Category: Policies & Regulations

Mr. Akhilesh Magal heads the Project Development team as Senior Consultant at BRIDGE TO INDIA.

The Central Electricity Regulatory Commission (CERC) has proposed to extend the validity of RECs beyond the current period of one year. The petition is listed for hearing on 15th January 2013 (click here for petition). Interested parties are invited to send in comments by 5th January 2013. I do not believe that this this is right move by the CERC for three reasons:

The CERC is attempting to correct supply. The problem however,  is on the demand side

This move will only compound the problem, leading to even more over supply

RPOs must be enforced. However, merely coercing obligated entities will not work. The CERC must create a framework of incentives to help obligated entities meet their RPOs.

The motivation for extending the validity is due to a large number of unsold non-solar RECs. Nearly 1.28 million non-solar RECs remain unsold, out the 1.5 million non-solar RECs available for sale on the exchange. This affects project developers adversely. If the non-solar RECs lapse at the end of this financial year, it will impact the project adversely.

There are three interesting observations I would like to make and propose a solution to each.

The CERC is attempting to solve the wrong problem. The issue is not with supply, it is with demand. The real problem is that obligated entities (DISCOMS, captive power producers and open access consumers) are not being penalized for non-compliance. Most DISCOMs are adopting a “wait-and-watch” policy to see if penalties will be enforced. The CERC can extend the validity for as long as they want, but if nobody wants to buy RECs- they will remain unsold. What the CERC really needs to do is publically list the defaulters and penalize them before the end of the year. That will set the cat among the pigeons.

Extending the validity, will exacerbate the oversupply. This will keep prices at the floor price of INR 1,500 and deter any new entrants into the non-solar REC market. This sends a wrong signal to potential developers who want to adopt the REC mechanism as an off-take. Unless, the demand is fixed, the REC mechanism remains in jeopardy. The Indian solar market needs the REC mechanism to work, as it is a bridge between a subsidized market and a free market.

Brow-beating obligated entities to fulfill RPOs will not work. DISCOMs are bleeding, open-access consumers have opted for open-access to reduce levelized cost of energy and captive consumers run their own plants (often at high prices) because the DISCOMs cannot guarantee supply. Under these conditions, it would be foolish to presume that the obligated entities are likely (or keen) to comply with RPOs. A better method to ensure compliance would be to offer tax-benefits on the cost of compliance (Accelerated Depreciation (AD) and other specific exemptions under different sections of the income tax code). But of course, tax benefits can be extended only to profitable companies, which excludes most DISCOMs (DISCOMs contribute nearly 75% of the demand for RECs). In such cases, the bail-out money for DISCOMs can be linked to RPO compliance and the cost of compliance can be drawn from the National Clean Energy Fund (NCEF). In either way, the government should hand-hold and not brow-beat.

Download our latest INDIA SOLAR DECISON BRIEF, ‘The Project Development Handbook’,for a free overview of the processes, timelines, costs, challenges and opportunities in project development in India.

The Tamil Nadu State Solar Policy (TNSSP) aims at achieving 500 MW till 2015 through the Solar Power Obligations (SPOs) mechanism (Read BRIDGE TO INDIA’s policy brief on Tamil Nadu for the complete analysis on the policy). SPOs are enforced on High Tension (HT) consumers of power (>33KV). This implies that HT consumers are obligated to purchase a certain percentage of their total power from solar. The SPO is fixed at 3% of total energy consumption until December 2013 and 6% from January 2014. While Tamil Nadu is the first state in the country to announce specific SPOs, they appear to be in conflict with the existing national Renewable Purchase Obligations (RPO) announced by the Central Electricity Regulatory Commission (CERC). According to the CERC, RPOs will be enforced on distribution companies (DISCOMS), captive consumers and open access consumers across the country. The SPOs are enforced on HT consumers.

Regulatory conflicts arise due to the RPOs from the CERC and the SPOs from the state

This conflict is a likely indicator of a larger trend in the Indian solar industry, where solar power is getting politically decentralized

SPOs have a higher likelihood to be enforced given that the DISCOMs have the authority to monitor and enforce SPOs

SPOs can be fulfilled by one of the following options:

Generating captive solar power in Tamil Nadu equivalent to or more than their SPO

Buying solar power equal to or greater than the specified SPO from other third party developers of solar power projects in Tamil Nadu

Buying renewable energy certificates (RECs) generated by solar power projects in Tamil Nadu equivalent to or more than their SPO

Purchasing power from the Tamil Nadu Generation and Distribution Corporation (TANGEDCO) at a solar tariff

There are two unanswered questions that arise from the conflict between RPO and SPO regulations:

Can solar plants that meet SPOs generate RECs? As per the CERC’s RPO-REC regulations this should be allowed, given that the power generated is not being used to meet RPO obligations of any entity.

Why do SPO obligated entities have to purchase RECs generated from solar power projects only in Tamil Nadu? The REC market is a national market that allows states without adequate solar resource to purchase solar RECs from those states that have adequate solar resource. Effectively, Tamil Nadu will have to set up its own REC market.

The dynamics of India’s solar industry are changing – fast. Reading between the lines, one observes:

Solar is getting politically decentralized. States are clearly choosing to override or ignore national regulations. Earlier Andhra Pradesh announced waivers in taxes, fees and duties for REC projects, which go against the regulations from CERC. This can seriously jeopardize the entire national REC market. On the up-side, RPO enforcements are likely to be more stringent since DISCOMs will implement and enforce them.

The introduction of SPOs could potentially be a strategy to offload the RPO burden onto HT consumers of power that constitute roughly 46% of the power demand. This is a good idea given the poor financial health of most DISCOMs in the country.

SPOs will also see more distributed power in form of captive/roof-top systems. This will go a long way in reducing the overall power demand in Tamil Nadu, which is experiencing a peak power deficit of 17.5%.

Tamil Nadu Solar Policy: Tariffs expected to fall to INR 6.2 (EUR 0.09)/kWh for 1,000 MW of utility scale projects

Tamil Nadu is the seventh Indian state out of 28 to announce an official solar target. In an overall target of 3GW, the policy is targeting 1,500 MW of capacity addition through utility scale installations till 2015. The Tamil Nadu Electricity Development Authority (TEDA) as the nodal agency will be directly allocating 1,000 MW out of this through the reverse competitive bidding procedure. The solar power produced from these projects will be sold to the state distribution company, TANGEDCO, at a preferential feed in tariff (FiT).

According to our financial model, the tariff in Tamil Nadu is expected to fall to INR 6.2 (EUR 0.09)/kWh

The 5% annual escalation of the tariff for the first 10 years makes this initial tariff viable for projects

According to our financial model, we expect that the Tamil Nadu Solar Policy will see tariffs fall to the lowest ever in the Indian market. For an internal rate of return of 12.8%, we expect the tariff to be INR 6.2 (EUR 0.09) / kWh for these 1,000MW worth of utility scale projects. This is the lowest ever tariff in the Indian market, under the competitive reverse bidding procedure used for the allocation of projects. So far, the lowest tariff under the reverse bidding mechanism has been INR 7 (EUR 0.11) / kWh for 25MW of projects in Odisha in February 2012. The 5% annual escalation of the tariff for the first 10 years, as fixed by the state, is primarily the reason why such a low tariff is possible in the first place. For the remaining duration of the power purchase agreement (PPA), the tariff will remain as determined in the 10th year.

The tariff will be determined by a process called the open tender-two part system in which all bidders have to submit two separate bids in two separate sealed envelopes. Of this, the first is a techno-commercial bid with the commercial terms and conditions and the financial statements of the bidder and the second, a financial or price bid.

For additional details on the project development investments, and other opportunities under the Tamil Nadu Solar Policy, download our INDIA SOLAR POLICY BRIEF for FREE.

Dr. Tobias Engelmeier is Founder and Managing Director at BRIDGE TO INDIA.

