be auctioned in Andhra Pradesh in time. The remaining 2 GW is delayed as the solar parks have not been finalized. The document also states that for the remaining 12 GW, the MNRE will devise a suitable mechanism with “minimum support from the government” and “after getting some experience while implementing Tranche I”. The document goes on to explain that this minimum government support could be “in the form of low cost, long tenure loans or other means”.

From the language of the document, we think that the full 3 GW of capacity could be allocated only by the end of 2015 as against the previous timeline of March 2015. With respect to the recently published guidelines for an allocation of 2 GW (from the remaining 12 GW) under the VGF scheme (refer), the process is only expected to move forward once some form of interest rate subvention mechanism has been devised. As nothing concrete has been proposed so far, BRIDGE TO INDIA does not expect new allocations based on such a mechanism any time soon.

The good news is that while the center stalls, several states are moving forward with their own plans. And rightly so: states should not hold their breath for central solar policies that provide only “minimum support”. Here are some recent announcements: Telangana is calling for bids to allocate 1 GW of solar (refer), Tamil Nadu wants to allocate 3 GW (refer), Karnataka will likely allocate 500 MW this year under its existing policy and Maharashtra and Gujarat are expected to launch new policies. While these state announcements will have their own set of issues with respects to implementation, we note that the targets at the state level will likely match, if not exceed, the 15 GW target of the central government until 2019.

All this has to be viewed in isolation of the larger 100 GW target until 2022. There still isn’t any official framework for achieving that. Going by the lower than expected budgetary allocations to the MNRE, BRIDGE TO INDIA does not expect big leaps in this next financial year.

Most sections of the overall Indian industry have labeled the budget presented on Saturday (28th February 2015) as an incremental progress in the right direction and not a ‘big-bang’ or reformist budget (the yardstick being the 1991 budget). While infrastructure has received its due attention, unfortunately, for the solar industry, incremental progress just doesn’t add up to the new and ambitious targets promised for the sector (100 GW by 2022).

Planned budgetary allocation has marginally increased to INR 62 billion, not in line with the new plans

There is a risk of underfunded new programs being started with negative consequences

Some benefits in the form of custom duty exemptions have been provided for inverter assembly and PV cell manufacturing

The most positive budget announcement for renewables has been the doubling of the clean energy cess on coal for a second year in a row. At INR 200 per tonne, the government is expected to collect around INR 120 billion (USD 1.9 billion) during the upcoming financial year. This trend, coupled with the continuation of higher taxes on petroleum products, effectively changes India’s status from a carbon subsidizing economy to a carbon taxing economy. This is good news.

However, all said and done, the Ministry for New and Renewable Energy (MNRE) has been provided only a slightly enhanced planned budgetary allocation of INR 62 billion (USD 1 billion), up from approx. INR 50 billion (USD 800 million) in the last budget. With this budgetary allocation, the ministry is expected to provide the following: “central financial assistance for grid-interactive power capacity addition from wind, small hydro, biomass power/cogeneration, urban and industrial waste to energy, and solar power. In addition, it should promote the deployment of off-grid/distributed renewable power systems. On top of the on-going schemes/programs, it is also expected to help fund (i) a scheme for mega renewable power generation of 100 GW, (ii) a 20 GW scheme for unemployed graduates, village Panchayat and small scale industries (refer), (iii) rooftop grid-connected projects as well as provide interest an subsidy scheme for such projects, (iv) creation of an international agency for solar policy and applications and (v) a scheme for establishment of solar zones and (vi) provide an outlay of INR 100 million (USD 1.6 million) for a scheme to train 50,000 youths under the ‘Surya Mitras’ program (refer).

Looking at this list, it is evident that there is a huge disconnect between the government’s ambition and the MNRE’s to-do list on one hand and the budgetary allocation on the other. From the solar industry’s experience with the rooftop solar capital subsidy, we already know what happens, when programs are started without sufficient budgetary allocations: they not only stall, but even prevent the un-subsidized market from picking up.

On the manufacturing side, there is some support in the form of a reduction of the basic customs duty on the Active Energy Controller (AEC) to 5%. AEC is a microprocessor based electronic component that is mostly imported and used for manufacturing renewables inverters. This will increase the competitive advantage of domestically assembled inverters by companies such as ABB, Schneider, Refusol, Bonfiglioli and TMEIC. An excise duty exemption has also been provided for the copper wire and tin alloys used in making solar cells. In the past, there has been a duty on importing raw materials for solar PV cells and modules but no duty on the finished products. This has been hampering the competitiveness of the domestic manufacturers. This exemption is in line with the government’s plan to remove inverted duty structures on import of raw material.

On the services side, an increase in the service tax to 14% is likely to add to the EPC and O&M costs for solar projects. On financing, there are now tax-free bonds for rail and roads, but against industry expectations, renewables are not included in this list.

The government re-affirmed that it wants to provide power to India’s un-electrified villages (it counts 20,000 of them) with a special mention of solar energy. This is good, but there is no detail on whether any allocation for such a program would be provided to the MNRE or would it be limited to the rural electrification programs under the Ministry of Power.

Overall, the budget shows some, incremental progress from the last time, but it falls well short of meeting the raised expectations of the solar industry. The hope is that the larger projects will get supplementary budget allocations through the course of the year. However, the prospects for any accelerated growth in rooftop and rural solar look slim.

Jasmeet Khurana, is Senior Manager – Market Intelligence at BRIDGE TO INDIA

On the 28th of February, India’s finance minister has presented the widely anticipated first full budget of the new Modi government. After all the fanfare around growing the Indian solar market including at the recent RE-INVEST, the industry was expecting if not real boost to the sector, at least a clear directional step towards creating a sustainable and fast growing solar market. This expectation was not met.

A couple of measures will help solar manufacturers and solar developers

Many new laws were promised – but we need to move to implementation

The bigger picture of building a healthy economy (driving power demand), building a healthy power sector (pricing) and enabling solar to take a large share of that (grid access) were not satisfactorily addressed

Photo credit: AP

Just to clarify: we were not expecting industry handouts, such as feed-in-tariffs, subsidies or tax breaks. They don’t work. Instead, we were looking for measures that would create a sustainable solar market, one that allows professional and household investors an attractive rate of return on solar projects. Such a market can be created by: ensuring sustainable (implying: higher) power tariffs; by drafting reliable and transparent grid access rules; by investing into expanding the power grid and making it “smarter”, i.e. future ready; by improving contractual security (clearing up the legal backlogs); by making acquisition of land easier; and by fully opening up India’s financial system.

That cannot, of course, be achieved in entirety in just one year’s budget. Thus, we would have already considered clear steps in the right direction a 10 out of 10 budget. However, they are missing. At the same time, there are no specific measures for renewables. For instance, there are now tax-free bonds for rail and roads, but not for renewables. In light of the government’s earlier emphasis on providing financing solutions to achieve the ambitious renewables targets, this is surprising. Also, there was an expectation that the Minimum Alternate Tax (MAT, at 18%) was to be dropped for renewables projects. This did not happen. An interesting point made by the finance minister was that the government sees a cleaner development as part being pro-poor as environmental degradation hurts the poor most.

Overall, there is little in this budget to suggest how India is to grow to a 10 GW a year solar market, in line with the government’s goals, from the current 1 GW per year. This budget, for us, is just a 3 out of 10 – a disappointment, really, especially when measured against the large expectations this government has fuelled over the past months. This is why:

What helps

– Overall economic policy seems to be sound and could bring India back to stable, higher growth rates (and hence rising power demand) and improve the business environment. There were no big handouts (subsidies) and the government seems determined to keep the budget (and inflation) under control.

