Recent solar auctions indicate a sector disconnect


SECI completed auction for its 3,000 MW solar tender last week. Capacity was won by 6 developers – Acme (600 MW, tariff INR 2.44/ kWh), Azure (300 MW, 2.64), Canadian Solar (200, 2.70), Adani (300, 2.71), ReNew (500, 2.71) and Softbank (1,100 MW, 2.71). The auction follows another similar 2,000 MW solar auction conducted by SECI just two weeks ago where Acme (600 MW) and five other Indian developers won at tariffs ranging between INR 2.44-2.54. All projects are expected to be located in Rajasthan and/or Gujarat.

Most solar developers appear to underestimate transmission related execution challenges;

The developers seem to have unlimited enthusiasm for the sector and are bidding for ever greater capacities;

With multiple tenders coming to market, tariffs have increased slightly but new risks will continue to test the developers;

It is a big surprise to us that such large auctions with no solar park infrastructure availability have been so successful. Developers are now given an extended 21-24 months for project completion because of concerns around land acquisition and transmission connectivity. But as recent experience in the wind sector has shown, even that is unlikely to be sufficient. The first wind auction under a similar pan-India location, inter-state transmission connectivity framework was conducted 15 months ago. Projects have already reached/ are reaching physical completion but are facing significant commissioning delays because of unavailability of transmission infrastructure. Despite multiple promises made by MNRE and Power Grid Corporation, it seems that there is simply no transmission capacity available in Rajasthan and Gujarat. The wind sector seems to have finally learned the lesson at its cost with the last auction being heavily undersubscribed. But most solar developers are still bidding with full enthusiasm regardless.

The other striking part of these auctions is the huge capacity won by Softbank and Acme, amongst others. In the latest SECI and NTPC tenders, developers have been allowed to bid for capacity of up to 2,000 MW, marking a step change in the sector. Softbank and Acme have capitalised on the increase winning and unprecedented 1,550 and 1,875 MW of new capacity in just the last two months. Softbank has also bid for the entire capacity available in NTPC’s recent 2,000 MW solar tender and seems to be keen to realise its mega aspirations. Meanwhile, Acme seems to be bulking up in preparation for its IPO.

Our calculations suggest that adjusted for changes in cost of modules, land and other parameters, tariffs have increased by about 5-10% over the last few months. That should provide some relief to developers but we believe that market outlook remains challenging with many risks – safeguard duty, INR depreciation, land and transmission procurement – yet to be priced in.

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Public sector fails to meet rooftop solar promise


Deadline for project completion under SECI’s 1,000 MW rooftop solar tender for installation on public sector sites is coming up at the end of June 2018. The tender was issued back in December 2016. Because of various problems in the tendering process, final allocation was made for 410 MW only in December 2017. We understand that no capacity has been actually commissioned yet. Similarly, in the Central Electronics Limited (CEL) rooftop solar tender issued in January 2017, only 32 MW has been allocated so far. Other public sector specific rooftop solar tenders issued by Rajasthan Electronics and Instruments Limited (REIL) and PEC have also been similarly delayed and/or cancelled.

Public sector offers tremendous opportunity for rooftop solar with very high potential and scalability, willing consumers and better credit risk. In early 2016, MNRE had announced an ambitious target of 6 GW of rooftop solar capacity on various central government buildings in conjunction with an attractive capital subsidy scheme (equivalent to 25% of capital cost) for all public sector consumers. It subsequently appointed five public sector units to aggregate demand and procure rooftop solar systems on behalf of various end consumers. Standard PPA and EPC agreements were prepared and vetted by Ministry of Law to fast track the deployment process.

Figure: Rooftop capacity target and tendered capacity, MW

Source: BRIDGE TO INDIA research

SECI’s 1,000 MW tender is symptomatic of the various problems faced in this segment. After initial site visits by prospective bidders and further consultations with different stakeholders, tender size was reduced to 500 MW. Final allocation was further scaled down to 410 MW because of lack of private sector interest in some locations. Out of the 206 MW of capacity awarded under OPEX model, PPAs were ultimately signed for only about 95 MW by the end of May 2018.

There have been multiple problems in rooftop solar deployment on public sector buildings:

a)    Actual site capacity in most cases is significantly less than estimates as site owners are reluctant to allow use of full space for various reasons;b)    Even though project sites are supposed to be already identified and screened, winning bidders are required to liaise with the respective government departments and obtain their agreement on final system size, area of deployment, business model, tariff and cost leading to delays;c)    Many government departments require the bidders to undergo further technical and financial vetting process delaying installation;d)    Some consumers are reluctant to pay capital cost upfront for budgetary reasons despite originally indicating their preference for CAPEX model;e)    Despite adverse changes in individual project sizes and/or types of roofs available, the consumers often require bidders to match lowest rates (L1) in violation of tender conditions;f)    The tenders stipulate tough conditions – minimum annual CUF, stiff completion deadlines, delay penalties, lack of payment security – forcing some leading industry players to scale back their interest. At the same time, eligibility criteria are fairly lenient resulting in a significant capacity being awarded to small local contractors with little prior experience;

Consequently, installation delays, capacity scale back and even tender cancellations have become common in this market. Tender issuance has also failed to live up to expectations as seen in the chart below.

Figure: Rooftop solar tender issuance by public sector consumers, MW

By our estimates, public sector consumers account for only about 400 MW of total rooftop solar capacity (16% share) in the country. Many established IPPs and EPCs have aggressively targeted the public sector market but there have been few success stories (Azure financing). Unless MNRE and SECI are willing to identify and fix problems quickly, this market will fail to live up to its promise.

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China scale back a huge positive for India


Chinese authorities have announced a major pull back in the country’s solar programme. Their new plan, titled 2018 Solar PV Power Generation Notice, proposes many radical and largely unexpected changes – utility scale target of 13.9 GW has been dropped altogether (2017 actual installation – 34 GW), annual distributed solar generation capacity addition has been capped at 10 GW (19 GW) and feed-in-tariffs (FITs) are to be abolished entirely for utility scale projects.

China’s revised plan would result in major surplus in global module supply over next few years;

Sharp fall in module prices would be a huge relief to the Indian developers and ease viability challenges for almost all projects;

The development is a major setback for the Indian manufacturers and for Indian government’s latest plans to support manufacturing;

The changes have been announced after the country added 53 GW of solar capacity last year (plus 53% over 2016), way ahead of all market expectations and far in excess of what China needs to add to achieve its target of 200 GW cumulative capacity by 2020. Unchecked expansion has led to a surge in subsidy and FIT bill with up to EUR 15 billion believed to be owed in past payments to developers. The government appears to be motivated by the desire to reduce financial burden of solar as well as to cut back on new generation capacity.