The Indian solar market is picking up speed. A number of new policies have been announced: the (draft) National Solar Mission – Phase II and the Tamil Nadu Solar Policy as well as new initiatives by Andhra Pradesh, Chhattisgarh, Rajasthan and announcements by Uttar Pradesh and Punjab. The policies are quite different from each other. There is no consensus yet on “how to get solar power right” in India. These are some of the key issues that would-in my view-make a solar policy strong:

Payment security (strength of PPA, bankability)

Measures to ensure quality in project execution (qualitative pre-selection of bidders)

Government support in land, permits, evacuation and information

Payment security: The most important element to a good solar policy is that it allows for bankable power purchase agreements (PPAs). Payments have to be guaranteed for at least the repayment period of the loan (typically 8-12 years), if not for the entire duration of the PPA (20-25 years). It is not enough to simply assume that a public sector PPA signatory such as a state distribution company(DISCOM) or a nodal agency like NVVN will be bankable. In fact, many state DISCOMs are not. One year rolling letters of credit are also not sufficient. Elements that enhance bankability are: strong payment guarantee schemes (as in Phase 1 of the NSM) for public sector PPAs, viable alternative off-take options, PPAs with highly robust private entities, strict enforcement timelines and processes for solar or renewable purchase obligations (RPOs), and (in general) a high degree of transparency and quality of information.

Ensuring quality bids: Now that Indian market participants have a track record, participation in project allocation processes should have a component of quality. Participants should have a letter of intent (LoI) from a financing bank (or a commitment to fund a project fully on equity), should have already identified the land and (if applicable) the off-taker. There could be a list of pre-defined EPC contractors and modules based on the use of standards of quality (can be tested by a testing agency). Majority ownership of Special Purpose Vehicles (SPVs) can only change post construction of the project. Timelines should be rigorously enforced but be realistic to begin with.

The government should provide support in the following way: It should help to specify and pool suitable land to be made available for project development, it should specify evacuation points and loads, ensure a simple and smooth permissions process and provide clear and solid data on irradiation, power prices, grid quality and power customers. The Tamil Nadu policy is a good example with respect to evacuation. The Andhra Pradesh policy aims to provide support on identifying private sector power off-takers. This is useful, but could perhaps be better managed by the project developers themselves.

The goal should be to encourage professional project developers to develop projects financed on a non-recourse basis by streamlining as much as possible of the “local” elements of project development (land, grid connection) and allowing developers to focus on technology choice, revenue streams and financing.

Jasmeet Khurana, Market Intelligence Consultant at BRIDGE TO INDIA, works on project performance benchmarking, success factors for module sales, financing and bankability of projects in India.

The Ministry of New and Renewable Energy (MNRE) has released a draft policy document for phase two of the National Solar Mission (2013-2017) on December 4th 2012 (yesterday). As predicted by BRIDGE TO INDIA, majority of the allocations under the new phase will be based on Viability Gap Funding (VGF) (read our analysis of the impact of VGF on the Indian market in the October 2012 edition of the India Solar Compass).

Phase 2 of the NSM will stress mostly on allocation of utility scale projects

A capacity of 2.5 GW of PV and 1.1 GW of CSP has been proposed to be allocated over the next two years

Phase 2 of the NSM will also support states in increasing their solar power installed capacity through various incentives

The key learning that has emerged from phase one of the NSM is that serious developers are interested mostly in utility scale projects and phase two of the NSM is expected to stress mostly on such allocation. A capacity of 2.5 GW of solar PV and 1.1 GW of solar thermal has been proposed to be allocated in the next two years for Phase 2 of the NSM. This leaves around 5.5 GW to be allocated at the state level for the NSM to achieve its target of a cumulative capacity of 10 GW by 2017. So far, only the state of Gujarat has contributed significantly towards this target so far(968.5MW under the Gujarat Solar Policy).

The MNRE has acknowledged the need to support state level allocations in the new draft for the NSM. It has proposed to provide support for setting up of solar parks in states. The policy document defines a solar park as a concentrated zone for solar development that consists of a minimum of 250 MW generation capacities on a land area of over 600 hectares with a minimum value of annual average global horizontal irradiance (GHI) greater than 5kWh/m2/day. For this, the MNRE will provide incentives which include 50% of the cost of the detailed project report (DPR), 40% of the cost of transmission infrastructure, 50% of the cost of civil infrastructure, up to INR 100 m for technical assistance and 100% support for irradiation monitoring stations. To receive these incentives, the states will need to take concrete steps that help promote capacity addition of solar power. Most significant of these are the requirement for states to declare their state Renewable Purchase Obligations (RPOs) and tariffs for solar power. With such condition, support for state solar parks are sure to strengthen the case for complete adoption and implementation of RPOs in states, providing a boost to the market.

Click here for a policy comparison of all solar policies in India.

Dr. Tobias Engelmeier is founder and Managing Director at BRIDGE TO INDIA. He consults international companies in developing successful market strategies in India.

BRIDGE TO INDIA has published its first INDIA SOLAR POLICY BRIEF on the Tamil Nadu Solar Policy. This policy brief presents a detailed analysis on the risks and opportunities on the state’s ambitious 3 GW solar power target till 2015. With its policy announcement in October 2012, Tamil Nadu becomes the seventh Indian state out of 28 to announce an official solar target. No breakup between photovoltaic (PV) and concentrated solar power (CSP) projects has been given as part of the policy.

The highlights are:

The policy document provides a break up of 1,500 MW of allocation to utility scale projects, 350 MW from rooftop projects and 1,150 MW through the renewable energy certificate mechanism (RECs)

Tamil Nadu has introduced this policy at a good time given the lull in the market due to no new allocations in the recent months

The policy has introduced innovative measures such as net metering that have not been implemented under any Indian solar policy so far

BRIDGE TO INDIA believes that while the policy is innovative and ambitious, implementation challenges need to be tackled for the policy to succeed in achieving its target

The policy is targeting 1,500 MW of capacity addition through utility scale installations. Of this, 1,000 MW will be allocated through competitive bidding for sale to Tamil Nadu Generation and Distribution Company Limited (TANGEDCO). The remaining 500 MW will be driven by private power purchase agreements (PPAs) with power consumers who need to fulfill solar purchase obligations (SPOs).A further 350 MW capacity addition is being targeted from rooftop solar installations. Of this, 300 MW is expected from the rooftops of government owned buildings, while 50 MW is expected from privately owned or domestic rooftops. For both, net metering is allowed. The remaining 1,150 MW of the total target is to be added through REC projects.

Tamil Nadu already has significant experience with the generation and transmission of renewable energy as it has the highest installed capacity for wind power in India (over 40% of total installed capacity; a total of 6,613MW in December 2011)[1].

At the same time, the state has a significant energy deficit. The total annual electrical energy deficit in the financial year 2011-12 was 8.9m MWh with a peak monthly deficit in March. The peak power deficit during that year stood at 2,247 MW or 17.5%. The Central Electricity Authority (CEA) estimates that the annual electrical energy deficit will significantly rise to 27.4m MWh (29.6%) in the financial year 2012-13 with an anticipated peak power deficit of 4,123 MW (30.7%)[2]. Power generation in Tamil Nadu comes mostly from wind, coal and hydro power plants. The state’s main industries are textiles and automotive.

Solar power could help reduce the deficit and the use of expensive diesel for back-up gen-sets. The generation potential in Tamil Nadu is high. Taking the average of various cities in Tamil Nadu, based on 2011 data from the Central Electricity Regulatory Commission (CERC)[3], we arrive at the following data points:

Average irradiation: 5.36-5.67 kWh/m2/day

Average ambient temperature: 28.8 degree celsius

Expected plant output: 1,560 MWh/year/MW

Capacity Utilization Factor (CUF) for a year: 17.81%

The Tamil Nadu distribution company (DISCOM) is a high loss making entity that can currently hardly afford to purchase expensive solar power over a long period of time through, for instance, long term Feed-in-Tariffs (FiT). The policy reflects this concern to some extent by shifting part of the financial burden from the DISCOMs to large power consumers.

The timing of the policy is good: The first wave of installations under the National Solar Mission (NSM) Phase I and the Gujarat Solar Policy has created a spurt of growth from almost nothing to 1,000 MW between early 2011 and mid 2012 with grid-connected power plants being built mostly in the states of Gujarat and Rajasthan in India’s north-west. Since then, the market has been very slow, waiting for the second phase of the NSM and new state policies such as the Tamil Nadu Solar Policy to be announced.

So far, the policy has attracted great initial enthusiasm from a number of new entrants: project developers from south India as well as large power consumers (obligated entities). However, the policy is still a work-in-progress and a number of essential aspects such as implementation of SPOs and other aspects or a payment security theme that ensure a realization of the targets are under discussion or need to be tackled. The strongest part of the policy so far is the SPO, which nudges industrial and commercial customers that are already plagued by high and rising power costs and low supply security towards adopting solar power quickly. The most interesting aspect of the policy is the net metering for 350 MW of rooftop projects as it has the potential to structurally change the solar market in Tamil Nadu and India as a whole (if implemented successfully). Most doubts come around the proposed targets for REC-based projects.