– 5% reduction on corporate tax (30% to 25% over a period of 4 years)

– This was not directly part of the budget, but to give the government its due: Instead of subsidizing petroleum products, there is now a duty, an effective “carbon tax” on them. This is hugely helpful. It might incentivize India’s 60-90 GW of diesel backup operators to consider solar hybridization or replacement.

What seems to help but does not (really)

– The coal cess is to be raised from INR 100 to INR 200 per ton of coal used. This will increase the funds in the National Clean Energy Fund and should lead to an increase in tariff of INR 0.04-0.06. The coal cess sounds like a good idea from the point of view of renewables, but it is worth keeping in mind that (a) domestic coal is given away to power plants at cost (rather than market prices) and that (b) the funds have so far not been spent on green investments. The underlying issues around power pricing remain unresolved.

– More public investments à growth driver, but not really sustainable/relevant to solar

– Less tax exemptions à makes the Indian market more transparent, accessible for professional investors

– The government affirmed that it wants to provide power to India’s un-electrified villages (it counts 20,000 of them). This is good, but there is no clarity on how it intends to do so. Previous governments have said the same and not delivered. What is different this time?

– Reduction on import duties of materials for solar cells (copper wiring, tin alloy). While this makes sense, it will have a small impact on cell manufacturing costs.

What slows down the sector

– Nothing, really. So that is good news. The only (minor) concern is an increase in service tax from 12.36% to 14%. That will affect all engineering and maintenance services which are crucial to upholding execution quality of solar.

What is missing

– No plan! The government wants to see 100 GW of solar and 60 GW of wind built in the next seven years. These are very ambitious goals and there is absolutely nothing in the budget to suggest how this might be achieved.

– No clear financing plan for renewables – there was much talk before the budget of initiatives such as currency hedging support, interest rate subvention and classification of renewables as priority sector.  But none of these measures have been accepted.

– No reform of the power markets. There is nothing to suggest how power prices might be rationalized and how.

– No grid investment plans. Evacuation of 100 GW of solar and 60 W of wind would require dedicated transmission infrastructure. Given that transmission lines take 3 years to build, the government would need to start now. There is nothing in the budget relating to that.

An afterthought: The stock market was not thrilled either. It closed a couple of point down, still near its all time high, at 29,361. Expectations, one could argue, were largely met. However, stocks of companies linked to the infrastructure and power sector, such as Tata Power, Coal India, NTPC and BHEL were amongst the day’s biggest losers.

Tobias Engelmeier is the Founder and Director of BRIDGE TO INDIA

On Saturday (31st January 2015), the Minister for New and Renewable Energy, Piyush Goyal, called for a meeting with solar developers and manufacturers to discuss various aspects related to structuring of accelerated depreciation (AD) mechanism to ensure a level playing field for developers. The minister announced that the government is considering proposals to provide interest rate subvention for developers who don’t claim AD.  Separately, there is a proposal to consider how private developers can raise capital through green bonds. But it appears that the developers’ demands for a universal tax-credit structure, like the one in the US, or for waiver of Minimum Alternate Tax (MAT) for solar projects might not be approved by the Ministry of Finance.

 The Indian government has announced several sound plans but the implementation process and policy clarity is not yet matching up

 BRIDGE TO INDIA believes that interest rate subvention may appear to be a fundamentally sound concept but the practical implementation and monitoring would be very challenging

 There is an urgent need to back up mega plans with detailed policy measures

The Indian government has announced several bold initiatives to grow solar energy in India in the last few months –new solar targets for 100 GW, strong focus on rooftop segment, setting up of government solar parks for utility scale and ultra-mega scale projects, significant increase in renewable purchase obligations (RPO) and attempts to reduce the cost of financing for solar projects. These are fundamentally sound plans but perhaps unsurprisingly, implementation process and policy clarity is not yet matching up.

In one of our previous blogs (refer),we also discussed how the allocation process for the upcoming NSM projects does not seem very well planned. The guidelines for these projects have gone through multiple rounds of changes and the timeline has already slipped considerably. Even on the issue of creating a level playing field for developers who are notable to claim AD, BRIDGE TO INDIA believes that interest rate subvention may appear to be a fundamentally sound concept but the practical implementation and monitoring would be very challenging. Disappointingly though, the differential tariff structure for AD and non-AD projects has been done away with before any an interest rate subvention scheme or any other such plan is implemented.

We understand that the Indian solar policy environment has been very dynamic since the new government took over but there is an urgent need to back up mega plans with detailed policy measures and simplify allocation and other investor interfacing processes.

In 2011, the per capita electricity consumption of Patna, the capital city of Bihar, was only 601 kWh[1] and even though it is a capital of one of India’s largest states, this is 23% lower than the national average of 780 kWh[2] and significantly lower than the global average of 3,044 kWh[3]. This shows that the city is still very far from providing enough power to its population.

BRIDGE TO INDIA’s modelling revealed that Patna has a geographical potential to install around 759 MW of rooftop solar

Analysts at BRIDGE TO INDIA have envisaged a road map for Patna to help meet its energy demands by adopting solar in a phased manner

The city could add 277 MW by 2025 without significant technical challenges, storage requirements or dedicated grid investments. Thus, solar could meet about 20% of the city’s power requirement

Bihar relies on power generated outside the state for about 70%[4] of its requirements. In addition, the state has a power deficit of 29%[5] and suffers from very high transmission and distribution (T&D) losses of around 38%[6]. This leads to frequent power outages. In the state capital, Patna, they range between two and nine hours a day. The power deficit is a key bottleneck for industrial and commercial growth as well as higher standards of living.

The key challenges faced by Bihar state power holding company ltd. (BSPHCL) include an ageing infrastructure, pilferage of power, a high cost of power generation, rapidly rising demand and ineffective energy accounting. All of these lead to a financial losses and curtail the SEB’s abilities to improve the situation.

Patna is the key driver of Bihar’s economy. An improved power situation in the city can help bring much needed investments into the state. For this to happen, Patna needs to de-couple itself from the overall power situation in the state and the region.

Patna should become a leader among cities and consider transformational changes in its power supply that will not only solve the city’s problems but also change the way it is perceived economically and politically.

Currently, the Bihar government plans to set up several coal-based power plants to meet the state’s power requirements internally. However, there is a nation-wide shortage of coal. Cost of imported coal is rising. The utilization factor of coal plants is falling. Even if the supply of coal is secured, pollution would increase substantially. Relying on coal alone is a risky proposition. Solar power, an energy source that is both easily and quickly installed and can be deployed in a distributed manner across Patna’s million rooftops, should be a key building block of Patna’s energy future.

If the power is generated at the point of consumption, the huge T&D losses can be avoided. Moreover, solar can help reduce the dependence on coal deliveries and on power producers from other states. In the beginning, solar power could help meet day time power requirements and conventional power could continue to meet peak demand for the evening and night time. Gradually, solar can start playing a more active role in eradicating the power deficit of the city.

This can be a financially sound investment. In Bihar, the Average Power Purchase Cost (APPC) for utilities has increased by 190% since 2005, but the tariffs have increased by only 30% in the same period. As a result, the erstwhile Bihar State Electricity Board (BSEB) incurs significant losses amounting to INR 16,180 m (USD 270 m) or INR 1.01/kWh (USD 0.017/kWh) for the power sold in 2011-12.[7] A higher adoption of distributed solar will lead to private sector investments and help reduce the burden on the state.