The new plan is expected to significantly reduce capacity addition in China – revised estimates for 2018 vary from 30-35 GW, a fall equivalent to about 20% of global demand. And there are concerns that the slowdown could last a few years with annual demand going down to as low as 20 GW over next few years. Downside impact on the manufacturing sector is expected to be severe. As other three major markets including US, India and Japan are also set to slow down this year, module manufacturers are faced with a vast oversupply situation. Prices have been coming down anyway for the past six months as seen in the chart below. But unlike some other analysts, we expect prices to bottom out at about USD 0.26-0.27/ W because the supply chain simply can’t endure any lower prices.

Source: BRIDGE TO INDIA research

Note: These are CIF prices for imported modules before GST and any other local taxes and duties.

The depressed module price outlook is an absolute positive for the Indian downstream industry. If module prices fall as far as expected, viability concerns of most projects would be addressed. Developers with significant pipeline – Acme, Azure, ReNew, SoftBank, Hero, Avaada, Mahindra and Engie – would benefit immensely. Tariffs for new auctions are expected to start falling again and may touch INR 2.40 levels in H2-2018 notwithstanding the ongoing safeguard duty uncertainty.

Of course, the news is a major setback for the Indian manufacturers and for Indian government’s latest plans to support manufacturing. SECI has already indicated informally that the 5 GW manufacturing tender may be delayed as a result.

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Another fanciful idea for domestic manufacturing


SECI has issued a new request for selection (RFS) for creating integrated module manufacturing capacity of 5 GW. Interested parties can bid for setting up manufacturing capacity in blocks of 1 GW each. The only financial incentive available to them – assured aggregate project development capacity of twice the manufacturing capacity over four years! These projects can be set up anywhere in India and connect to the inter-state transmission system (ISTS). Combined manufacturing and project development capacity shall be allocated through a single auction process with a ceiling tariff of INR 2.93/ kWh for power generation. Winning bidders would therefore be allocated manufacturing and project development capacity of 1 GW and 2 GW respectively or multiples thereof.

The new scheme design is challenging with many curious features;

Few players have the willingness and capacity to participate in a tender of this scale/ complexity;

Weak module pricing outlook and poor competitiveness continue to hurt the prospects of local manufacturing;

The RFS comes after MNRE issued a concept note and an EOI on domestic manufacturing back in December 2017. The note proposed 30% capital subsidy for an aggregate integrated manufacturing capacity of 10 GW. We understand that 45 responses were received from a diversified mix of project developers and manufacturers.

The new scheme design is challenging with many curious features. All major raw materials, other than polysilicon, for manufacturing have to be sourced locally. Manufacturing capacity needs to come online within a period of three years and there are stiff penalties for not meeting even the intermediate milestones. The project development business would be free to use any modules irrespective of source or place of manufacturing – possibly to ensure scheme compliance with WTO agreements. Project development needs to be phased out evenly over four years with projects commissioned in last two years getting only 90% of the bid tariffs.

Our simplistic back-of-the-paper calculations suggest that 10% extra tariff on generation side would be equivalent to about 30% of capital cost for the manufacturing line. The government is essentially creating a subsidy pool out of extra revenues offered to project developers. But we believe that few players have the willingness and capacity to participate in a tender of this scale/ complexity. Combined capital cost of a 1 GW manufacturing line and 2 GW projects is estimated in excess of INR 110 billion (USD 1.6 billion). Minimum net worth requirement for bidders is INR 20.4 billion (USD 300 million). Our list of potential candidates is limited to ReNew, Adani, Softbank and Tata Power.

The scheme timing is also unhelpful because of the weak outlook on module pricing through most of 2018 and early 2019. Chinese and other international module suppliers are aggressively expanding capacity whereas, demand is set to weaken in most large markets. There is also no clarity as yet on safeguard duty decision. Lack of progress is baffling as the prolonged uncertainty is very damaging for the industry. It appears that MNRE may be trying to reach a consensus on the duty level together with Director General of Safeguards (DGS), local manufacturers and project developers.

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Karnataka order shows the perils of open access market in India


Earlier this month, Karnataka Electricity Regulatory Commission (KERC), the state power regulator, issued an order notifying various open access charges for renewable projects. The regulator has withdrawn all open access incentives for solar projects. But some incentives would continue to be available for other renewable projects. Controversially, the order seeks to levy some open access charges with retrospective effect on solar projects commissioned in FY2017-18.

Karnataka has added an unprecedented 1,255 MW of open access solar capacity in Q1 2018, 93% higher than capacity addition across all of India in 2017;

Open access is facing increasing resistance from DISCOMs and regulators;

We are hopeful that the courts will revoke retrospective charges but policy challenges in open access market are not going to disappear any time soon;

The KERC order comes after expiry of the state’s attractive solar policy offering ten-year exemption from transmission, wheeling, banking and cross subsidy surcharge (CSS) to solar projects commissioned by March 2018. Lapsing of the policy led to an unprecedented rush in project activity in the March quarter with 1,255 MW of new projects getting completed in the state. Karnataka is now by far the biggest open access solar state with total installed capacity of 1,592 MW, 56% of total open access solar capacity in the country. Notable players to have added capacity in the state include CleanMax (224 MW), Amplus (218 MW), ReNew (200 MW), Avaada (145 MW), Shapoorji Pallonji (145 MW), Embassy Group (100 MW) and Prestige Group (90 MW).

Reinstatement of all open access charges including CSS means that new solar projects shall face additional cost of INR 2.85/ kWh. That would kill the open access solar market overnight other than for captive projects. KERC may have a reasonable justification for reinstatement of charges – “renewable energy sources can now compete with conventional sources of energy,” whereas the DISCOMs are hurting financially because of these exemptions.

But there is absolutely no justification for the retrospective levy of 25% of transmission and/or wheeling charges, applicable line losses and banking charges. KERC estimates net impact of these charges to be INR 0.51/ kWh but developers claim the actual impact can be up to three times higher depending upon connectivity voltage. Irrespective, the industry is furious as retrospective charges threaten to undermine financial viability of 1.5 GW of projects commissioned in the last year. Some developers have already approached Karnataka High Court and obtained a stay on the new KERC order. We are hopeful that the courts will revoke retrospective charges.

The Karnataka move is a sign of growing friction between private developers on one side and DISCOMs, regulators and state nodal agencies on the other side. It adds to policy chaos in the open access market and once again shows that this market is not for the faint-hearted.

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Bidding stays aggressive in solar auctions


NTPC, SECI and Maharashtra State Electricity Distribution Company Limited (MSEDCL) completed auctions for their 750 MW, 200 MW and 1,000 MW tenders respectively in last two weeks. The NTPC and SECI projects would be located in Anantapur solar park, Andhra Pradesh and Pavagada solar park, Karnataka respectively. There is no solar park availability for the MSEDCL tender.