For the complete analysis on the Tamil Nadu Solar Policy, download the policy brief for FREE.

[1] Ministry of New and Renewable Energy (MNRE) annual report financial year 2011-2012[2] “Load Generation Balance Report 2012-13″; CEA. The annual peak power deficit is calculated by subtracting the highest availability at any point in time from the highest demand at any point in time during that year.[3] “Performance of solar power plants in India”; CERC

Jasmeet Khurana, Market Intelligence Consultant at BRIDGE TO INDIA has expertise in project performance benchmarking, success factors for module sales, financing and bankability of projects in India.

The Central Electricity Regulatory Commission (CERC) recently announced the revised benchmark capital cost for solar projects. In the order, dated October 25th 2012, the benchmark capital expenditure (CAPEX) for solar photovoltaic (PV) projects in India has been reduced to INR 8cr/MW. This is largely driven by the falling costs of PV modules. This has resulted in a 20% reduction from the earlier benchmark of INR 10cr/MW. As per our analysis, this revision of the benchmark CAPEX by the CERC ahead of the announcement of guidelines for phase two of the National Solar Mission (NSM), will pave the way for setting up of more reasonable allocation and execution procedures for projects under the policy.

New allocation of projects under phase 2 of the NSM will be based on bidding for Viability Gap Funding (VGF)

The maximum VGF that can be provided is based on a percentage of the benchmark CAPEX

A more realistic estimate of the benchmark CAPEX benefits the bidders by correctly estimating the required guarantee to be paid

As per our analysis, the revised benchmark CAPEX is a more realistic estimate of actual market costs

It is proposed that new allocations under the phase two of the NSM will use bidding based on Viability Gap Funding (VGF) as a mechanism to allocate new projects (to read more, download the October 2012 edition of the India Solar Compass). Under the VGF mechanism, the project developer that requires the minimum fund from the government to make their project viable will be allocated the project.

The maximum VGF that can be provided to any developer will be based on a fixed percentage of the benchmark capital cost. This percentage will be fixed by the Solar Energy Corporation of India (SECI). To draw out the guidelines for this mechanism, the SECI needs to set the limit of the funding it can provide to the projects in order to budget for the fund requirements for the upcoming bidding process. For example, if the VGF can be provided for up to 25% of the benchmark cost of INR 8cr/MW, SECI may need to provide a maximum VGF of INR 2cr/MW.

The mechanism will be designed in such a way that the developer asking for the minimum fund will be required to submit the maximum bank guarantees. This is done to ensure project completion. If the benchmark costs, as determined by CERC, do not reflect the actual costs, developers can be expected to pay unrealistic performance and other guarantees. A benchmark capital cost that reflects the actual market costs will only help in making the guarantees more reasonable. As per our analysis, this revision of the benchmark CAPEX by the CERC ahead of the announcement of guidelines for phase two of the NSM, will pave the way for setting up of more reasonable allocation and execution procedures for projects under the NSM.

For a complete background on the National Solar Mission, read our latest publication, the INDIA SOLAR HANDBOOK.

Read why the revised benchmark CAPEX might not be good news for REC project developers in India.

Jasmeet Khurana, Market Intelligence Consultant at BRIDGE TO INDIA discusses India’s newest state solar policy as a part of his blog series, ‘Understanding the Tamil Nadu Solar Policy 2012′. This is part I of the IV part series.

Tamil Nadu announced its state solar policy last week. The policy aims to achieve an ambitious installation target of 3GW by 2015.

The policy targets installations through Solar Purchase Obligations, which are separate from Renewable Purchase Obligations (RPOs)

Though distribution companies (DISCOMs) will be directly responsible to meet RPOs, the burden of purchasing solar power will eventually pass on to consumers through power tariffs

The state of Tamil Nadu has tried to transfer the obligation as well as its financial responsibility to the select few obligated entities that already pay higher tariffs

For a target of 1.5GW of utility scale projects till 2015, the policy targets an installation of 1,000MW from the fulfillment of Solar Purchase Obligations (SPO). This SPO is different from the solar RPO requirements of 0.05% earlier notified by Tamil Nadu Electricity Regulatory Commission (TNERC) for the current financial year. These obligations have been mandated at 3% till December 2013 and 6% from 2014 onwards on various power consumers such as Special Economic Zones (SEZs), IT parks, industrial consumers guaranteed with 24/7 power supply, colleges, residential schools and all buildings with a built up area of more than 20,000 square meters.

So far, though distribution companies are directly responsible to meet RPOs, the financial burden of purchasing, for example, solar power is eventually passed on to the consumers through power tariffs over time. In Tamil Nadu’s case, the financial situation of its distribution company, TANGEDCO, is weak and according to official estimates it has been known to be running a loss of around INR 50,000cr as of March 2012. It is also known to have defaulted on payments to wind power producers, for well over a year. Under these circumstances, banks would have been particularly wary of lending to any project developer selling power to the distribution company.

Under its new policy, the state has tried to transfer the obligation as well as its financial responsibility to the select few obligated entities like the industrial consumers, IT parks, SEZs, etc. that already pay higher tariffs. This has been done by allowing developers to sell directly to these obligated entities. Moreover, till it is clarified by the state regulator, these consumers have the dual obligation: direct obligation of the SPO and the impact on tariffs that will result due to the earlier notified RPO.

Follow this space for part II of ‘Understanding the Tamil Nadu Solar Policy 2012′ on ‘Tamil Nadu Solar Policy burdens consumers, but only a select few’.

Write to us at contact@bridgetoindia.com for more information.

BRIDGE TO INDIA provides a precise, analytical and in-depth update on the Indian solar market every quarter as a part of its INDIA SOLAR COMPASS. This is an excerpt from the October 2012 edition of the INDIA SOLAR COMPASS.

The Ministry of New and Renewable Energy (MNRE) has delayed the publishing of guidelines for phase two of the National Solar Mission (NSM). The guidelines were scheduled to be published by October 2012, but as per our interactions with government officials, they will not be available before the end of 2012.

Two of the main topics of debate that may be delaying the launch of phase two are the method of incentivizing solar projects and protecting the domestic manufacturing industry.

The Solar Energy Corporation of India (SECI) will take over from the NVVN as the nodal agency with which project developers will sign Power Purchase Agreements

The MNRE is considering two options to incentivize projects under the NSM: Generation Based Incentive (GBI) and Viability Gap Funding (VGF).

The allocation of projects for batch one of phase two should take place before April 2013. The industry is waiting eagerly for new project opportunities under the NSM, as there are currently no policy-based projects available anywhere in India. Two of the main topics of debate that may be delaying the launch of phase two are the method of incentivizing solar projects and protecting the domestic manufacturing industry.

The MNRE has to explore options other than feed in tariffs (FiT) to incentivize solar, because the Ministry of Power (MoP) does not have adequate unallocated power[1] from conventional sources that can be made available for bundling with solar power produced by projects under the NSM.

For phase one of the NSM, the NTPC Vidyut Vyapar Nigam (NVVN) was the government’s nodal agency with which project developers signed Power Purchase Agreements (PPAs). Linked to the MoP, the NVVN bundled the power bought from solar plants with power from conventional sources that had not been allocated to states by the MoP in the ratio of 1:4. The bundled power was then sold at a unitary rate. However, the MoP will not play any role in phase two of the NSM as the Solar Energy Corporation of India (SECI) will take over from the NVVN as the nodal agency.

In addition, the MoP cannot continue to assign this unallocated power to NSM projects, when many states are overdrawing power from the grid due to inadequate supply. For example, in July, the power-deficit states of Uttar Pradesh, Haryana and Punjab had overdrawn power from the national grid, which resulted in widespread grid instability and vast blackouts affecting the entire northern, eastern and the north-eastern grids. The MoP could be looking to allot the unallocated power to the states with high power deficits to curb overdrawal from the grid. Making provisions for the bundling of power as a part of the NSM is currently not a priority for the MoP.