Based on the rooftop space availability for optimum solar power generation, we estimate that Patna has a geographical potential to install 759 MW of rooftop solar. This is significantly greater than the anticipated peak summer power demand of around 600 MW in 2014. It might not make sense to realize the entire solar potential and thereby generate excess power in the city. This excess power would need to be transmitted to other consumers in the state outside the city limits through investment in the grid. Also, such a high share of solar power would likely lead to issues related to balancing of loads and the local grids. Therefore, for the purpose of this study, we propose that 20% of the city’s power requirements comes from solar. This will not pose technical challenges or require costly investments into the grid infrastructure. It would still allow for a solar capacity addition of 277 MW by 2025.

The question then is: how can Patna go solar? Solar without storage is already very close to matching the cost of power from new coal plants. However, while storage can make solar a back-up power supply, it is still expensive and can distort the dynamics against adoption of solar. The challenge is to ensure a stable power supply before asking a customer to adopt commercially attractive solar (without storage). To solve this conundrum, we propose a phase-wise adoption of solar without storage. Adoption of solar can start in the areas with the fewest power cuts. The industrial areas in Patna and some of the residential areas in the city, for example, already receive a fairly reliable power supply. Mass adoption of solar power in these areas will allow for greater supply of power for other areas. This excess power can then create another area of reliable power. Subsequently, adoption of solar in this new area of reliable power can again have the similar impact and the process can be replicated through the city.

In the beginning, the government will need to invest into making the proposition viable for private investors. This can be done in the form of tax incentives, generation based incentives (GBI) and/or upfront capital subsidies. Distributed solar power is expected to reach parity with landed cost of conventional power for the government by 2019 and with the tariff for the consumer by 2021. Based on the roadmap provided in this report, if the government invests INR 1,496 m (USD 25 m) for a GBI, it will save INR 5,892 m (USD 98 m) in the next ten years.

Over time, as solar power becomes more competitive, policy makers can focus more on facilitating rather than incentivizing solar power for the end consumers. In the long term, solar power will make Patna more resilient and independent.

CEED and BRIDGE TO INDIA analysis

Combined Business Plan for North Bihar Power Distribution Company and South Bihar Power Distribution Company, by BSPHCL, in 2012 http://bit.ly/1icUnqz

World development indicators, by World Bank, http://bit.ly/1pSBvSq

“Combined Business Plan for North Bihar Power Distribution Company and South Bihar Power Distribution Company”, by BSPHCL, published in 2012, http://bit.ly/1icUnqz

“Load generation balance report”, by Central Electricity Authority, published in 2013, http://bit.ly/1evyRKI

Tariff order, Bihar Electricity Regulatory Commission, published in 2013, bit.ly/1oN4iZO

Combined Business Plan for North Bihar Power Distribution Company and South Bihar Power Distribution Company”, by BSPHCL, published in 2012, http://bit.ly/1icUnqzTobias Engelmeier is the Founder and Director of BRIDGE TO INDIA

The revised guidelines have been issued for implementation of tranche-I of batch II under phase II of NSM for 3,000 MW (see here). The development of the solar park in Andhra Pradesh is delayed due to land acquisition challenges. The delay has hampered the plan of Ministry of New and Renewable Energy (MNRE) to complete project allocation by March 2015. With the increased targets and strict deadlines, the bureaucratic machinery underneath is finding it difficult to keep up and issues with the implementation of solar parks seem far from being resolved. The salient changes in the guidelines are:

Projects can be set up outside of the solar park, too

The minimum project size has been reduced from 50 MW to 10 MW to encourage more competition

Some limited mitigation has been provided for development risk of solar park. But relief is provided only up to three months  and there is no provision of compensation, liquidated damages or deemed generation for developers due to such delays. BRIDGE TO INDIA is of the opinion that the provision of extra time should not be limited and must be extended in line with delays in implementation of solar parks

The maximum capacity for a single bidder has been capped at 300 MW in a single lot

For the first time, the bidding process will be conducted electronically. Solar power will be bundled with unallocated coal power from NTPC on a 2:1 basis (two units of solar with one unit of coal). This bundling mechanism reflects the extent to which the cost of solar power has fallen. In phase I, the bundling ratio for solar power and coal power was 1:4. The power will be purchased by NTPC Vidyut Vyapar Nigam (NVVN), which sells it on to state distribution companies.

The initial power purchase agreement (PPA) would be for 25 years. However, the developers will be allowed to operate the plant for longer period. The extension after the period of 25 years will be based on mutual agreement between developer and NVVN. The guidelines consider a plant life of 40 years. The developers will be free to reconfigure and repower their plants from time to time during the PPA duration.

Earlier, the MNRE was planning to allocate the capacity in three parts of 1,000 MW each for three states – Andhra Pradesh, Telangana and Madhya Pradesh. The guidelines have been reworked such that MNRE can decide the lot size and state depending on the readiness of solar parks and willingness of distribution companies to buy power. The domestic content requirement (DCR) is yet to be defined for each lot. The minimum project size has been reduced from 50 MW to 10 MW. Since these guidelines do not distinguish between developers claiming AD and developers not claiming AD, this puts pure renewable IPPs at a considerable disadvantage.

The removal of complicated two stage bidding process as suggested in the draft guidelines (January 5th 2014) is a welcome step.

 BRIDGE TO INDIA’s key observations and suggestions on the guidelines are as follows:

        i.            If the government is unwilling to underwrite solar park development risk, the project developer are likely to shun this alternative altogether. The project developers must be provided with suitable compensation in case of delay in solar park development

       ii.            Pricing differential needs to be provided between AD and non-AD investors to provide a level playing field

      iii.            Developers should be provided a mock session to the electronic bidding tool in advance of the actual bidding so that they are familiar with the process

On the very first day of 2015, the Ministry of New and Renewable Energy (MNRE) has notified proposed changes to the rooftop solar subsidy (refer). The two major changes are: reduction of subsidies from 30% to 15% and a lower priority for subsidy disbursement to industrial and commercial consumers.

The funding available for subsidy mechanism does not nearly meet demand and that this makes it actually counterproductive

Just like the water heater subsidies, the subsidies for industrial and commercial customers could have simply been revoked altogether

So far less than 15% of the installed rooftop solar capacity has made use of the subsidy

BRIDGE TO INDIA has been arguing for quite some time that the funding available for the subsidy mechanism does not nearly meet demand and that this makes it actually counterproductive. The earlier subsidy scheme has arrested growth even for those industrial and commercial consumers in the country for whom rooftop solar was already a viable option even without government support. The vague (and ultimately unfulfilled) promise of getting subsidies has led customers to just wait and see (refer).

Thus, there was an urgent need to overhaul the scheme and we are happy to see that the government has taken a first step in that direction. However, we believe that overall, the proposed new policy is still flawed. Just like the water heater subsidies, the subsidies for industrial and commercial customers could have simply been revoked altogether. This might sound counterintuitive, given that the government is planning to raise the target for distributed solar to 40 GW by 2022. However, it is clear that a subsidy will not in itself help achieve this highly ambitious target. It could only support a tiny fraction of this capacity and hence its only purpose could be to accelerate a market.

According to a recent BRIDGE TO INDIA analysis, so far less than 15% of the installed rooftop solar capacity has made use of the subsidy (around 40 MW out of 285 MW – refer to our “India Solar Rooftop Map”). Even within that, currently the EPC companies that are able to avail the subsidy (the so-called “channel partners”) also attach a premium to the project cost. This is broadly on two accounts: firstly, they have to use Indian modules that can be 5-10% more expensive and secondly, they put a value to all the hassles, delays and risks associated with the subsidy disbursement. A 15% subsidy will put such players and projects on almost a level playing field with those that are operating outside the realm of subsidies. Thus, the subsidy might not even accelerate the market towards a 40 GW. Its only function might then be to protect domestic manufacturers in a niche market of “subsidised rooftop solar” worth perhaps 50-100 MW (depending on the actual subsidy amount made available).