Capacity has been won by following developers:

– NTPC tender: Sprng (250 MW, INR 2.72), Ayana Renewables (250 MW, INR 2.73) and SoftBank (250 MW, INR 2.73);

– SECI tender: SoftBank (200 MW, INR 2.82);

– MSEDCL tender: Technique solar (20 MW, INR 2.71), Adani (200 MW, INR 2.71), ReNew and ACME (250 MW each, INR 2.72), Tata (150 MW, INR 2.71) and Azure (130 MW, INR 2.72);

The difference between profiles of winning bidders in the three tenders is pretty stark. Successful winners in the NTPC and SECI tenders are large international developers, who tend to be more risk averse particularly on offtake and land acquisition aspects. In contrast, winners in the MSEDCL auction are predominantly Indian developers.

After factoring in solar park costs (NPV of INR 9.8 million and 8.8 million/ MW for Andhra Pradesh and Karnataka solar parks respectively), bids under NTPC and SECI tenders are extremely aggressive as per our calculations. It is clear that the international bidders are paying a substantial premium for their risk aversion.

MSEDCL is one of the healthier DISCOMs (A rated) in the country but its record on renewable energy has been mixed with multiple incidents of payment delays and PPA execution delays. Despite that, the tender was oversubscribed by 45% and the winning tariffs are also fairly aggressive in our view. It is notable that the Maharashtra tender had to be re-issued for the fifth time. It failed to attract sufficient interest previously due to missing change in law protection from safeguard/ anti-dumping duty risk. But after the clause was added, the tender saw strong bidder interest.

By our calculations, risk-adjusted equity IRR for all these tenders is barely in double digits, way below the return hurdle for the sector. More than 10 GW of tenders are pending allocation but 7 GW of this capacity is stuck due to intra-state transmission system connectivity concerns. Developers, keen to add to their business pipeline now, appear willing to accept growing execution challenges and ignore soaring tender promises of MNRE.

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Wind-solar hybrid policy has little substance


Wind-solar hybrid policy has little substance

MNRE released the final version of National Wind-Solar Hybrid Policy last week. The policy aims to “provide a framework for promotion of large grid connected wind-solar PV hybrid systems for optimal and efficient utilization of transmission infrastructure and land, reducing the variability in renewable power generation and achieving better grid stability.” A major change from the draft policy is removal of the 10 GW capacity addition target by 2022. The final policy has no specific target. Indeed, it is remarkable for having no numbers at all.

The two touted advantages of hybrid plants – reduction in power cost and improvement in grid stability – are debatable in our opinion;

The policy offers no incentive or other tangible mechanism to promote hybrid technology;

Prospects of hybrid plants are limited in our view to select opportunistic cases depending on project location, transmission availability and open access policy;

There are supposedly two main advantages of hybrid plants and both of these are debatable in our opinion. One, by exploiting common transmission and evacuation infrastructure, such plants can use capital more efficiently and bring down tariffs even further. But transmission and evacuation infrastructure costs usually account for only about 3-5% of total capital cost of solar and wind power plants. Savings of this scale are likely to be easily eroded by sub-optimal wind or solar resource available at the location and/or higher curtailment risk. The other claimed advantage is that hybrid plants can reduce variability in power output and improve grid stability as wind and solar resources are somewhat complementary to each other. This is statistically correct although the benefit is hard to quantify. There are other easier and cheaper ways to achieve the same result including better forecasting techniques, ancillary services market, demand side management etc.

The policy is silent on how it will promote hybrid technology. There is no financial incentive on offer. If developers proactively add hybrid capacity, they would have to find private open-access customers as DISCOMs are unlikely to sign bilateral long-term PPAs in the current environment. Conversion of existing wind and solar plants into hybrid plants is allowed but that is technically untenable. It is almost impossible to overlay wind turbines on an operational solar site or vice-versa. These constraints are illustrated well by how Hero Future Energies recently added a 28 MW solar project, next-door to an existing 50 MW wind project in Karnataka. Power from the new solar plant would be sold entirely to private customers.

So far, no hybrid tenders have been issued by any procurement agencies in India. SECI has issued an expression of interest for a 160 MW wind-solar hybrid-cum-storage plant in Andhra Pradesh. Overall, we believe that the potential of hybrid plants is rather limited. The concept has found limited relevance elsewhere. It seems attractive in theory but technical and financial viability constraints mean that hybrid plants will remain a one-off opportunistic choice for developers rather than a mainstream option.

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ReNew breaks away from the competition

India’s largest RE developer, ReNew Power, recently completed acquisition of Ostro Energy, a wind and solar project developer with a total portfolio of 1,108 MW. The acquisition, the largest in the sector so far, makes ReNew Power by far the biggest renewable developer in the country with a total portfolio of just over 5,900 MW including capacity under construction. The company is now in the process of launching its IPO in the domestic market.

The Ostro acquisition is likely to be a high watermark for sector M&A for many years due to lack of similar opportunities in the market;
Actis has benefited from attractive wind feed-in-tariffs and excellent market timing to make an estimated 25% annualized return on its investment;
ReNew Power is breaking away from rest of the market through aggressive expansion and fund raising;

Figure: Commissioned and pipeline capacity of top RE developers as of March 2018, MW
Source: BRIDGE TO INDIA research
We believe that the Ostro acquisition would be a high watermark for sector M&A for some time to come. Very simply, there are few opportunities of this size and quality. Deal closures also remain slow because of wide gulf in valuation expectations and nasty due diligence surprises. Moreover, we believe that interest of the buyers is likely to wane over time – primary project pipeline is looking bountiful and interest rates are beginning to rise.
Ostro Energy was set up by Actis, a UK based PE fund, just 4 years ago. It has been valued at INR 108 billion (USD 1.6 billion), or about INR 97.5 million/ MW of capacity. We consider the gross valuation steep at about 7.5x EBITDA and estimate Actis’ exit IRR at about 25%. That is in large part due to its excellent market timing – it quickly built up a juicy portfolio of feed-in-tariff based wind projects (90%) and has sold out possibly at the market peak.
The Ostro deal caps 2 years of exceptional deal making and fund raising for ReNew Power. It is financing the deal through 100% cash, in part by raising USD 247 million in equity funds from Canada Pension Plan Investment Board (CPPIB). In the last two years, it has completed five acquisitions and raised USD 1.5 billion in overseas debt and equity funding. It is believed to be considering several further bolt-on acquisitions and has won 1,200 MW of new capacity in auctions in the last six months alone. The background to such aggressive deal making lies in the company’s imminent IPO plans. We understand that the company is hoping to get a valuation of around 8.5-9.0x EBITDA.
First domestic IPO of a renewable IPP in many years – Orient Power launched an IPO in 2010 – would be an exciting and much anticipated development. But time will tell whether the company delivers on its bold plans or fails to live up to expectations.