In phase one of the NSM, the bundled power served to bring down the difference between the average cost and the sale price of solar power. Without the availability of enough unallocated power to negate the higher prices of solar considerably, the government will find it difficult to sell solar power at a higher price. Therefore, it will be difficult and financially unviable for the MNRE to provide FiTs to solar power projects. In light of this, they are considering two options to incentivize projects under the NSM: Generation Based Incentive (GBI) and Viability Gap Funding (VGF).

As per our conversations with MNRE officials, the GBI is a less likely option. As an alternative, the MNRE is keenly considering introducing VGF to incentivize solar in phase two of the NSM. VGF, unlike the GBI is a onetime or short-term capital assistance. As a result, it is not a strain on the government’s finances in the long term.

Click here to download the free October 2012 INDIA SOLAR COMPASS to read our complete analysis. This report also contains detailed analyses on state specific policy allocations, projects and financing in the Indian solar market this quarter.

[1] Unallocated power is the reserve set aside by the central government for various uses, such as allocating a part of it to a state with a power deficit

You can contact us for any further information on the Indian solar market.

Mr. Akhilesh Magal heads the Project Development team as a Senior Consultant at BRIDGE TO INDIA.

The Andhra Pradesh State Solar Policy (APSSP) was announced on 26th September 2012 (download the entire policy here). The announcement of the policy comes at a crucial period in the Indian solar market.

Commencement of the APSSP is expected to create a boom of solar projects in India

The policy offers exemptions from charges like transmission and wheeling, Cross Subsidy Surcharges and Electricity Duty, as well as refunds on VAT, stamp duties and registration charges for purchase of land

Banking of solar power will also be allowed, but may not be carried over from one year to the next

The market has seen a lull since the announcement of projects under the Round 2 of Phase 1 of the National Solar Mission. This policy heralds the transition from a government subsidized market to a market mechanism based solely on the Renewable Energy Certificate (REC) mechanism (as BRIDGE TO INDIA has predicted). This is in contrast to other state solar policies like Gujarat, where the government provided a preferential tariff. The AP policy could serve as a precedent to other states to adopt the REC mechanism in full measure. From a state’s point of view, the success of the REC mechanism is extremely crucial since it takes away the subsidy burden from the government. However, the success of the REC mechanism also hinges on the enforcement of the Renewable Purchase Obligations (RPO). It remains to be seen if the Andhra Pradesh government will show the same enthusiasm in enforcing the RPOs.

This strong thrust towards REC based projects will open up the markets for three models:

Model 1: APPC+REC projects

Model 2: RESCO+REC projects

Model 3: Captive+REC projects

To know more about these models, download our REC report for free.

The state policy offers a bouquet of benefits for such models. They include:

No wheeling and transmission charges

No Cross Subsidy Surcharges (CSS)

Electricity Duty (ED) exemption

VAT refund on all components

Refund of stamp duty and registration charges for land purchased

RECs can be availed over and above all the benefits

Banking of solar power allowed. Banking charges are determined at 2% of energy banked

Banking not allowed within a single day

Consumption of banked units not allowed during peak demand season i.e. February to June and during daily peak hours between 6:30PM and 10:30P

Energy cannot be carried over to the next year i.e. banking allowed only between January to December

The major bottleneck in the widespread adoption of these models in other states remained the open access charges (wheeling, transmission, cross subsidy, etc.). Maharashtra for example has the following set of prohibitive charges:

Wheeling Charges (@11kV)0.21 INR/kWhWheeling Loss (@11kV)9%Transmission charges0.056 INR/kWhTransmission Loss4.85%Cross Subsidy Charges0.84 INR/kWh

[Source: MAHADISCOM. Commercial circular 155]

The announcement of the APSSP is a complete game changer and will definitely create a boom of solar projects (as BRIDGE TO INDIA had predicted months ago). It would also serve as a precedent to other states that are in the process of formulating their state solar policy.

Finally, foreign module manufactures have reasons to smile since the policy does not mandate a domestic content requirement. The sun seems to be shining all of a sudden – at least in Andhra Pradesh. It remains to be seen if there are any hidden clouds hovering in the horizon. Right now, it appears clear all the way.

Download our latest free INDIA SOLAR DECISION BRIEF on ‘The REC Mechanism: Viability of solar projects in India’.

Mr. Akhilesh Magal heads the Project Development team as a Senior Consultant at BRIDGE TO INDIA.

The Central government’s decision to bail-out the state electricity boards to a tune of INR 1,900b does not come as a surprise. The power sector in India is on the brink of collapse. However, bailing out the bankrupt electricity boards is not a sustainable solution. Key fundamentals of the market must be corrected.

Equal pricing of power across consumer segments: politicians pander to the vote-bank politics by giving away power for free to farmers. In most case there is no power to be given away for free. Gujarat has shown that by enabling consumer choice, farmers automatically gravitate towards the more reliable (albeit expensive) source of power (See link).

Transmission and distributions losses: the distribution and transmission companies have no incentive in promoting energy efficiency. Neither do they have the money to upgrade their equipment nor do they have the will to prevent thefts. Gujarat again is a leading example where complete deregulation of the power sector has resulted in much more efficient networks. Post-reform, the losses dropped to 20% from a previously high 35% (See article)

The current state of the state electricity boards also does not bode well for the development of renewable energy. Solar energy in particular is one of the most expensive forms of renewable energy. The average cost of solar is between INR 7 to 8 per unit which is significantly higher than the cost of energy from coal (~INR 2 per unit). The boards are resistant to purchase expensive power, when they can get much cheaper thermal power. This resistance is apparent from the hesitancy to meet the Renewable Purchase Obligations (RPO). The RPOs are mandated from by the Central Electricity Regulatory Commission (CERC) on captive consumers, distribution companies and open access consumers. These obligations require a certain share of renewable energy in the overall energy mix. However, data suggests that the RPOs are being poorly implemented and no penalty is currently being enforced on the obligated entities.

This seriously jeopardizes the solar market since the market is poised to move away from the subsidies under the National Solar Mission (NSM) and various state policies to market driven mechanisms such as the Renewable Energy Certificate (REC) mechanism. The current financial state of the power sector in India is the biggest barrier for this transition.

It remains to be seen if the central government is willing to go the extra mile and actually implement the deregulation of the power sector which started in 2003. The timing for these reforms could not be better. The government has a small window of opportunity to slip these reforms through – along with a host of other reforms it recently introduced. National elections in 2014 means that the government will not risk taking this decision in or after 2013. It’s now or never.

Download our latest free INDIA SOLAR DECISION BRIEF on ‘The REC Mechanism: Viability of solar projects in India’.

As a part of extensive market research, Market Intelligence at BRIDGE TO INDIA publishes topic-based strategy reports on key and most relevant issues in the Indian solar market. These reports are classified as India Solar Strategy Briefs and India Solar Decision Briefs. This is an excerpt from our latest INDIA SOLAR DECISION BRIEF on ‘The REC Mechanism: Viability of solar projects in India’. Download the free report here.

The REC mechanism is relatively new in India and several regulatory loopholes remain. The Central Energy Regulatory Commission (CERC) plans to apply modifications to overcome certain challenges.

REC prices over the lifetime of the project must reflect the current capital cost, which is an unfair disadvantage as the capital costs are made upfront

Uneven cash flows and year-end spikes in the REC prices are results of the infrequent annual implementation of RPOs.

Currently off-grid projects are excluded from the REC mechanism

Regulations regarding net-metering schemes in India are presently absent

The CERC is considering several changes to the regulations which would be implemented in the coming months. Some of these are:

1. Vintage based multiplier: One of the major concerns is that REC prices over the lifetime of the project must reflect the current capital cost. REC prices would depreciate over time, reflecting the falling cost of capital of a solar plant. This would unfairly disadvantage REC projects since the capital costs are made upfront. To circumvent this problem, the CERC is mulling a vintage based multiplier. In this mechanism the solar REC projects commissioned in the period 2012-2017 will be issued a multiplicative factor. This factor would be equal to the fall in CAPEX from 2012 to 2017. This factor would be used to issue additional RECs. Assuming that the capital cost falls by 50% in 2017, every REC issued in 2012 would be worth two RECs in 2017.

2. Quarterly fulfilment of RPO: In order to ensure a smoother cash-flow, the CERC is considering a quarterly implementation of the RPOs. This would distribute more evenly throughout the year and prevent year-end spikes in the REC prices. Such a regulation would be beneficial to both project developers (cash-flow) and the obligated entities (year-end high prices).