There is currently still too much ambiguity left in the proposed new policy to contribute in any meaningful way to the larger objective of increasing the market size by a factor of more than 100. If the target of 40 GW is to be reached, the focus has to change from government incentives and protection of domestic manufacturers in niche markets to the creation of an overall, attractive market. The latter includes: financial innovation, availability of reliable information, standardisation of PPAs, and clear and predictable grid rules for grid access. In the commercial and industrial segment, the rest will be done by the dynamics of energy pricing: rising tariffs and falling solar costs. In the residential segment, subsidies make more sense as the viability gap is still too large for solar to gain significant ground without support. However, for residential rooftop subsidies, too, we need a predictable framework in which available subsidy meets the expected demand for it.

Overall, BRIDGE TO INDIA believes that this will have a small positive impact on market growth. However, with the raised expectations of a 100 GW target, we are still waiting for policies that can be substantial building blocks in a comprehensive and ambitious policy framework that does justice to the very ambitious national goals.

India finalizes amendments to the REC mechanismIn other news, on 30th December, the Central Electricity Regulatory Commission (CERC) has released the final order for the third amendment to the Renewable Energy Certificate (REC) regulations (refer). Two key changes that have been enacted are: the new floor price for solar RECs now stands at INR 3,500/MWh and the forbearance price at INR 5,800/MWh and, under a vintage REC mechanism, older solar projects registered under the REC mechanism will get a multiplier on RECs for every MWh of energy. BRIDGE TO INDIA’s analysis to the changes suggested in the draft stage of the amendment can be accessed here. Most of the changes proposed at the draft stage have been incorporated.

In the past, China and the US, who together accounted for over 40% of global carbon emissions, rejected any official targets with respect to reductions. The recent development has been indicative, for the first time ever, they have committed to carbon targets. India is in a delicate position. On the one hand, it is already the world’s fourth largest emitter. On the other, its per capita emissions are still amongst the lowest in the world. (China’s, by comparison, have already caught up with Europe’s.)

 India is planning to invest into climate friendly technologies such as renewables and energy efficiency in any case

Coal power in India needs to be ramped up, then phased out

India can now push the narrative and force more cuts on other emitters

Image source: Straight.com

There is, unfortunately, still a strong correlation between emissions, energy use and economic development. Hence, India will emit much more, as its people become better off, contributing significantly to global climate change. At the same time, India, with it’s high population density and widespread subsistence farming, is intensely vulnerable to climate change. It needs both: room to emit more and a climate deal that can credibly limit climate change, which means asking China, the US and the EU to do more and exerting strong pressure on developed countries, such as Australia, Canada and Japan, that stall completely.

 India, with its anticipated, massive push for renewables could easily advocate for ‘investment into climate-friendly technologies’ as a global parameter – in absolute or relative terms. India still has the opportunity to leapfrog towards a more climate-friendly energy economy and infrastructure. It will be cheaper for India to invest into new, climate friendly technologies than it will be for developed countries with existing infrastructures and path dependencies to do so.

 Within India itself, more measures can be taken to poster the Indian climate contribution without slowing down growth. India could set up an internal carbon cap-and-trade market, much like China is planning to do. If the overall cap is set at a business as usual scenario, then the economic effect should be zero. However, within India, resource smart companies would be rewarded and resource inefficient ones would be penalized. This would help reduce overall resource consumption (and thus emissions) and speed up a transfer of knowledge within the country. Additionally, local environmental pollution should be priced. This will avoid some of the worst excesses and will be much cheaper than remedying landscapes and livelihoods at a later stage. Again China, which failed to do this, is an instructive example. Lastly, why not host a climate summit in India soon? What better way of showing that India means climate business.

 In addition to building up solar, India also plans a major push on coal. It is difficult to see an alternative to much more coal usage in the medium term. However, as the Chinese example shows, the local environmental pollution (including air quality) effects and the social disruption associated with the mining, transport and usage of coal are so significant that it will soon be economically and politically prudent to start reducing significantly the share of coal in the energy mix.

 In light of the above, India needs to change track in its climate policy. Its stance has been far too reactive and inflexible. India needs to become a driving force in making a substantial global deal happen. Here are a couple of ideas as starting points for such a policy:

 India needs to forge the right alliances with those countries that have a serious commitment to the climate change goals. These are the most vulnerable states on the one hand (island and developing states) and the EU on the other. The ‘right to emit’ and the ‘vulnerability’ have to be de-coupled. India can fight for its right to emit while all the same pushing for a deal. In the past, India has lined up with China, which was a mistake. Far from being a natural ally, China emits at India’s expense.

 India could push for a metric that not only considers where pollution is generated, but also where the products and services are consumed. A key reason for China’s massive growth in emissions was an ‘export’ of emissions. Take the following case, for example: The US company Apple sells an iPhone to a customer in the US that was manufactured in China. The emissions accrue to China, but perhaps not in the same way as the associated profits or benefits do. Associating emissions with consumption goes into the direction of a carbon tax. Such a tax on carbon could give India more room to pursue Modi’s ‘Make in India’ industrialization strategy while passing a share of the carbon bill to global consumers. The crux, of course, is in the question where the taxes are levied and what they are used for. If they are levied at the consumer, then the proceeds to go into the global climate fund.

 Tobias Engelmeier is the Founder and Director of BRIDGE TO INDIA

Last week, we discussed the proposed changes in the Electricity Act 2003 and, in particular, the proposed 10.5% solar RPO target (refer link 1 and link 2). To give the market further impetus, in the past few days, the government has announced fund allocation for solar parks infrastructure, viability gap funding for public sector led projects and new funds for canal-top solar (refer). However, growing the market from 1 GW a year to 15 GW a year requires a deeper, sustained, market-level effort making the economic fundamentals irresistible.

 If solar is cheaper than other sources of new power generation capacities, the difference will induce discoms and consumers to switch

BRIDGE TO INDIA estimates that if cost of debt financing can be reduced to 8%, tariffs can come down to INR 5.4/kWh with an annual escalation of 2% per annum

We suggest to decouple the tax benefits from the solar investment and instead make it a tradable benefit

India cannot afford the luxury of a publicly funded energy transition like in Germany, where consumers spend upwards of € 20 bn a year to subsidize renewables through higher power prices. The good news is that with the solar technology becoming increasingly efficient, subsidies are no longer required and the government can tinker with other parameters to make solar competitive with conventional power.  BRIDGE TO INDIA estimates that if cost of debt financing can be reduced to 8%, tariffs can come down to INR 5.4/kWh with an annual escalation of 2% per annum. Solar Energy Corporation of India (SECI) is already planning a 750MW project in Madhya Pradesh along similar lines in collaboration with the World Bank.

 To make the 100 GW target realistic, the government needs to improve access to and reduce cost of international debt. One way of doing so may be to provide comfort to the international lending community on currency and discom insolvency risks. In addition to this, there are other complementary measures that would support the desired uptake of solar. If solar is cheaper than other sources of new power generation capacities, the difference will induce discoms and consumers to switch.

 There are other tools in the government kitty to make solar more attractive. India currently allows an accelerated depreciation benefit (the value ranging between INR 0.5-1/ kWh) for profitable corporate entities to invest into solar. In addition, the finance ministry already has a proposal on its desk to allow similar income tax benefits to tax-paying individuals. However, both these provisions are restrictive in that they address only companies or individuals who have a tax burden and also want to invest into solar. There is no reason, however, why these elements should be bound together. It also discourages professional, project-based equity investment in the sector, which is much needed for achieving the ambitious new targets. We suggest to decouple the tax benefits from the solar investment and instead make it a tradable benefit. This has been done in the US, where the tradable tax credits attract large amounts of institutional and international capital to the sector.