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ISTS tenders face long delays


Central Electricity Regulatory Commission (CERC), India’s chief power sector regulator, recently issued a draft procedure for applying for connectivity to the inter-state transmission system (ISTS). The draft procedure comes in the wake of last year’s CERC order on transmission connectivity ‘squatting’ and seeks to provide much needed clarity for ISTS connectivity for RE projects. It is applicable to all new projects greater than 50 MW and incorporates a two-stage approval process.

Stage I connectivity can be sought by developers at any time irrespective of their project status. Approvals are proposed to be granted within 60 days of application but would lapse after 2 years unless Stage II application is submitted within 24 months of the approval date. This stage is essentially meant to serve as an advance planning guide for all relevant parties;

Stage II approvals are to be provided on a first-come, first-serve basis to developers once there is demonstrable progress on the projects – respective PPAs are signed and the developers have acquired rights to over 50% of total land required for the projects or if they have achieved financial closure or can show access to 10% of total estimated capital expenditure. Approvals are proposed to be provided within a month but shall lapse if the applicants fail to sign binding agreements and submit necessary bank guarantee (INR 50 million for every 300 MW project capacity) within a month. Similarly, if the developers fail to meet agreed technical milestones for the projects, the agreement and bank guarantee shall be forfeited;

Developers can apply for Stage I and II approvals at the same time. Crucially, the procedure includes ongoing interchange of information between various parties and regular monitoring of project progress. There are some intricate issues at stake here and the developers want a number of amendments to the draft procedure. Final procedure approval may yet take many months after consultation with all public and private sector stakeholders.

Transmission connectivity has become an increasingly thorny issue for RE projects over the last few years due to lack of coordination between various government agencies. Crux of the problem is that creation of transmission capacity – pooling substations and/or transmission line – usually takes 3-4 years. But the projects, once allocated, have a timeline of only 1-1.5 years for implementation. Developers are rightly concerned that there is simply not enough transmission capacity in resource rich states of Rajasthan, Gujarat and Tamil Nadu to match MNRE’s RE procurement plans. Currently, there are 9,000 MW of wind and solar ISTS tenders pending allocation.

ISTS tenders form the cornerstone of MNRE’s new tendering plan to meet 175 GW target by March 2022 and supplying RE power to deficit states in north and east including Uttar Pradesh, Bihar, Punjab, Haryana, Chhattisgarh and West Bengal. But transmission bottlenecks mean that actual progress is likely to be much slower than usual

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India launches its first offshore wind project


National Institute of Wind Energy (NIWE), an autonomous technical institution set up by MNRE, has invited Expressions of Interest (EOI) for India’s first offshore wind project. The 1,000 MW project is proposed to be located about 25 km from Pipavav port off the coast of Gujarat. Transmission infrastructure for sub-sea connectivity shall be the responsibility of project developer(s). Due date for submission of EOI is 25 May 2018.

Little progress has been made in offshore wind since announcement of the offshore wind policy in 2015;

MNRE would need to offer substantial subsidy support to the project to make price of power financially acceptable to DISCOMs;

Offshore wind remains a marginal technology because of high costs and execution challenges;

MNRE announced the offshore wind policy in 2015, wherein NIWE was appointed as nodal agency for the sector. But there has been little progress since then. The pilot project has been in development for over 2 years with assistance from the European Union, which is providing technical assistance for completing preliminary wind resource assessment, environmental impact assessment, ground investigations, geophysical and geotechnical studies. As it is the first project of its kind in India, it is fair to assume that project completion would take longer than usual at about 5 years.

MNRE is proposing to allocate the project through an open international competitive bidding process. Offshore wind has potentially higher PLF (up to 45%) but capital and operating costs are proportionately higher still. Factoring these in together with higher execution risks, final tariff is expected to be more than 2x current onshore wind tariffs. It is not clear if any capital subsidy or viability gap funding shall be made available for this project. We believe that DISCOMs would be unwilling to buy the power unless MNRE offers capital subsidies to reduce the final tariff to below INR 3.00/ kWh.The Gujarat DISCOMs recently cancelled two different tenders deeming tariffs of INR 2.98 – 3.06 to be too high.

Although offshore wind technology has been technically proven for about ten years now, high costs and operational challenges mean that it remains a marginal power source. International capacity addition has remained static at about 2-3 GW annually (about 5% of total wind capacity) with cumulative global capacity of only 18,814 MW as of December 2017. More than 90% of this capacity is concentrated in a few countries in north Europe and China.

The launch of India’s first offshore wind project is an exciting development and an inevitable step in onward march of the RE sector. Diversifying energy sources and piloting new technologies is highly desirable. But the government should move with caution. Its plans to hold auctions for 5 GW of offshore wind energy capacity in 2018-19 are highly unrealistic.

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Gujarat tender cancellation is ill advised


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

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

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

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

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

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

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

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

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DC overloading gains increasing acceptance in India


A solar power plant rarely produces nameplate capacity power as solar modules operate at their maximum efficiency only during limited peak hours. It has therefore become routine industry practice to over-size DC module capacity, a concept commonly known as DC overloading. It allows solar plants to increase generation during non-peak hours and optimizes overall performance. In 2017, 45% of the projects installed in India used DC overloading of over 20%.

However, DC overloading may create a situation where peak-hour generation crosses capacity constraints of the inverter forcing it to ‘clip off’ extra generation. Optimal DC overloading requires balancing the trade-off between clipping losses during peak hours and extra generation during off-peak hours through the year. This trade-off is complicated by the fact that solar modules degrade over time causing reduction in clipping losses in later years. 

Figure: Benefits and losses of higher DC overloading

Figure: DC overloading in India in 2017

Increasing DC capacity reduces effective cost of transmission lines, AC side equipment and soft costs. Choosing optimal DC:AC ratio depends on multiple parameters:  

Irradiation: Higher irradiation results in higher clipping losses and hence, lower DC overloading is suggested for such projects.

Site temperature: High site temperatures adversely affect power output from the modules. Most utility scale project sites in India have high temperatures (over 40 deg C) during peak-hours, resulting in underperformance of the system and lower clipping losses. Hence, higher overloading may be desirable for such sites.

Land availability: Increasing DC overloading requires more land. Land availability constraints, in solar parks or other projects, may dictate the amount of overloading.