3. Net Metering: The net-metering scheme being considered by the CERC includes the following topics:

Connection of renewable energy source to the grid at lower voltages

Accounting and billing

Safety standards and technical requirements

Taxes and duties (or waivers) for self-generated electricity

An overarching policy framework for distributed energy generation

These regulations would ensure that there is a well-defined policy framework for connecting small scale solar power projects onto the grid. This will reduce the likelihood of unnecessarily delays and complications in such projects.Secondly, one of the major concerns for such REC projects is over-generation. Instances when the supply exceeds the demand (building is empty, holidays, exceptionally sunny days, etc.), the excess power can be fed into the grid and consumed at a later stage. Such banking regulations are also under discussion and would come as a boon to solar project developers under the REC mechanism.

4. REC for off-grid: Currently off-grid projects are excluded from the REC mechanism. However, with a comprehensive metering policy, the CERC intends to include off-grid projects under the REC mechanism. The main issue with off-grid projects is that responsibility cannot be assigned to the DISCOM for a periodic reading of the solar meter, accounting and reporting the power generated to the SLDC. The DISCOM is currently incentivized to carry out these functions only if the project is grid connected.

This is an excerpt from our latest INDIA SOLAR DECISION BRIEF on ‘The REC Mechanism: Viability of solar projects in India’. To continue reading, download the free report here.

Mr. Mohit Anand heads the Market Intelligence team as Senior Consultant at BRIDGE TO INDIA. Together with his team, he is responsible for the INDIA SOLAR NAVIGATOR, India’s only dedicated online business intelligence tool that is designed to enable leading solar companies to take strategic decisions to succeed given the ever-changing landscape of the Indian market. His team is also responsible for the INDIA SOLAR COMPASS and many other market reports on solar power in India.

The Ministry of New & Renewable, Government of India, hosted a workshop on the ‘Challenges and issues in the solar RPO compliance/RECs‘ on July 24th 2012 in New Delhi. The workshop included presentations on the current scenario of solar power in India, states and Renewable Energy Certificate (REC) trading, the supply chain and financing options. Senior management executives from companies like AF Mercados, CERC, GEDA, RRECL, NLDC, IEX and Sunpower presented on these topics.

BRIDGE TO INDIA, on behalf of GIZ, presented on the international REC experience – the status of implementation of the REC mechanism in various countries and the lessons that India can learn.

Japan, Australia and UK are countries with the most robust REC mechanisms globally

India needs to incorporate measures – perhaps implement a system of penalties – to improve Renewable Purchase Obligations (RPO) enforcement

India should incentivise RPO compliance through REC and increase the REC window

India needs to heighten the price stability and increase the bankability of RECs

The International Experience: REC Mechanism from BRIDGE TO INDIA Energy Private Limited

Write to us at contact@bridgetoindia.com for further questions on the market or to receive regular updates.

Mr. Shivansh Tyagi specializes in project development policy and project finance as Consultant in the Solar Project Development team at BRIDGE TO INDIA. He interest lies heavily in tracking the development of power infrastructure in India. 

Two major grid collapses in less than 48 hours – this is the worst power crisis India has ever seen, affecting 19 states and about 600 million people. A cascading effect of power overdrawn from the grid by northern states like Uttar Pradesh and Punjab lead to grid frequency plummeting to an alarming low of 47.50Hz in India earlier during the day. This grid failure has raised fundamental questions about the robustness of the Indian power grid, especially given India’s ambitious renewable power targets, adding significant amounts of unscheduled power to the grid.

Wind and solar power are still a negligible part of India’s power generation but there are plans to increase the proportion significantly

Wind and solar power are known to be more erratic in comparison with power from thermal or large hydro sources

Is the Indian grid stable enough to transmit power from more erratic sources such as solar and wind power?

Currently, wind and solar power only contribute around 8% of India’s power. This is still a negligible quantity. Although reaching a significant installed capacity of renewable power is still some way in the future, it is hard to imagine that India’s grid will be ready for this scenario. For an idea of the challenges ahead, just look at the “Energiewende” discussion in Germany. India wants to integrate in-firm wind and solar power up to the tune of 12-15% by 2020, as targeted by the Indian government under the National Action Plan on Climate Change (NAPCC). The erratic nature of solar and wind power can cause drastic grid disturbances, much more than those experienced through conventional power.

The Indian government plans to develop green energy corridors with dedicated transmission lines for solar and wind power. But will that be a sufficient solution for the capacity addition that is imminent with India’s economic growth and rising power demand?

India is almost back to its status quo of having a highly unstable transmission infrastructure prior to 2001 or perhaps even more fragile than it was ten years ago. With the plan of a centralized national grid (one that will synchronize all five regional grids in India) incidents like the one witnessed this week could leave the entire nation with no power and an economic loss of millions.

If the Indian grid is not ready for significant deployment of centralized renewable power, what are our alternatives?

Mr. Shivansh Tyagi specializes in project development policy and project finance as Consultant in the Solar Project Development team at BRIDGE TO INDIA.

Under the National Action Plan on Climate Change (NAPCC), the government has made it mandatory for particular obligated consumers to consume a part of their total consumption from renewable sources under Renewable Purchase Obligations (RPOs). The RPO creates demand for renewable energy in the market. In order for the obligated entities to meet these RPOs, the government has introduced the Renewable Energy Certificates (REC) mechanism. The RECs create a supply push needed to complement the demand pull from the RPOs.

The REC mechanism has significant potential to reach more than 1GW by 2017

However, there is no clarity on the regulatory framework that surrounds the REC mechanism at this point

It is important for these regulations to be clarified in order the REC market to become viable in India

The RECs provide a simple way for obligated entities to fulfil their RPOs, especially for small Open Access (OA) consumers and captive power plants. They otherwise have to maintain three different power purchase agreements, one conventional energy supply and two others for solar and non-solar renewable power to fulfil their RPOs. The obligated entity can simply buy the RECs from the exchange. The CERC had formulated the regulations for RECs in 2010. Even though the regulations are quite detailed, there is a lack of clarity on issues regarding (a) defining minimum size of projects eligible for REC, (b) new grid connection regulations for REC projects allowing smaller projects, such as up to 500kW, to be connected on the lower voltage side and (c) new intra state distribution open access regulations for renewable power projects.

The regulations states that the minimum size of a project under the REC scheme should be determined by the SERC which in turn leaves the decision onto the state nodal agencies i.e. renewable development authority.Only four state nodal agencies have notified the minimum size allowed for REC projects. However, there are cases where projects lower than the specified capacity of 250kWp have been accredited.

The following table lists the minimum size regulations in various states across India:

StateREC capAndhra PradeshNo CapAssamNo CapBiharNo CapChhattishgarhNo CapDelhiNo CapGujaratNo CapHaryanaNo CapHimachal PradeshNo CapJammu & Kashmir250 kWGoa & UTNo CapJharkhandNo CapKeralaNAMadhya PradeshNo CapMaharashtra250 kWManipur and MizoramNo CapMeghalayaNo CapNagalandNAOrissa250 kWPunjabNo CapRajasthanNo CapTamil NaduNo CapTripuraNo CapUttar PradeshNo CapUttrakhandNo Cap

Secondly, the regulations are silent on a separate grid connection rules for REC projects. As for REC eligibility, the project is required to be grid connected thus grid connection become a necessity. The current grid connection rules according to Indian Electricity Grid Code (IEGC) – applicable to wind and solar projects in general – states that the injection points should always be at the higher voltage side of distribution or transmission network. The grid rules are made in context to large power plants where per unit cost of step-up transformer for connection to the grid is very low due to high energy generation. However these additional costs make small REC projects unviable.

Recently in the state of Maharashtra, Tata Power Renewable Energy filed a petition in Maharashtra Electricity Regulatory Commission MERC to allow connection at low voltage side for their 500kW solar rooftop plant at Tata Motors. The commission expressed its inability to give any judgement as the regulation is yet to be framed. The MERC referred the case to the CEA and CERC, which in turn replied that they are in consultation to formulate new grid connection rules for such small scale solar projects referring to the FOR meetings, leading to which the petition was withdrawn (Petition order).