 A third potential measure could be a waiver of the Minimum Alternate Tax (MAT) of 19.8% for solar projects. Here, a case can be made that new (and clean) energy infrastructure would create much more additional tax revenues through growth in production, employment and consumption, than the loss of MAT revenues from solar projects.

If these structural changes can be incorporated in the upcoming budget, along with procedural changes such as ensuring intended use of the clean energy fund and more allocations to the MNRE, we see India on track to achieve its ambitious solar goal of 100 GW by 2022. An important further point of consideration is political: The center needs a buy-in from the states for a 10.5% solar RPO target. This buy-in should be much easier, if solar is a winner and not a cost of financially weak state discoms. The above measures could ensure that.

Last week, speaking at a UNEP and FICCI conference on ‘Designing a sustainable financial system for India’, the Minister for Coal, Power and Renewable Energy, Shri. Piyush Goyal reiterated the government’s plan to achieve 100 GW of solar by 2022. This is a very ambitious goal – to say the least. Is it feasible? The short answer is: it depends on political will. And it will require a huge amount of political will. Initial demand creation through an enhanced obligations mechanism, an increased role for distributed generation, an escalation based tariff structure and non-subsidized growth of the sector are some of the highlights of how the government is thinking of going about it.

The government is planning to give a new impetus to the solar sector

The ministry clearly understands that the solar sector at this scale cannot be driven by subsidies and steps need to be taken for it to become commercially viable and sustainable

BRIDGE TO INDIA believes that achieving the distributed generation target will be most challenging but perhaps also most rewarding for a sustainable market growth

Indian workers walk past solar panels at the Gujarat Solar Park at Charanka in Patan district, about 250 kilometers (155 miles) from Ahmadabad, India, Saturday, April 14, 2012. Gujarat state Chief Minister Narendra Modi will dedicate the 200 megawatt solar power park, along with other solar projects totaling 600 megawatts of power on April 19. (AP Photo/Ajit Solanki)

Image source: blog.comparemysolar.co.uk

To drive the initial demand, the government is working on amending the Electricity Act 2003 to increase the Renewable Purchase Obligation (RPO) targets, introduce Renewable Generation Obligation (RGO) targets and bring in an enforceable penalty structure for non-compliance. Since a significant part of the power generation capacity in the country is owned by central government and private power generators, implementing RGOs might be easier. For RPO-driven renewables demand to work, India’s many states will need to come on board to accept the amendments. The government will also need to ensure that buying solar power is viable for state distribution companies. Unless larger power sector reforms improve their profitability, this is a tough proposition.

 Larger scale, streamlined development through solar parks, lower interest rates and staggered payments through an escalated tariff are some of the ideas the new government is already working on to ensure that buying solar power is an attractive option for power distribution companies. Based on unconfirmed information, the government plans to achieve 60-70 GW through large-scale projects and the remaining through distributed generation (up from a current total of only 300 MW distributed solar).

BRIDGE TO INDIA believes that achieving the distributed generation target will be most challenging but perhaps also most rewarding for a sustainable market growth. How the government defines distributed generation will also be crucial. China currently classifies anything below 20 MW (!) as distributed generation. (It was just a last-minute reclassification to help achieve previously defined targets, read more).

At the conference, the Minister also discussed the idea of leasing small parcels of not-so-fertile land from farmers for setting up small-scale projects that can freely feed the power back into the grid. Whether this will become a more substantiated plan and whether such projects would be considered as distributed generation is yet to be seen.

It is clear that the ministry understands that the solar sector at this scale cannot be driven by subsidies and steps need to be taken for it to become commercially viable and sustainable. This is an encouraging sign and the expectations are only building up. We hope that a suitable action plan is announced soon. This 100 GW plan will be India’s showcase at the climate conference in Lima starting today and will determine how India is seen as a global investment destination.

Last week, the Ministry of New and Renewable Energy (MNRE) announced revised subsidy benchmarks for various off-grid and decentralized solar applications (refer). The subsidy amounts have been fixed in absolute Rupee terms instead of as percentage of capital cost. BRIDGE TO INDIA welcomes this change as it brings more transparency into the process.

Revised subsidy benchmarks announced by MNRE, fails to address the critical issue of delay in subsidy disbursement

BRIDGE TO INDIA agrees that discontinuation of subsidy mechanism might be a better step

Better incentive mechanisms to ensure quality of installations, which is plant performance linked could be more effective

Image source: dwih.in

However, the core issue of unavailability of subsidy funds is still unresolved. The minister indicated that some funds may be released by December’14. This is over and above the funds released for 25 MW of rooftop solar in August 2014 (refer). However, the amount is far too small in comparison to the demand. All new funds released are allocated to servicing the backlog of project applications.

According to a BRIDGE TO INDIA analysis, less than 15% of the installed rooftop solar capacity in India has been able to avail capital subsidy (around 40 MW out of 285 MW – refer to our upcoming “India Solar Rooftop Map”, to be published on the 18th of November’14). Since the subsidy scheme covers only a fraction of the market demand – and that without any discernible rationale, it creates investment and business insecurity, indecision at the customer end and inefficiency in public expenditure (read more to know how a large part of the disbursed subsidy does not even reach the end customer).

Even though it may sound counter-intuitive to outsiders, most solar industry players in India have long been asking MNRE to scrap the subsidy mechanism altogether. BRIDGE TO INDIA agrees that such a step would be overall positive for the market. Our analysis shows that non-subsidized grid parity is already the single largest driver for rooftop solar market growth in the country. BRIDGE TO INDIA projects that even without any government incentives, the Indian rooftop solar market is poised to reach 1.5 GW of cumulative installed capacity by 2018.

However, we suggest better incentive mechanisms in view of the multiple significant advantages of distributed solar from an economic, environmental and social perspective – to ensure quality of installations, a plant performance linked incentive such as a generation based incentive (GBI) can be considered. Also, MNRE could revamp the accelerated depreciation benefit by decoupling the tax incentive from investment in the same way that, say a carbon credit or a renewable energy certificate can be traded independently of the power output. Then, the tax benefit could be generated by one party (say, a professional rooftop investor) and sold to another party that wants to use it to reduce its tax burden. This approach has been very successful in the US. It helps transform the market from one driven by one-off investors into one driven by institutional capital, where professional approach, competition and reasonable return expectations help make solar power a scalable opportunity and a mainstream choice for end-customers.

Andhra Pradesh has opened the financial bids for allocation of 500 MW solar projects. Developers have quoted a tariff for the first year, which will then increase at 3% every year till the 10th year. The term of the Power Purchase Agreement (PPA) is 25 years. First Solar has quoted the lowest bid at INR 5.25/kWh (levelized at INR 6/kWh) and has shown the way to reach parity with imported coal.

The lowest bid of INR 5.25/kWh (levelized at INR 6/kWh) is also the lowest in India

Over 95% of the projects will be installed in the southern districts of Anantapur, Kurnool and Chittoor

The bid shows solar as almost at par with imported coal

India has seen bids lower than this rate in the National Solar Mission (NSM) batch I phase II and Rajasthan state policy. However NSM offers viability gap funding and Rajasthan provides land and transmission infrastructure. The tariffs seen in Andhra Pradesh are now the lowest without a capital subs

The highest successful bid will likely be at INR 5.99/kWh (USD 0.1/kWh). The cumulative capacity offered by the bidders was 616 MW, 116 MW more than the proposed 500 MW. The levelized tariff for this bid would be INR 6.85/kWh (USD 0.11/kWh). The median winning bid will likely be at INR 5.86/kWh (USD 0.1/kWh), the levelized tariff of that will be 6.7/kWh (USD 0.11/kWh).