New project tenders in India in recent years have not prescribed any cap on DC overloading. The trend to use higher DC overloading has increased in India. A few projects have even used overloading of over 50%.  

For more details of Indian inverter market and various design and operation issues related to inverters, download our report, Inverter Design and Selection.

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SECI draws strong response to its 2000 MW wind auction


SECI conducted another e-auction for 2,000 MW of wind power projects on 6 April 2018. Winning bids were INR 2.51 – 2.52/kWh, just marginally higher than the tariffs discovered in the previous 2,000 MW SECI auction (2.44 – 2.45) held in February 2018. Winning bidders include an even spread of international and Indian names. International winners include Continuum (250 MW), Sprng (300 MW), BLP (285 MW) and Engie (200 MW). Indian winners include Inox (100 MW), Adani (300 MW), Mytrah (300 MW) and ReNew (265 MW).

These projects will be connected to national grid. SECI will sign 25-year PPAs with developers and back to back Power Sale Agreements (PSAs) with DISCOMs across non-windy states. The project commissioning timeline is 18 months from the date of signing PPA.

So far, 6,000 MW of wind capacity has been auctioned by SECI alone in the past one year. All these projects will have Inter-State Transmission System (ISTS) connectivity. NTPC has also issued a similar 2,000 MW tender, for which bid submission is expected by 25 April 2018.

With 7,500 MW of wind capacity tendered (by SECI, Tamil Nadu, Gujarat and Maharashtra) and 4,000 MW capacity tenders in pipeline, wind sector is expected to pick up pace in 2018 and 2019. MNRE has planned to auction a further 20 GW of wind projects by March 2020. Wind tariffs have gradually settled down around INR 2.50/kWh (40-60% lower than state feed-in tariffs) and are expected to remain stable in the upcoming auctions.

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National Electricity Plan of limited use


About two weeks ago, the Central Electricity Authority (CEA), a statutory agency constituted under the Ministry of Power, released final National Electricity Plan for the five-year period beginning April 2017. The Plan is an important document – it should provide a roadmap for power sector development and serve as a planning guide for all government agencies. Unfortunately, unrealistic assumptions about power demand growth and RE capacity addition as well as some fundamental exclusions render the exercise futile in our opinion.

Despite annual demand growth of only 4.5% in the recent years, the Plan uses much more optimistic growth projections (6-7%) as per findings of the 19th Electric Power Survey.

Table: Power demand projections

Source: Electric Power Survey, National Electricity Plan

Generation capacity requirement is subsequently estimated so as to meet 24×7 demand in line with recent government initiatives. The snag is that the Plan considers 175 GW of RE capacity addition target as a given even though only about 110 GW of it seems likely. That makes the entire exercise questionable. The Plan considers variability constraints of RE power as well as retirement of 23 GW of old thermal plants over 2017-22 (plus another 26 GW between 2022-27) to come up with incremental capacity requirement from other sources.

Table: Power capacity projections

Source: National Electricity PlanNote: CAGR is calculated for previous five years. MU – million kWh

As per the Plan, thermal capacity should actually fall in the next five years net of retirals. But an extra 42 GW of thermal capacity is believed to be already under construction. The Plan projects thermal PLF at 56% in the next five years but the actual number could be materially different because of lower RE capacity addition (positive), lower demand growth (negative) and lower than expected thermal capacity addition because of concerns about overcapacity (positive).

The Plan duly notes that high variable RE generation would have an adverse impact on the grid. But it refrains from any meaningful discussion of remedial measures such as creation of an ancillary services market, making thermal plants more flexible, strengthening of the transmission grid and improvement in forecasting ability. There are no details on timelines, policy or procedures on these critical aspects. There is also surprisingly little depth on storage or any other new technologies.

Because of all these limitations, the Plan is a wasted exercise. Much like the recently released Ministry of Power report on optimal energy mix and Niti Aayog’s long-term National Energy Plan, it is another missed opportunity to take stock of challenges facing the sector and come up with pragmatic solutions. That the final Plan document is issued more than year after the start of the relevant period, only betrays the lack of rigor to this exercise.

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MNRE allows pass-through of duty risk


Last week, MNRE issued a clarification to its guidelines for competitive bidding of solar PV projects. The clarification allows inclusion of changes in duties and other cesses in Change in Law provisions in power purchase agreements. It effectively means that risk of any new duties or changes in duties including safeguard and/or anti-dumping duties arising after the “last date of bid submission” would be borne by the power purchasers ie DISCOMs.

The protection offered to developers is highly welcome even if it poses some operational challenges and doesn’t eliminate the risk entirely;

It paves way for the tender pipeline, stuck for many months, to start moving forward;

The status of projects auctioned without any explicit protection remains unclear;

The MNRE move was much needed as duty uncertainty is highly damaging to the industry and is not expected to go away anytime soon. The safeguard duty announcement is pending a High Court decision in response to an appeal by Shapoorji Pallonji. Meanwhile, the Indian Solar Manufacturers Association have withdrawn the anti-dumping duty petition but plan to refile it in the coming weeks. The tender pipeline is getting clogged as a result with 10,145 MW of aggregate capacity awaiting allocation.

Table: Project development tenders awaiting allocation

Source: BRIDGE TO INDIA researchNote: In addition to these tenders, there is a 100 MW EPC tender by THDCIL pending allocation.

Unfortunately, the MNRE clarification is not the end of this matter. For one, some states/ DISCOMs may decide that the duty risk is too high for them to bear and hence, choose not to incorporate the revised provision and/or hold off on their tender programs. Two, protection is provided only to projects where the revised change in law provision is incorporated in the tender documents. There is still no clarity on who will bear duty risk in projects auctioned without formal protection. Moreover, change in law provisions by nature are fractious. The process for determination of compensation is usually messy and protracted. Final decision by the respective central/ state regulator can easily take months or even years.

That may explain why Karnataka, despite offering full change in law protection in its last two tenders, got a weak response from the market. NTPC has already accepted the change for its latest Andhra Pradesh tender. We expect SECI also to do so shortly although DISCOMs, the ultimate offtakers, may not be so keen on the move.

Despite all the ongoing uncertainties and challenges, the MNRE clarification is positive news. Together with the latest clarification from the Ministry of Finance that customs duty of 7.5% is not applicable to most solar module imports, it offers welcome relief for the industry.

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Gujarat auction gets a tepid result


Gujarat conducted e-auction for a 500 MW utility scale PV solar tender last week. Capacity has been won by four developers at tariffs between INR 2.98 – 3.06/ kWh – Kalthia Engineering (50 MW, INR 2.98), Gujarat State Electricity Corporation (GSEC) (150 MW, INR 3.00), Acme (100 MW, INR 3.06) and Azure (200 MW, INR 3.06). Losing bidders include Hero, Adani, Shapoorji Pallonji, Mahindra, Mytrah and Fortum.