The open access charges for conventional energy are between INR 1 per kWh to INR 3.5 per kWh, which makes the sale of solar power through OA unviable even with the REC upside. Some states like Maharashtra give concession on OA charges but most states to do not have a separate regulation on open access charges. Further, the transmission and distribution losses are very high in India and a generator has to bear such charges if they are selling power through open access. It is possible to install a solar power plant on the consumer’s roof itself, so that the generator and consumer are not using the infrastructure of the area’s distribution company (DISCOM). In such cases DISCOMs should not charge any losses to the generator.

If the REC market must be successful the government should address these difficulties as soon as possible and ask all nodal agencies to come up with clear regulations on RECs and grid connectivity. The REC market has the potential to reach more than 1 GW by 2017. We believe that this can only be achieved through clarity on the regulation that surrounds this mechanism.

Senior Consultant, Akhilesh Magal will be speaking at REaction2012 on ‘Viability of REC projects in India’ today, July 26th 2012 in Chennai, India.

Akhilesh Magal heads the Project Development team as a Senior Consultant at BRIDGE TO INDIA. He will be speaking on ‘Viability of REC projects in India’ at REaction2012 on 26th July 2012 at the Chennai Trade Centre. This blog looks at the growing relevance of REC mechanisms in India.

India is facing an acute energy deficit of 10-13%[1]. Industrial and commercial electricity prices have risen by nearly 11% p.a. from 2000 to 2010 while agricultural electricity prices have remained more or less constant as a result of cross-subsidies[2]. Rising grid electricity prices, frequent power interruption, costly diesel backup electricity, falling costs of solar energy and abundance of solar resource have made solar PV an attractive technological choice for industrial and commercial consumers.

Solar PV is becoming an attractive choice for industrial and commercial consumers due to high prices of conventional power

State regulators issue mandatory consumption quotas (Renewable Purchase Obligations) for solar energy which can be met by buying Renewable Energy Certificates (RECs)

Currently, the demand for RECs is much greater than the supply and our analysis suggests that therein lies an innovative market opportunity for industrial and commercial consumers looking to reduce their expenditure on power

The electricity prices in India vary significantly across different consumer groups. The electricity price paid by industrial and commercial consumers is much higher than that paid by residential and agricultural consumers. There is a fundamental upward movement in power prices as such, driven by the energy deficit and globally rising costs for fossil fuels. In addition, there are two specific factors that increase the power prices for commercial and industrial consumers. Rising grid electricity prices, frequent power interruption, costly diesel backup electricity, falling costs of solar energy and abundance of solar resource have made solar PV an attractive technological choice for industrial and commercial consumers. However, profitability continues to be a concern in smaller systems.

Our analysis suggests that the REC mechanism can provide a significant upswing to new and innovative business models.  Apart from the sale of electricity, a solar energy producer’s revenues are bolstered by the sale of solar RECs on the Indian Energy Exchange (IEX). The trading of REC in India has commenced in February 2011 and has shown early signs of promise. The total number of REC traded as of April 2012 was 105,844[3]. Meanwhile, the supply deficit for REC stood at 55% during the trading session for the month of April 2012, emphasizing that many obligated entities consider REC as a viable option to meet their renewable purchase obligations (RPO) and are participating in the trading. This demand significantly exceeds supply. There was no solar REC traded during this period, due to non-availability of solar REC generating projects. This is expected to change with many solar projects in India adopting the REC generation mechanism in the next six to eight months.

[1] CERC. Annual Report. 2011

[2] Government of India – Power Finance Corporation Ltd. Annual Report. 2011

[3] Indian Energy Exchange. REC Data. 2011

EAI is organising REaction2012, a summit focussing on future technologies, business models and business opportunities in renewable energy. Senior Consultant, Akhilesh Magal will be speaking on ‘Viability of REC projects in India’ for his presentation on July 26th 2012 at 4:45 pm in order to provide an account on the development of REC trading in the Indian market and its future prospects.

WRITTEN BY OLIVER HERZOG & DORJE WULF – QUO VADIS, INDIA SERIES 2/4

Despite the many structural problems in India’s economy, urgently needed reforms in terms of economic liberalization, budget consolidation and government effectiveness seem to have been put on hold recently. In addition, erratic political decision-making has contributed to an unpredictable investment environment.

India’s fragmented political landscape continues to slow down decision making

During recent regional elections, a string of corruption scandals have led to massive losses for the parties of the established ruling coalition

Several renowned companies (foreign as well as domestic) have been alienated by unfavorable intellectual property jurisdiction, non-transparent political decision making and unpredictable turns in tax policies

In spite of the many current economic problems, there seems to be a complete lack of efforts to bring reforms back onto the agenda at the moment. The Congress Party is frequently obstructed by coalition politics and its own fading support in the country. Within its fragmented political landscape, politicians struggle to make meaningful reforms happen while five or six different coalition parties are busy fighting for their own clientele’s specific demands.

In addition, unsettled by a string of corruption scandals, voters are now punishing the long-established elites of the nation-wide parties in state elections in favor of regional leaders. According to recent studies by KPMG and Gallup, corruption has become an endemic problem by now. A prominent example for the adverse effects of corruption on business is the case of the Norwegian telecom firm Telenor which was deprived of 122 telecom licenses in India after a corruption scandal in the licensing process became public. Another reason for poor regional election results were policy flip-flopping as well as a poor record of delivery. The recent election in India’s largest state, Uttar Pradesh (UP), is a case in point. The regional Samajwadi Party won, whereas Congress and the BJP performed poorly. While these changes in voter behavior are a good sign for a working democracy, they will not make it any easier to find political compromises in the future. Too many parties and groups joust for influence, thereby frequently contradicting economic reason and the needs of the Indian nation as a whole.

As investors prefer a predictable economic and legal environment in order to take decisions, the aforementioned developments are worrying. Recently however, a number of additional incidents in India have irritated the international business community casting a shadow on India as investment destination.

At the beginning of 2011, German wind turbine manufacturer Enercon was dragged into a demoralizing lawsuit against its own subsidiary Enercon India Ltd. (EIL), following a strategy dispute with their Indian joint venture partner. In the course of the case, the Indian Intellectual Property Appellate Board temporarily nullified twelve Enercon patents. In the end, the Germans lost effective control of the Indian company with sales of close to USD 600m and were forced to entirely write off their stake in EIL. The Enercon case caused diplomatic tensions between India and Germany at the highest level. Another high-profile case is that of the Korean company POSCO’s USD 12 bn steel project which has been delayed for several years now due to local protests against land acquisition. Recently, the German carmaker Volkswagen, which has been operating in India for over ten years now, put a planned USD 380m investment on hold over a VAT argument with the state government of Maharashtra.

Moreover, frustrated by the lack of political progress and non-transparent processes, steel tycoon Lakshmi Mittal recently announced that ArcelorMittal will shift its investment focus from India to other markets – markets in which returns can be realized faster and in which investments are more predictable. Even though Mittal believes in India in the long term, it is remarkable that a leading businessman of Indian origin considers India currently as too challenging a market.

Another prominent company struggling with the Indian system is telecoms giant Vodafone. The company is to be charged retroactive taxes of INR 2 billion (USD 35.8 million) originating from the sale of an Indian subsidiary in 2007. The deal structure was opaque due to several levels of investment vehicles registered in tax enclaves to exploit double taxation agreements between India, Mauritius and the Virgin Islands. After the Indian Supreme Court had dismissed tax demands in January, Vodafone thought to have won the case. However, now the finance ministry proposed new legislation to retroactively levy taxes on transactions as far back as 1962. The new law aims to circumvent international holding structures in order to grant the Indian state the right of taxation in any case. In the meantime, Vodafone’s hearing of appeal has been deferred until July 27 by the Bombay High Court. This case is particularly delicate for two reasons: firstly, the finance ministry de facto proposed to breach effective tax treaties with sovereign states. Secondly, the retrospective character of this tax proposal would make doing business in India completely unpredictable (what other retroactive laws might follow?). Especially this retrospective character sparked worldwide indignation amongst business executives, lawyers and investors.

Summing up, a high and rising budget deficit, a lack of structural reforms and an unpredictable legal environment taken together with high costs of debt (discussed in part 1 of this blog series) reduce investors’ confidence in the Indian market in the short term. At the same time, India is desperately in need of international funds to address its massive infrastructure requirements as well as to re-boost its industrial growth.

This blog is a part of a Oliver Herzog and Dorje Wulf’s co-authored blog series on ‘Quo Vadis, India‘. The next part will be published in the coming week.