The most favored locations were the three southern districts of Anantapur, Kurnool and Chittoor. Over 95% of 500 MW is likely to be located in there. Incidentally a new solar park for an additional 1,000 MW under NSM batch II phase II will also be located in Kurnool district.[1] Additionally, the central government has agreed to provide a grant of INR 5 bn (USD 83 m) for development of solar parks with a total capacity of 2,500 MW.[2]

The developers might be tempted to approach the state government for land in the solar parks. However, under the current terms of bid document, the developers have to commission the project within 12 months from signing the PPA. Since, central government hasn’t declared the timeline for solar park development,  developers may have to acquire land outside solar parks for this bidding.

Most project capacity are of 30 MW or more. BRIDGE TO INDIA estimates that developers will be able to get a turnkey EPC price at ca. INR 57 m/MW[3]. Land prices in Anantapur, Kurnool and Chittoor districts are currently ca. INR 400,000-500,000 per acre (although that might rise now). Adding transmission infrastructure, financial cost during construction and other commissioning costs, the project cost will be ca. INR 65 m/MW (USD 1.08 million/MW). At a debt cost of 11% and a 30:70 debt equity ratio, the median tariff of INR 5.86/kWh (levelized tariff 6.7/kWh) could thereby achieve an equity IRR of over 15%.

The tariff offered by First Solar is only marginally higher than the cost of power from new, imported coal, which is between INR 5-5.5/kWh (0.08-0.09/kWh). However, the escalation in imported coal tariffs is higher than 5%. With further bid results in Telangana (500 MW) and Karnataka (500 MW) expected soon, India could likely see solar tariffs below the tariff of new, imported coal. NSM phase II batch II bids will quite likely see solar undercutting coal.

[1] Refer to our blog, “MNRE releases draft guidelines for 3,000 MW solar under NSM”, http://bit.ly/1yGmPsF

[2] Economic Times article, “Centre to provide Rs 500 crore grant to Andhra Pradesh for solar parks”, http://bit.ly/1DW01YG

[3] The price of INR 57 m/MW has been calculated by considering 1.1 MW DC capacity and 1 MW AC capacity for project size of over 30 MW.

Mudit Jain is a Consultant at BRIDGE TO INDIA

India’s new government is revamping the National Solar Mission (NSM). The planned allocation of 1,500 MW under batch II of phase II has been cancelled. Instead, the Ministry of New and Renewable Energy (MNRE) has now issued draft guidelines for a more ambitious 3,000 MW for tranche-I. The guidelines clarify the allotment for part-I of this tranche, for 1,000 MW, located at a solar park in Kurnool district in Andhra Pradesh. We expect the allocation process will begin in December (“December tranche”). The guideline document for this can be accessed here.

Out of 1,000 MW, 250 MW is reserved for domestic content requirement (DCR)

The individual project size is set as 50 MW; a company can apply for a maximum of five projects

The objective is to make life as easy as possible for developers. However, the draft guidelines leave crucial questions unanswered

The solar park for the “December tranche” of 1,000 MW will be developed by a joint venture (JV) of public senctor companies (SECI, NEDCAP and APGENCO). The power will be purchased by NTPC Vidyut Vyapar Nigam (NVVN). Out of 1,000 MW, 250 MW has been reserved for projects under DCR.

The selection process for the “December tranche” will be based on reverse tariff bidding. The capacity of all projects will be 50 MW. A single group company (including all subsidiaries, promoters and affiliates) can have a maximum of five projects (250 MW) – three in ‘open’ category and two in ‘DCR’ category. Unlike, previous allocations under NSM, the “December tranche” will not distinguish between developers claiming accelerated depreciation (AD) and developers not claiming AD. While the AD mechanism brings down the cost of power, it puts renewable IPPs (without a different. taxable business to leverage AD) at a disadvantage. (If the AD route is to be followed in future, it would be a good idea to delink the AD from the asset owning company and make it a tradable good to make solar more inclusive).

To fast track the installation phase, the government wants to help project developers by taking up the cumbersome process of land acquisition and provision of transmission infrastructure. The JV developing the solar park is responsible for developing and maintaining the local infrastructure. The state transmission utility will provide the power evacuation (transmission) infrastructure. Developers will only have to enter into an “implementation support agreement” with the JV company.

 While the document demarcates some responsibilities, it still leaves room for confusion. For example, the guideline specifies that, “while it will be the endeavor of the State Agencies /Central Agencies to facilitate support in their respective area of working [read: providing land and transmission infrastructure], but nevertheless, the developer shall be overall responsible to complete all the activities related to Project Development at its own risk and cost”. This is confusing and self-contradictory. In the past, we have seen that for solar parks in Gujarat and Rajasthan, developers have had to face delays due to a delayed delivery of evacuation infrastructure and allotment of lands. Such a clause increases the contingency risks of developers and exposes them to activities out of the project’s scope that they have not accounted while bidding. It would be much better, if the allocation process would begin only after all the developmental work is completed and the evacuation infrastructure has been created at the solar park. Alternatively, the guidelines must delink the risks of land and transmission infrastructure availability from the developers.

 Overall, the draft guidelines highlight the government’s new, more ambitious target of 15,000 MW under batch II of phase II in three tranches:

        i.            Tranche-I (including the 1,000 MW “December tranche”): 3,000 MW through bundling mechanism, with 1,500 MW of unallocated coal power from 2014-17

      ii.            Tranche-II: 5,000 MW possibly via an interest rate subsidy from 2015-18

    iii.            Tranche-III: 7,000 MW possibly via solar parks (land and transmission infrastructure) from 2016-19

 Figure 1: Target capacity under batch II phase II of NSM

Previously, the central government aimed at 3.6 GW by 2017. This new target is significantly higher than the previous target of the NSM and is in line with the aim of making India a 5-6 GW solar market per year.

Mudit Jain is a Consultant at BRIDGE TO INDIA

The Renewable Energy Certificate (REC) mechanism was introduced three years ago as a market tool to support the policy of Renewable Purchase Obligation (RPO). However, since then, the mechanism has attracted little interest from investors. Projects that counted on REC income have made losses as there were not enough takers for RECs. The Central Electricity Regulatory Commission (CERC) has now proposed a revision for the mechanism. Will the changes finally revive the dysfunctional solar REC market?

So far the REC market has failed to deliver because of non-implementation of the RPO mechanism and a high minimum price of RECs (set by CERC)

Despite CERC’s step towards reducing the price per REC, the market not fly unless RPOs are enforced

The long term demand for RECs looks bleak considering that parity is fast approaching

There have been two primary reasons why the REC market failed to deliver: non-implementation of the RPO mechanism and a high minimum price of RECs (set by CERC). So far, one REC (representing 1 MWh of solar power) could not be sold for less than INR 9,300 (USD 97). However, given the drastic fall in the cost of solar, it quickly became cheaper to buy solar power than to buy RECs (see graphic). Since June 2013, the ratio of buy bids to sell bids has fallen continuously and unsold RECs have accumulated. At the end of September 2014, over 377,000 RECs, equivalent to 80% of all issued RECs, remained unsold.