Tariffs have gone up by 22% in 3 months because of the threat of safeguard duty;

Ministry of Power statement that developers would be expected to bear duties only as applicable on the date of auctions is being disregarded by them;

We expect little progress on over 11,700 MW of tenders stuck in pipeline until there is clarity on duty decision;

Gujarat has the highest rated DISCOMs in the country. It also enjoys the reputation of a highly efficient and well-managed power sector. State tenders have always been extremely competitive as a result. But tariffs in the latest tender are relatively much higher, up by INR 0.55 or about 22% over the recent Bhadla auctions by SECI. Main reason is the threat of safeguard duty – 30% duty would mean tariff going up by about 16-18%. The Power Minister has made comforting noises on pass-through of duties but the industry clearly remains cautious. The state did not offer any concession on change in law provision unlike Karnataka. International players, usually much more risk sensitive, stayed out with the exception of Fortum, which was also very conservative.

With the benefit of hindsight, Gujarat may not have actually gone ahead with this auction although recent news articles suggest that power situation in the state is getting worrisome. With tariffs coming at higher than expected levels, it remains to be seen if the state will exercise any part of the 100% green-shoe option.

The role of state public sector companies in Gujarat tenders is intriguing. It makes no sense that state government owned companies are participating in government tenders and crowding out private sector competition. We saw the same trend in the last 500 MW auction in the state in September 2017 when GSEC and Gujarat Industries Power Company (GIPC) together won a total capacity of 150 MW.

The auction sends a clear message for MNRE and power procurement agencies including NTPC, SECI and DISCOMs. Uncertainty is undesirable for all stakeholders and the duty decision should be expedited. By the same logic, auctions should be held back until the status of duty investigation is clear. It may be a while before we see any further auctions in the sector.

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Uttar Pradesh shows open access promise


Uttar Pradesh (UP) has recently amended the Captive and Renewable Energy Regulations 2014 to provide 50% exemptions from transmission and wheeling charges for intra-state open access sale of solar power. The state agencies have been reluctant to provide OA approvals in the past. There is virtually no OA solar capacity in the state. But this amendment, in line with the state solar policy, indicates the state government’s intent to finally open doors to the open access (OA) market. 

Figure: Electricity consumption by consumer category in UP in 2015-16

Source: All India Electricity Statistics, General Review 2017, CEA

This figure shows that the industrial sector accounts for 34% of total power consumed in the state although almost 38% of their requirement is met from captive sources. The state has a relatively low cross-subsidy surcharge (CSS) of INR 0.60/ kWh for industrial consumers which makes OA solar about 25% cheaper than grid power. Commercial consumers are also eligible for OA power but CSS for them is prohibitively high at INR 4.52/ kWh.

Project developers could avoid CSS by opting for the group captive route but regulators are increasingly challenging this approach.

A comparison of OA solar cost under multiple scenarios (before exemptions, after exemptions and for captive sources) with other sources of power shows that OA can be a very attractive route for industrial and commercial consumers. 

Figure: Cost of power from different sources in UP

Source: BRIDGE TO INDIA analysis Note: We have assumed base cost of solar power and conventional power at INR 4.50/ kWh and INR 3.50/ kWh respectively to calculate total landed cost of OA power.

OA market in other states such as Karnataka and Madhya Pradesh has attracted large IPPs such as ReNew, Avaada, Shapoorji Pallonji, Aditya Birla, Hero and AMP. As these states shut down following withdrawal of incentives, UP could be the next hope for OA market.

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MNRE’s new quality policy creates confusion


MNRE’s proposed quality testing and standards regime is facing a difficult take-off. Policy ambiguity and lack of testing infrastructure have already led to multiple revisions in implementation timetable.

The Indian RE sector has a major quality problem and MNRE intervention, long overdue, is highly welcome;

The policy needs to be backed up with urgent investments in testing infrastructure;

MNRE needs to work actively with the industry to finetune the policy and define a clear, time-bound implementation roadmap to address concerns;

Poor quality is the proverbial ‘elephant in the room’ for the RE sector, more so for solar PV than for wind or any other technology. Project developers, contractors and equipment suppliers are under an increasing amount of pricing pressure because of the extremely competitive nature of this market. The result has been aggressive cost cutting, combined in many instances, with poor design, engineering and equipment selection. Highly fragmented and commoditized nature of the sector has further added to these concerns. There is ample anecdotal evidence about projects underperforming significantly even in early years of operations. But hard data remains impossible to get as both developers and equipment suppliers are worried about negative impact on their future business prospects.

Heeding long standing quality concerns in the industry, MNRE acted belatedly and issued two separate orders last year:

Solar Photovoltaics, Systems, Devices and Components Goods Order in August 2017 mandates all equipment manufacturers, suppliers and distributors to ensure compliance with new local standards specified by Bureau of Indian Standards (BIS) by 30 September 2018. The order applies to all goods both domestically manufactured and imported from other countries. Non-compliant products are proposed to be scrapped immediately.

Lab policy for testing, standardization and certification for RE sector, issued in December 2017, aims to develop and update Indian standards for all RE systems and set up lab testing infrastructure in line with international best practices.

The orders, although well-intentioned, have caused confusion and pain in the industry. There is hardly any accredited lab testing infrastructure in the country at present. The few available labs have waiting list of several months. The requirements are challenging from a cost and timeline perspective, when the industry is already grappling with equipment cost increases, GST and import duties. The applicability of policy to individual components and kits is not clear. Many are also questioning the logic of testing requirements when the proposed BIS standards are almost identical to IEC standards.

Notwithstanding the short-term challenges, there should be no doubt that a quality policy is badly needed for long-term health of the sector. But the standards need to be recalibrated over time to suit Indian operating conditions. Effective implementation requires setting up of modern testing facilities throughout India and will take time. There also needs to be a clearer time-graded implementation pathway with strict penalties for non-compliance.

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String inverters gaining market share in India


Share of string inverters in the Indian solar market is increasing rapidly. It went up from only 1% until 2016 to 9% in 2017 for new utility scale solar capacity commissioned. We expect the trend to accelerate even further in the coming years.