Related links:

Quo Vadis, India: A debt burden putting pressure on growth

The National Solar Mission (NSM) has faced controversy with reports arising in the media of discrepencies in the dates of commissioning of some projects. Project commissioning dates are crucial as delays are penalized heavily under the policy. The NTPC Vidyut Vyapar Nigam (NVVN), the implementation agency of the NSM, has concluded an investigation into the controversy and has a released the list of commissioning dates of projects in Rajasthan.

The deadline for the commissioning of projects under batch one of phase one of the NSM was January 9th 2012

An NVVN investigation has found that out of the 20 projects in Rajasthan, 13 projects were actually commissioned after the deadline

The action by NVVN to provide clarity on this has been crucial in instilling confidence in the implementation of the regulations under the NSM

Under batch one of phase one of the National Solar Mission (NSM), PPAs were signed in the month of January 2011 for 28 Solar PV projects for a total capacity of 140MW. The deadline for commissioning of these projects was January 9th 2012. The responsibility for ascertaining the commissioning of these projects was entrusted to state nodal agencies in the respective states.

Reports then surfaced about discrepancies in the commissioning dates provided by state authorities in Rajasthan. Subsequently, a committee comprising of representative from state authorities and NTPC Vidyut Vyapar Nigam (NVVN) was constituted to ascertain the commissioning of 20 PV projects located in the state of Rajasthan.

Out of the 20 projects in Rajasthan, it has been found that 13 projects were actually commissioned after the deadline. It has been found that projects have been finally commissioned as late as March 3rd 2012.

Company name for delayed projectsEarlier reported date of commissioningActual date ofcommissioningDiscrepancy foundAlex  Spectrum RadiationNot reported21.02.2012NoAmrit Energy (AAPL)Not reported02.02.2012NoDDE Renewable Energy10.01.201214.02.2012YesElectromech Maritech10.01.201201.02.2012YesFinehope Allied Energy10.01.201207.02.2012YesGreentech PowerNot reported08.02.2012NoIndian Oil CorporationNot reported02.02.2012NoKhaya Solar Projects09.01.201228.01.2012YesNewton Solar07.01.201209.02.2012YesOswal Woollen Mills09.01.201210.01.2012YesPrecision TechnikNot reported22.03.2012NoSaidham Overseas09.01.201230.01.2012YesVasavi Solar Power09.01.201202.02.2012Yes

Source: MNRE, NTPC Vidyut Vyapar Nigam Limited (NVVN)

The NSM has a provision to draw the bank guarantees of projects in case of a delay in meeting the deadlines. The provision states that the NVVN can draw 20% of the total sum as a first tranche if a project is delayed by a month (January 9th – February 9th, 2012), 40% as a second tranche after two months (February 9th – March 9th 2012) and the remaining 40% as a third tranche after three months (beyond March 10th 2012). In addition, a penalty of INR0.1m (EUR1,540) per MW is to be levied for each day of delay beyond March 10th 2012. Bank guarantees have been en-cashed for the delayed projects as per the regulations.

The projects have been delayed as developers have struggled with on ground project execution challenges and securing non-recourse financing on time. The difference in the actual commissioning dates and those claimed by the developers suggests that the Rajasthan Renewable Energy Corporation Limited needs to provide clarity on its definition of commissioning. Further, it needs to be stringent in assessing the status of the projects in the state. The action by NVVN to provide clarity on this has been crucial in instilling confidence in the implementation of the regulations under the NSM.

For further analysis on project delays under the NSM, please read BRIDGE TO INDIA’s April 2012 edition of the India Solar Compass.

Karnataka Renewable Energy Development Ltd. allocates 20MW of solar thermal and 60MW of solar PV under the Karnataka solar policy

Lowest winning bid was submitted at a tariff of INR7.94/kWh

CSP loses out to PV on account of project size allocation by KREDL

The Karnataka Renewable Energy Development Ltd. (KREDL) has announced the ten winners of the solar bidding it held in November 2011 under the Karnataka solar policy.  The KREDL had floated tenders for 80MW worth of solar projects under the Karnataka solar policy on August 9th 2011. The bidding process for these projects was supposed to be closed on November 24th 2011.  The winning bids, out of a total of 22 submissions, were not announced due to a legal complication (refer to BRIDGE TO INDIA’s April 2012 edition of the India Solar Compass). Due to the delay in announcements, the developers were given a chance to re-submit their bids.

The original capacity to be allocated was 30MW of solar thermal and 50MW of solar PV, but as bids for only 20MW solar thermal capacity had been received, the excess 10MW has been allocated to solar PV.

The lowest bid, which stood at Rs. 7.94/KWh, was submitted by Helena Power Private Limited (allotted 10MW PV) and the highest successful bid at Rs. 8.50/KWh was submitted by Welspun Solar AP Private Limited (allotted 7MW PV).

Other successful companies are Sunborne Energy Services India Private Limited (10MW CSP), Atria Power Corporation Limited (10MW CSP), Jindal Aluminum Limited (10MW PV), ESSEL Infrastructure Limited- Gulbarga (5MW PV), ESSEL Infrastructure Limited- Badami (5MW PV), GKC Project Limited (10MW PV), United Telecoms Limited (3MW PV) and Sai Sudhir Energy Limited (10MW PV). The solar thermal projects need to be commissioned within 30 months of signing the PPA and solar PV projects will get a period of 18 months for commissioning.

Solar thermal allocations saw very limited interest and even the stipulated capacity of 30MW could not be allocated. This can be attributed to the project size that the KREDL was offering for solar thermal technology. A plant size of 10MW or less is not the best business model for CSP solar power. That is also the reason that the Indian National Solar Mission had offered a minimum plant size of 50MW for CSP.

India is moving rapidly from direct government support for renewable energies to more market-driven mechanisms. Soon no support will be needed. This opens up the Indian market to growth in a completely new dimension.

Accelerated Depreciation was the early choice for government support for renewables. It allowed the Indian wind power sector to take off

Generation-Based Incentives came next. They attracted more international investment and improved efficiencies of renewable energy plants

We are now entering the phase of Renewable Purchase Obligations. This will give the market more freedom to choose the most cost-effective way to meet renewable energy targets

By 2016, renewable energies in India will be driven by purely commercial calculations as they become competitive with grid power on the power consumer side

This is a brief history of India’s renewable energy policies. In the mid 1990’s tax incentives kick-started the Indian renewable energy economy, leading to significant investments into wind parks by Indian taxpayers from companies to Bollywood movie stars. Turbine manufacturers, such as Suzlon, Vestas or Enercon started to move down the value chain and develop entire projects, which could be sold as tax-optimizing investments.

As a result of the focus on installed capacity, and since owners of the plants where not from the industry, generation of wind power remained below international par. At the same time, the government started early capital subsidy-based programs to support off-grid renewable energy generation. These were of limited success, however, as they failed to create attractive market opportunities.

From around 2007 onwards, India moved towards Generation-based incentives (for wind and solar power) and Feed-in-Tariffs. The National Solar Mission, which came into effect in 2010, was the first scheme that supported a renewable energy source across the country (prior programs were offered by India’s individual states) and based on a preferential FiT. The program – as well as the state solar policies of Gujarat, Rajasthan and Karnataka – limited the amount of capacity that was to be built.

While Gujarat offered its solar projects to investors on a first-come-first-served policy (with some financial and technical criteria), the other policies used a reverse bidding auction to determine which project developers would be allowed to benefit. During a time of rapidly falling solar component costs, these auctions successfully ensured that the distribution utilities did not overpay project developers.

There was some concern in the investor community that the reverse bidding process would reduce the price certainty in the market and thereby reduce international investor interest. These concerns have, however, proven to be unfounded as more and more international investors seek to enter the Indian market not only for solar energy, but also for wind, biomass and small hydropower. As professional renewable energy investors emerge, a slow shift has started towards higher quality project execution and limited (or even no) recourse financing.

The next step will be the Renewable Purchase Obligations (RPOs). All Indian distribution companies will thereby have binding targets for the amount of electricity from renewable energy they sell as a percentage of the total. The central government suggests a rise from 7% in 2012 to 15% in 2020 (with a sub-category for solar power of 0.25% in 2012, rising to 3% in 2020). The RPO quotas are currently in the process of being implemented on the levels of the states (under India’ federal system, they have the ultimate say), with some variations in percentages and timelines. There are still some doubts as to the enforcement (penalization) of the quotas, but most observers believe that the system will be up and running staring in the financial year 2013-14.