In the draft proposal (refer), the CERC now wants to slash the minimum (and maximum) price to INR 3,500 (and INR 5,800) per REC. Projects commissioned before 1st April 2014, shall be eligible for a vintage multiplier. Considering that the average pool purchase cost (APPC) is around INR 3.3/kWh (USD 0.5/kWh), this revision will bring the effective revenue solar power (APPC plus REC) to at least INR 6.8/kWh, which is at par with the tariffs offered under various policies. This revision has raised hopes for a revival of the dysfunctional REC market.

While it is a step in the right direction, we believe that the market will not fly as long as RPOs (the demand side) are not enforced. Though most states have solar RPOs, few are taking any steps to actively enforce them. In order to enforce RPOs effectively, states have to accept a stringent penalty structure for non-comliance. The penalty, moreover, has to be higher than the traded price of solar RECs.

In addition, there are other aspects of the market that do not make sense. Firstly, why should the price be controlled at all? Basic economics tells us that we can only control either price or quantity – but not both. If the goal is achieving RPOs, then RECs should be traded at any price that the buyer and seller might agree to.

Also, there is no reason why RECs should not be sold bilaterally but have to go through exchanges. Additionally, most states prefer buying solar power to buying just a certificate that cannot be used. This restricts the market to those states that cannot build or purchase own plants, which are typically states where the distribution companies are financially weak. Enforcing RPOs on them is going to be tough. A further concern is that the current RPO targets are roughly in tune with the old NSM goal of achieving 20 GW of solar across the country by 2020. Now the government wants to push for 100 GW or more (see our previous blogs). Will the RPO targets be amended accordingly?

The larger question hovering over RECs, is the long-term visibility of demand. As the cost of solar falls and the cost of energy rises, solar will soon be built across India without incentives or obligations, simply on the merits of a competitive generation cost. This will happen in various market segments throughout the next 5 years. Under conditions of parity, when solar installations will likely fast exceed RPO targets, who will buy RECs? What investor (and bank) will take such a bet? Overall, BRIDGE TO INDIA maintains that the REC market remains fundamentally flawed. A more promising way of looking at incentivising demand for solar power may be to look at a “value of solar” calculation. We will write a post on it shortly.

Last week, the Delhi Electricity Regulator Commission (DERC) released the guidelines for implementation of solar energy systems on rooftops in the city. The document details the procedure for application, registration and connectivity. These guidelines bring clarity to the nitty-gritties of installing solar on rooftops and greatly simplifies the approach for people looking to go solar. The key takeaways:

The registration process has been divided into 3 tiers: feasibility analysis, registration and connection agreement

The rooftop solar plant must get connected to the grid within one year of registration

If more power is fed into the grid than taken out, the distribution company will, at the end of the year, reimburse the system owner at the Average Power Purchase Cost (APPC) for that year (currently around INR 4.75-5/unit)

Source: zenautomation.in

The local transformer capacity allotted for renewable energy systems will be at least 20 % of the rated capacity of the transformer. In case the capacity of the renewable energy system exceeds the sanctioned load in the premises, rooftop owners will have to enhance their sanctioned load by paying “Service Line cum Development (SLD) charges”. The owner will be exempted from paying the corresponding fixed charges for load enhancement.

The procedure has been divided into three steps:

1. Feasibility analysis

The consumer will have to submit an application to the distribution company along with an application fee of INR 500 for feasibility analysis. Applications will be put on a priority list and served on a first-come, first served basis. The distribution company will then complete the feasibility analysis within 30 days of receipt of the application.

Upon completion of feasibility analysis, the distribution company will decide whether it is feasible to provide connection for the applied capacity, reduced capacity or it is unfeasible.

In case the feasibility analysis suggests reduced capacity or unfeasibility, the rooftop owners have three options:

Accept the reduced capacity and move ahead with registration

Seek refund of application fee within 7 days of receipt of feasibility report

To stay in the priority list for 180 days and seek a re-consideration of the application

2. Registration

Within 30 days of receipt of feasibility report, the consumer is required to fill in the registration form and submit it along with requisite documents and the registration charges listed below.

Sl. No.Capacity (kW)Charges (INR)11 to ≤ 101,0002> 10 to ≤ 503,0003> 50 to ≤ 1006,0004> 100 to ≤ 3009,0005> 300 to ≤ 50012,0006> 50015,000

 If the registration is found deficient or not in order, the consumer will be given two chances to rectify these after which application for registration may be rejected.

3. Connection agreement

Within 30 days from the date of registration, connection agreement will be executed between the consumer and the distribution company. The rooftop solar plant must get connected to the grid within one year of registration, failing which the registration may be cancelled and the freed capacity will be used for allotment to other applicants.

Non time of day consumers (residential and commercial/industrial consumers with a load less than 5 kW) will get their exported units of energy adjusted against their electricity consumption in the monthly bills. In case the export of energy from the solar plant exceeds the consumption from the grid, excess energy credits will be carried forward in the subsequent billing cycle.

For time of day consumers (commercial and industrial consumers with a load above 5 kW), the exported energy will be compensated with electricity consumption in similar time blocks in the billing cycle. In case of surplus export of energy, the surplus generation will be accounted as if it occurred during the off-peak time block.

Any remaining net energy credits remaining at the end of the year will be paid for the distribution company at Average Power Purchase Cost (APPC) of the company for that year (currently around INR 4.75-5/unit). In case of revision of APPC by DERC in the true up order of relevant year, the differential amount will be credited/debited to the account of the consumer.

 Shikhin Mehrotra is a Research Analyst – Consulting at BRIDGE TO INDIA

There are currently nine states (Gujarat, Andhra Pradesh, Uttarakhand, Tamil Nadu, West Bengal, Karnataka, Kerala, Delhi and Punjab) that have announced net-metering policies in India. These policies are aimed at encouraging the adoption of distributed solar PV generation in the country. A careful examination of the policies, indicate that the technical pre-requisites of the solar system components in each of these policies vary significantly and are in some case, not aligned to the central guidelines on distributed generation tabulated by the Central Electricity Authority (CEA). Should there be uniformity in distributed regulations?

Most states in India that have announced net-metering policies have not adhered to the CEA regulations of distributed solar generation. These discrepancies can hinder the overall solar market in India.

There is a large variation is metering regulations. Andhra Pradesh for instance has very stringent metering requirements that can push meter costs to well over 15% of overall systems costs.

Grid penetration limits are yet another important requirement that is completely missing from the CEA as well as many other states (ex: Uttarakhand, Andhra Pradesh, etc.). Among the states that have announced limits (Example: Delhi), they need to be reviewed and perhaps upgraded to allow for greater deployment of solar

 A recently concluded collaborative research project between BRIDGE TO INDIA, the National Center for Photovoltaic Research and Education (NCPRE) based in I.I.T. Bombay, Prayas Energy Group and the University of California, Berkeley suggests that uniformity in regulations can go a long way in boosting the distributed solar market in India. Download the report here.

 In addition, the aim of this research project was to understand if the Indian grid is prepared for the impending distributed energy boom. If yes, then what are the ‘safe’ levels of PV that might be injected on to the grid without any major changes in the grid. If no, then what are the specific grid upgrades that might be required. The study also looked at safety procedures in installing and operating these distributed solar systems. The study also examined the current regulations on distributed generation stipulated by the Central Electricity Authority (CEA) and compared them with international standards.

 There are three main differences between various state solar policies.

Metering requirements. The CEA has already announced metering requirements for solar PV generation under the regulations titled, ‘Installation and Operation of Meters, 2006’. However not all states adhere to these regulations. Take Andhra Pradesh for example. The state mandates a meter class accuracy of 0.2. The cost of such a meter ranges between INR 25,000 to 35,000. For a consumer who wants to set up a 2kW system battery-less system that costs approximately INR 250,000, the meter would add another 10-15% to the overall costs. This can serve as a discouragement to consumers.