Increased adoption of string inverters for utility scale projects is in line with experience in other international markets including USA and China. About 50% of utility scale capacity installed in China in 2016 used string inverters. In the USA, string inverter share is expected to grow up to 28% in 2020. Key reasons for increasing share of string inverters are as follows:

Flexibility and yield: Although efficiency of central inverters is usually higher in comparison to string inverters (about 99% vs 98.5%), string level optimization can deliver better power output with string inverters due to increased reliability and redundancy;

Installation time: String inverters can be installed much faster than central inverters as they do not need special containers or civil structures for housing – useful for projects with tight deadlines;

System availability and maintenance: String inverters can be easily replaced in case of any issue reducing the plant downtime whereas, owing to their large size, central inverters require dedicated on-site technical support;

Huawei and Sungrow, both Chinese companies, are the biggest proponents of usage of string inverters for utility scale segment. But we believe that with growing acceptance of string inverters, a few leading European companies are also looking to offer string inverters.

The main advantage for central inverters is their low upfront cost and maintenance cost. However, string inverters provide savings in BOS costs due to no requirement of string combiner boxes, container or civil structures etc. Further, falling capital and maintenance costs of string inverters means that cost advantage of central inverters has narrowed significantly in the last few years. Ultimately, the decision of string vs central inverters depends on individual project factors such as location, size, site contours and uniformity, site accessibility and installation time available.

For more details of Indian inverter market and various design and operation issues related to inverters, download our report, Inverter Design and Selection.

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Rooftop solar attracts more financing


As the Indian rooftop solar market grows, it is attracting more attention from investors and financiers. Shell is rumoured to be entering the market in partnership with Fourth Partner, a leading rooftop solar EPC. Several other prominent IPPs, international developers, contractors and PE investors seem to be actively interested. Access to both equity and debt capital has improved significantly addressing one of the key market constraints.

Rooftop solar is growing steadily and expected to become a 3 GW market annually by 2021 as per our projections;

Growing market size and intense competition in utility scale solar are drawing new players to the market;

More favourable policy environment is needed to reduce risks and sustain financing interest;

Despite its 40% share in the national solar target of 100 GW, rooftop solar share has been stuck at a lowly 10% of total solar capacity addition. In 2017, it grew by an estimated 924 MW as against total solar capacity addition of 9,225 MW. But changing fortunes of utility scale solar – set to register negative growth in 2018 (-27%) – are proving beneficial for rooftop solar. We expect rooftop solar to grow by 45% in 2018 with its share in total solar installations rising to 18%.

Lack of equity capital has been a major constraint for the OPEX market, which has been a cozy club between CleanMax, Cleantech Solar and Amplus. Other investors have shied away from the market or failed to raise sufficient capital. They have been put off by small market size, formidable execution challenges and high default risk of private C&I customers – falling cost profile creates a strong possibility that they may stop honouring higher priced PPAs at some point in future. Poor legal rights of developers offer little mitigation against this risk. But growing market size and intense competition in utility scale solar are drawing new players to the market. ReNew has been investing heavily in the business. Tata Power, Mahindra, Sterling & Wilson, Sembcorp, Engie, Statkraft and Mytrah are also increasingly interested in this market as are some PE investors.

Debt financing remains tighter in contrast although availability has improved over the last year. The Indian government has arranged concessional lines of credit aggregating INR 88 billion (USD 1,375 million) from the World Bank, ADB and the New Development Bank. State Bank of India has been quick to operationalize the World Bank line with sanctions of INR 23 billion (USD 362 million). Other facilities are also expected to ramp up shortly. We also expect some private non-banking finance companies (NBFCs) to enter the market with standardized financing solutions for residential and SME customers.

Improved funds availability is a big boost for rooftop solar. But there should be no doubt that this market remains challenging. There has been no underlying improvement in risk profile or execution challenges. Growing competition for blue-chip customers is driving margins down. The weak policy framework has failed to support the 40 GW ambition. It remains to be seen how many of the new entrants can sustain their interest and build up scalable rooftop solar businesses.

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India and France take star turns in ISA


International Solar Alliance (ISA) conducted a founding summit in Delhi over the last two days. The event was organized with great pomp with 21 heads of state attending besides Indian Prime Minister, Narendra Modi and the French President, Emmanuel Macron. There were several new announcements on financing, project schemes and partnerships although most of these appear vague. That makes it difficult to assess real progress.

India and France have announced lines of credit worth USD 1.4 billion and EUR 700 million respectively for member nations;

ISA has signed new partnership agreements with the African Development Bank, Asian Development Bank, Asian Infrastructure Investment Bank, Green Climate Fund and New Development Bank, having previously executed such agreements with the World Bank, EIB and EBRD;

India has proposed a generic action plan for increasing solar penetration, encouraging innovation, ensuring concessional funding and developing new regulatory norms;

The various initiatives announced so far fall broadly in three categories – augmenting low cost finance, scaling up solar applications such as solar water pumps, lighting systems and mini grids, and cross-border knowledge sharing. Little financial commitments have been made so far, although we continue to believe that mobilizing international capital is the lowest hanging fruit for ISA. Its highly visible profile and global partnerships should allow it to attract capital from international investors, philanthropic entities and utilities, keen to attach themselves to climate friendly causes. The proposal to procure equipment on a global scale to bring down costs seems a little far-fetched because of the vast differences in technical standards, operating and policy environment across countries.

Unfortunately, India is unlikely to benefit materially from any of the ISA initiatives. The domestic solar industry is reasonably mature with plenty of financial interest from local and overseas players. Some local contractors and equipment suppliers may be able to target new business opportunities in other countries. And it is to be hoped that India’s leadership role would focus the minds of the Indian government in addressing vexing policy and operational issues at home.

Given the nature of the alliance, it is not surprising that ISA is still a work in progress. But it appears to have more style than substance. The grand vision is still fuzzy. The target of installing 1,000 GW of solar capacity and mobilizing USD 1,000 billion in investments by 2030 seems improbable. Also, India and France are unlikely allies in this venture. Neither can stake a claim to genuine leadership in the solar sector. Both countries are keen to showcase themselves in a global leadership position and seem to be using ISA as a platform for individual gains. By denying entry to other leading nations such as Germany and China, they run the risk of holding ISA back from achieving its potential

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Open access solar continues to be mired in uncertainty


Karnataka’s attractive open access policy for solar projects is set to expire at the end of this month. That is leading to a rush in project development activity in the state, which already leads other states with a total installed open access based solar capacity of 334 MW. As much as 1,000 MW of new capacity is expected to be commissioned over February and March.

Many large developers have entered the Karnataka open access market to capitalize on the short window of cost exemptions;

Fierce resistance from DISCOMs, transmission companies and even regulators makes open access an unpredictable and challenging market;

We expect the market to muddle along at about 500 MW per annum driven by sporadic opportunities across select states;

In 2014, Karnataka offered complete exemption from transmission, wheeling, banking and cross subsidy surcharge (CSS) to solar projects commissioned before March 2018. Unlike other states offering similar incentives, it was the first state to offer long-term certainty by offering an exemption window of 10 years. But real progress started only from 2017 onwards when falling costs made open access solar financially viable.