In addition to the RPO scheme, there is an option of trading Renewable Energy Certificates (RECs). These can be generated by renewable energy producers that do not receive a preferential feed-in-tariff and bought by “obligated entities” (distribution companies and large captive consumers) in order to meet RPO targets.

The RPO system will help India to complete the transition from installed capacity-based to more effective generation-based incentives. It will also be a significant step towards a free market for renewable energies by placing wind, biomass and small hydropower in direct competition with each other. (It is important to consider that India’s main goal is to produce as much power as cheaply and as reliably as possible – not to foster a specific renewable energy technology.)

The RPO scheme itself, however, will only provide a bridge between the current FiT-driven regulatory support scheme and the time when renewable energies will be able to compete widely with other sources of energy. Given that energy is seriously short in India and given the rising fossil fuel costs as well as the rapidly falling costs of renewables, the relevant “parities” will come within the next three years. Some technologies, such as wind, small hydropower, biomass and (a little later) CSP will compete with coal and gas in the grid. Others, especially PV will compete with end-user power prices. Diesel power generation (a 60GW installed capacity in India) is already significantly more expensive even than PV power generation and the breakeven with PV plus storage (to be able to replace back-up power units) is expected in the next two years.

By and large, the Indian government is very successful at encouraging the growth of renewable energies. While the focus is on power generation, the policies also allow for a domestic renewable energy industry to develop. Both factors together significantly increase India’s energy security. Where the policies are not yet strong enough, is with respect to de-central energy generation – which India’s underserved countryside sorely needs and which renewables could very well provide. Impending Telecom-tower legislation, net-metering (and a proper grid-code), financing support for projects and a wider scope for generation of RECs could help here.

The Jawaharlal Nehru National Solar Mission (JNNSM) was launched in 2008 with a goal of installing 22,000MW of solar power in India by 2022. The first phase, first batch bidding guidelines stated that a company is allowed to bid for only one 5MW solar PV and 100 MW solar thermal project. This was done to foster competition among project developers.

These guidelines were allegedly flouted by LANCO Infratech. In December 2010, LANCO, by floating front companies, had managed to secure about 40% of the total capacity bid in that batch. A government appointed committee comprising of senior officials from the Ministry of New and Renewable Energy (MNRE), the Ministry of Power and the Ministry of Corporate Affairs, is expected to submit its report on the allegation by end April 2012.

A year and two months hence, in February 2012, the same front companies floated by LANCO are under allegations of having obtained fraudulent project commissioning certificates. Seven associate companies of the LANCO Group have been granted commissioning certificates for 5MW solar projects each in Askandra, Jaisalmer. The certificates have been granted by the Rajasthan Renewable Energy Corporation Limited (RRECL), responsible for monitoring the completion of projects under the NSM in Rajasthan. These plants have not been completed yet. The deadline for completion was January 9th 2012. The RRECL defines project commissioning as the logistics for power generation being in place and while the plant does not necessarily generate power. RRECL Director (Technical) M.M. Vijayavergia has gone on record to say that since we have now learnt that all the panels were not installed, we are informing the NWN that these are partial commissioning certificates.”

This incident points to the faulty implementation of the NSM policy. The NSM does not have a strong due diligence mechanism for the bidding companies. There is a lack of proper monitoring mechanisms by the NTPC Vidyut Vyapar Nigam (NVVN) for the execution of the NSM projects and the validation of the commissioning certificates. Officials at the NVVN have acknowledged that they took the commissioning certificates on face value from RRECL without verifying them.

As a result of these irregularities, the MNRE has sent a team to verify all the solar projects in the country. This will provide a clear and more accurate assessment of the installed solar capacity in India. Further, the NVVN has penalized three of the seven companies which produced false commissioning certificates. Such an action has sent a strong message to the market that moving ahead, the policies and regulations will be strictly implemented.

The Electricity Act of 2003, allows power consumers to purchase electricity from any power producer not limited to the distribution company (DISCOM) in that area. The term open access refers to the distribution and transmission lines being open to all somewhat similar to our highways where anybody can use it as long as they pay a toll. This regulation was meant to allow power consumers to choose who they want to buy power from. While this sounds great on paper, open access has hit three major bottlenecks.

1) Cross Subsidy Surcharge (CSS): The DISCOMs lose out on the cross-subsidy earned from industrial and commercial consumers – if these opt for open access. (In India, industrial and commercial consumers subsidize agricultural consumers). To compensate for this loss, DISCOMs levy a CSS on open access consumers. This charge is usually INR1 to INR2 per kWh. Combined with other charges such as wheeling and distribution charges, the cost of purchasing power through open access often becomes higher than the price at which the DISCOM offers power.

For example: In the state of Maharashtra, the wheeling (distribution) charge is fixed at INR 0.05 per unit and the wheeling losses are 6% (for 33kV). The transmission charges are fixed at INR 4,944/MW/month, which works out to roughly INR 0.04 per unit. Additionally the transmission losses are fixed at 4.85%. The average CSS is fixed at INR 2. The total charges, losses and subsidies total to nearly INR 2.30

2) Delay of Open Access Applications: The power to grant open access lies with the State Load Dispatch Centre (SLDC), which is closely associated with the DISCOM (previously these entities were bundled as the State Electricity Board (SEB)). This close association prevents SLDCs from granting applications for open access on grounds that open access would jeopardize the state DISCOMs. Applications are often needlessly delayed for documentation issues or other trivial issues.

3) Rollback of banking of power: Banking of power allows generators to feed into the grid in times of excess and conceptually draw from that banked power as and when the consumer requires it. This is crucial for intermittent renewable energy generators especially wind. Wind generators produce 90% of their power during the short period between July and October. Recently Maharashtra announced a rollback of the banking provision. This would virtually de-incentivize all renewable energy generators.

As renewable energy takes off in India, we would see many more independent installations and independent Power Purchase Agreements (PPA) being signed. India needs to immediately do the following:

Discard the Cross Subsidy Surcharge (CSS) – In fact India needs to introduce fair power pricing, and discard subsidies in the power sector all together.

Enforce the state utilities to grant open access in an unbiased manner.

Enable banking of power Without banking, renewable energy is meaningless owing to its intermittent nature.

Upgrade the power grid infrastructure to reduce wheeling and transmission losses – More thought has to be given on how India can finance such an expensive overhaul.

Progressive states like Maharashtra have already decided to scrap the CSS. Maharashtra recognizes that by encouraging open access, the availability of power from private independent producers would increase, thereby reducing the demand on state DISCOMS.

Open access is the way forward for the Indian power sector and a good pretext to start the ball rolling on the badly needed power sector reforms, support the proliferation of renewable energy and reduce the alarmingly high power deficit . It is time for the regulatory authorities to get their act together and clear the hurdles for a truly open access to power in India.

The results of the round two of the NSM surprised everyone with the price of solar energy falling to INR 7.49 per unit. A large part of the success of the NSM must be attributed to the government. However, the larger implications of this would be outside solar projects driven by government subsidies. The next few years would see a boom in entrepreneurs riding the “captive wave”.

The major effect of this transition would be to open up the solar market to India’s small and medium entrepreneurs. Commercial viability of solar is a silver bullet to India’s small entrepreneurs – spread across India’s many cities, towns and villages. Entrepreneurs can bootstrap themselves by avoiding costs bank guarantees and previous experience in installing solar plants (as the NSM and state policies require). The mushrooming of several entrepreneurs providing solar solutions will see two effects:

1)   India reaches its solar goals much quicker than expected – outside the government schemes – due to the scalability of these smaller solar models.

2)   Solar energy prices nosedive further due to large demand – opening up the market to the rural and residential sector.

While this outlook looks promising, India is still a very difficult place to start a business. A World Bank survey rates India as one of the worst places in the world to start a business. Issues such as licenses and registrations can take up to several months, not to mention the stifling red-tape. Starting clean and staying clean is a tremendous challenge to India’s entrepreneurs. The other issue is the hesitancy of local banks to lend money to start-ups without any collateral – exactly what start-ups lack.

Despite these hurdles, the energy is palpable and one sees several success stories. The coming years, therefore will be decisive in India’s move to meet its solar goals – with India’s multitude of entrepreneurs driving it forward.