Maximum PV penetration levels. This is one of the most important pre-requisites to any distributed solar policy. Not many utilities currently understand the effect of having several generating sources at the tail-end of the grid. Yet, many states such as Andhra Pradesh and Uttarakhand do not specify any limits. Although the policy might have targets that would serve as limits to the overall program, limits on the distribution transformer are absent. There are two recommendations from the report A) The CEA come out with a maximum penetration regulation and B) Utilities adopt a “learn-as-you-go” approach to approve connections at every distribution transformer.

Electrical parameters. There are several critical electrical parameters such as voltage range, frequency range, flicker and harmonics that need to be observed in order to ensure that the grid integration of the solar PV system ensues smoothly. However, our research concludes, that many states completely missed outlining these critical parameters. Nor, have many states referred to CEAs flagship regulation (download here).

 The effect of non-uniformity can serve to slow down the growth of the distributed (often rooftop) solar PV market in India. Manufacturers of meters for instance, have to cater to different regulations in different states. This can quickly escalate costs and remove any cost reductions that might have resulted in efficiencies of scale. System integrators also would have their task cut out. Most integrators (or EPC) are national players. Their training costs would quickly escalate thanks to the diverse regulations. In short, having uniform regulations helps the entire solar PV market, from regulators to consumers.

 Akhilesh Magal is a Consultant at BRIDGE TO INDIA

Several new announcements at the central and state level are creating a lot of excitement in the Indian solar market (read the October 2014 edition of the India Solar Compass). Last week, Rajasthan notified that it is looking to revamp its solar policy to achieve 25 GW of solar capacity in five years (refer). The proposed policy aims to streamline land lease/acquisition and statutory approval process to attract investors.

More public sector companies are being asked to consider investing into solar

Scaling-up effect will help bring down the cost of solar power in India significantly

India has the attention of the local and international investment community

 At the central government level, the Ministry of New and Renewable Energy (MNRE) has persuaded large public sector companies National Thermal Power Corporation (NTPC) and Coal India to invest into GW-scale solar projects. More public sector companies, especially those under the Ministry of Petroleum and Natural Gas, are also asked to consider investing into solar. NTPC is clearly looking at this investment as an expansion of its portfolio as a power producer. But Coal India and other public sector companies are being nudged by the government to use available resources such as land and capital.

 Land for new solar parks (typically, 500 MW to 2,500 MW) has been identified in 11 states under the draft solar parks policy released last month (refer). Andhra Pradesh alone has earmarked a solar park for a 2.5 GW capacity. Under the solar park policy, for the states that come forward for central support on such parks, their distribution companies are obligated to buy 20% of the power from these parks. The remainder may be sold within the state, or to other states through national grid.

 All these are excellent initiatives and if they go through, the scaling-up effect will help bring down the cost of solar power in India significantly. However, attracting interest from investors into the sector has not been India’s biggest challenge. Most bids at the central and state level have been oversubscribed in the past and intense competition has led to some of the lowest tariffs globally. But solar power is still likely to be more expensive compared to conventional power (at least in the initial years) and the distressed distribution companies may be hard pressed to pay for it.

 It is still not clear: who will buy this solar power and on what terms? Only 3 GW of capacity is planned for the bundling mechanism (that makes solar power competitive by bundling it with cheaper coal power). The off-take of most other planned solar plants is uncertain. It is important to remember that the Renewable Energy Certificate (REC) mechanism also initially found a lot of takers but, in the absence of an adequately functioning market, has now come to a complete halt.

 India has the attention of the local and international investment community. To sustain this phase of optimism and to ensure that the Indian solar market maintains its upward trajectory, the government needs to quickly address key questions around off take and distribution companies bankability. This requires much closer co-ordination between centre and states.

In January 2014, the Congress led government of Maharashtra (GoM) issued a subsidy of INR 1.60/kWh on industrial electricity tariffs to compensate for a tariff hike approved by the Maharashtra Electricity Regulatory Commission (MERC) (refer here). But as the legislative assembly election in Maharashtra draws closer, the future of this subsidy is doubtful. If the GoM continues this subsidy, it will have to pay close to INR 7 bn (USD 113 bn) every month to be paid to the generation, transmission (MSETCL and MSPGCL; ca. 1bn) and distribution (MSEDCL; ca. 6bn) companies (refer here). In a year this amounts to INR 84 bn (USD 1.4 bn). The subsidy has added significantly to the existing revenue deficit of the state government of INR 54bn (USD 875 bn) for FY 2014-15 (refer here).

The existing subsidy might not last post elections

If the subsidy is withdrawn, margins of all electricity intensive industries will be hurt

An impact of INR 1.60/kWh is expected across all industrial consumers

Generating companies (gencos) like Adani and Indiabulls have been given clearance to hike their power sale PPA’s by INR 0.48 to INR 1.40 per unit on grounds of using imported coal. MSEDCL in turn has not passed on this hike to the consumers nor has it paid the gencos. This resulted in the last week shut down of Adani power plant (Refer here).

Even if the Congress government in Maharashtra wins the upcoming election, it will be extremely difficult to sustain the subsidy. In all likelyhood, the cost of electricity for industrial consumers in Maharashtra will rise by 20%, which might make their production uncompetitive. Most industries are aware of the brewing storm, but choose to ignore it as it has not hurt their books yet. It is high time that they start looking for an alternative to grid power in Maharashtra.

All industrial electricity bills since April 2014 carry a reference to the subsidy. It shows that, sans the subsidy, industrial consumers would end up paying an energy charge of INR 8.60/kWh instead of the current INR 7.01/kWh (see Bill snapshot below).

Industries in Maharashtra have some options to steer away from the grid and tariff uncertainty. But as with all good things, these options come at a cost. One option is to buy power via the open access route from merchant power plants (from e.g. thermal, bio mass, wind and now solar plants).  The second option is to invest into a captive or group captive power plant or buy power from such a plant.  The third option is to buy electricity from the power exchanges.

This mechanism is not yet fully functional in Maharashtra, but will hopefully be so in the near future. Different industries benefit differently by most of these options. To make the right choice, industries need to understand their consumption pattern and link that to the different power sources and purchase options. Other questions include: how much space is available on-site (e.g. on the rooftop)? How long or short term should a power supply deal be? Is enough capital available for investment into own power generation infrastructure and if it is available, is that part of the core business?

At BRIDGE TO INDIA, we have been working with industries in Maharashtra and elsewhere in India to find the best options for a secure and inexpensive power supply. We provide solutions as a consultant and as a power supplier.

Reference links:

MSEDCL Commercial circular on subsidy:http://www.mahadiscom.in/consumer/Comm_Cir_218-2014.pdf

Genco tariff hike: http://timesofindia.indiatimes.com/city/nagpur/Coal-shortage-causes-tariff-hike-again/articleshow/41380606.cms

Subsidy volume for transco’s: http://www.mercindia.org.in/pdf/Order%2058%2042/Final%20Order%2036%20of%202014.pdf

http://www.mahadiscom.in/consumer/Comm_Cir_221_Applicability%20of%20Interim%20Charges,%20GENCO%20Charge%20&%20TRANSCO%20Charge%20to%20be%20levied%20for%2012%20months%20as%20per%20MERC%20Orders.pdf

Maharashtra Budget 2014:http://articles.economictimes.indiatimes.com/2014-02-25/news/47670997_1_revenue-surplus-deficit-budget-plan-size

Ashutosh Singh is a Consultant at BRIDGE TO INDIA