Many large developers have been drawn to open access market in Karnataka. They include large IPPs such as ReNew (commissioned 120 MW), Avaada, Shapoorji Pallonji, Aditya Birla, Hero Future and AMP as well as real estate developers such as Embassy Group, Soham Infrastructure and Sagitaur. Specialist rooftop companies including Amplus and CleanMax are also targeting capacity addition close to 150 MW each before the deadline.

Other states providing similar incentives have also attracted market interest. Telangana and Andhra Pradesh, both offering a 5-year cost exemption window for some charges, have installed solar capacity of 284 MW and 187 MW respectively under open access model.

But these are rare bright spots in the open access market, which continues to face policy and regulatory volatility. There is strong resistance from DISCOMs and other state agencies, who are reluctant to see their premium customers go away. Haryana and Gujarat are the best examples, where open access solar remains non-existent despite several incentives available on paper. Madhya Pradesh, with the second highest open access solar capacity in the country (318 MW), withdrew CSS and additional surcharge waiver from December 2017 onwards. The move, introduced mid-year, resulted in increase in cost of open access solar by around INR 2.20/ kWh making it unviable overnight. Gujarat and Maharashtra have also introduced some charges after waiving them off for a limited period. Even Karnataka is proposing re-introduction of wheeling, banking and transmission charges/ losses.

Meanwhile, the Ministry of Power also appears to be tightening screws on the open access market. In addition to recommending more stringent scheduling restrictions and hiking CSS,additional surcharge and standby charges, it is gradually tightening definition of group captive structure, a common ruse used to avoid payment of CSS.

Overall policy and regulatory regime for open access solar continues to be erratic and unpredictable. Falling costs should mean strong growth prospects but we expect the market to muddle along at about 500 MW per annum in the next few years.

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Trade protection for domestic manufacturers is misguided


While the solar industry anxiously awaits the safeguard duty decision, we have examined the rationale of policies favouring domestic manufacturing in a recent study. We have assessed the complete solar value chain – from manufacturing to project construction and operations – and evaluated each activity for employment and value creation to understand their overall impact on the economy.

Solar value chain can be broadly divided into upstream and downstream activities. The upstream activities comprise manufacturing of solar cells, modules, inverters and balance of system and downstream activities comprise project development, engineering, construction and operations. Our findings suggest that module manufacturing contributes a relatively minuscule amount of total economic benefit from solar sector:

80% of total job creation in solar sector comes from downstream activities;

87% of total value creation in solar sector comes from downstream activities;

Even within upstream activities, majority of job and value creation comes from manufacturing of balance of system components;

As part of the study, we have collected employment and cost data directly from various domestic and international manufacturers, EPC companies and project developers. We found that a 1,000 MW cell and module manufacturing line creates only 1,220 jobs. In contrast, manufacturing of inverters and various balance of system components for the same capacity creates almost 3x as many jobs. But bulk of job creation comes from project construction and operations.

Extrapolating these numbers, 10 GW of new solar capacity addition in a year – split 80% utility scale and 20% rooftop solar – creates 66,300 full time jobs in year 1, rising to 316,860 by year 25. The proportion of total jobs created in module manufacturing, inverter and BOS manufacturing, project development and construction and operation is 4%, 10%, 5% and 81% respectively over complete life-cycle of the projects. 

Figure: Job and value creation for 10 GW solar capacity addition

Source: BRIDGE TO INDIA research

We have similarly estimated economic value creation, value of final finished goods less direct cost of key inputs, from each upstream and downstream activity. 10 GW of solar project capacity creates INR 5,42 billion (USD 8.4 billion) of total economic value, split between module manufacturing, inverter and BOS manufacturing, power generation as 10%, 3% and 87% respectively.

The analysis is conclusive – majority of job and value creation in solar sector comes from project development and power generation. Given the critical contribution of solar power to the Indian economy, the government needs to ensure that sector growth prospects are not harmed. Instead of trade barriers, manufacturing should be supported a range of genuine policy reforms including investment in R&D, creation of supply chain and associated infrastructure. Please read our full report here.

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Wind makes an emphatic case


In the latest wind auction for SECI 2,000 MW tender held on February 13, 2018, winning tariffs came out at INR 2.44 – 2.45/kWh. Winners include ReNew (400 MW), Sembcorp (300 MW), Inox (200 MW), Torrent Power (500 MW), Adani (250 MW), Alfanar (300 MW) and Engie (50 MW). There were five other participants including Sprng, Enel, Orange, Hero and Mytrah. The tender was oversubscribed by 1.85x.

The auction has conclusively demonstrated that wind is price competitive with solar power;

Most developers are indifferent to RE technology;

Wind offers compelling advantages over solar including less land requirement and significantly better domestic manufacturing capability;

There are many interesting takeaways here. First, the immense market depth is a revelation. The large number of credible bidders, over-subscription of 1.85x in such a large tender and fine bidding margin all show that the Indian RE market is now very mature.

Figure: Wind and solar auction tariffs over last year, INR/ kWh

Source: BRIDGE TO INDIA research

The fall in wind tariffs has also been, frankly, a major surprise. In the old preferential allocation regime, when states were offering attractive feed-in-tariffs ranging between INR 3.70–4.90, viability was still regarded as challenging and developers were lobbying for additional incentives like GBI (generation-based incentive). Improvement in turbine technology has played its part in making wind competitive. But more importantly, the government has reduced investor risk by making project allocation more transparent and addressing transmission connectivity challenge. More developers have entered the market creating more competition. EPC contractors have also been forced to become more efficient and the consumer has been the big beneficiary. This is a great lesson for policy makers in policy design.

The other interesting aspect of falling wind tariffs is implications for future RE mix. India needs to add another 80 and 27 GW of solar and wind power respectively in the next four years to meet the March 2022 targets. These numbers seem unfairly balanced against wind. The rationale for higher solar target has never been outlined. Presumably the reasons are geographical wider distribution of solar radiation (in comparison to wind) and an expectation that solar costs would fall more sharply than wind power. Solar may have also benefitted from its image of a newer, more progressive technology in comparison to wind, which has been around for much longer.

But rapid improvement in wind competitiveness should lead to a reconsideration of the RE mix. Many complex factors including land and transmission requirement, geographical dispersion, power generation variability, seasonal profile, operational risk and role of domestic manufacturing go into the mix. Solar offers the advantages of slightly quicker deployment and a more reliable generation profile, which is also more closely aligned to demand pattern. But wind has some crucial advantages – it requires much less land in comparison to solar power. And India has a strong eco-system of manufacturing and construction of wind power plants – in sharp contrast to solar, where the country remains heavily reliant on imports

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