Category: Projects

Since announcement of preliminary findings by Director General of Safeguards (DGS) last month, a decision on provisional safeguard duty has been anxiously awaited by the Indian solar industry. We understand that the government is leaning towards a 20-25% duty and the decision process is fairly advanced. In fact, a DGS Board meeting had been convened last week. But a delayed High Court hearing in response to an appeal by Shapoorji Pallonji Infrastructure Capital, a project developer, has deferred the duty announcement.

The government believes that solar power can afford a nominal level of duties as costs/tariffs have fallen to record lows;

But the duties risk upsetting progress in downstream project development activity, which creates over 80% of jobs and value in the sector;

We need a long-term policy reform for creating genuine competitive advantage in manufacturing;

It seems increasingly inevitable that India is set to levy a safeguard and/or anti-dumping duty on imports of PV cells and modules. The government rationale appears to be that with solar falling to all-time cost lows to become the most competitive source of power (alongside wind), the sector can afford a nominal level of duties without any undue damage.

It is still a fair question to ask: why promote manufacturing and more importantly, how to do it? As per our latest report, Trade protection for domestic manufacturers is misguided, module manufacturing accounts for only 4% and 10% of total job and economic value creation respectively in the sector. The downstream power generation activity, on the other hand, accounts for a disproportionate number of jobs and value creation (86% and 87% respectively), and also produces other vital benefits including greater energy access and carbon abatement. High module imports are sometimes cited as a threat to India’s energy security, but making modules is not really going to address this issue if the country remains reliant on 100% imports for polysilicon and/or wafers.

The main problem with manufacturing is simply that India is not very good at it. Manufacturing’s share of the country’s GDP has been stuck at close to 16% over the years, a remarkably low level for a developing economy such as India. Despite demand growing nearly 10x in the last 4 years and the government offering multiple incentives (capital and operational cost subsidies, assured demand in the form of domestic content requirement), manufacturing has failed to take off – India produces less than 1 GW of cells (0.7% global market share) and about 2 GW of modules (2.0%). Many leading Indian and international players (Sterling & Wilson, Welspun, JK Group, Dalmia Bharat, Trina, LG, JA Solar and Hareon) have closely examined this business, yet decided to stay away.

As we noted earlier, 1-2 Chinese players may set up local capacity to opportunistically take advantage of duties. But a serious manufacturing revival appears unlikely unless the Indian government can come up with radical, multi-dimensional reform to improve domestic competitive advantage

On 22nd January this year, the US government imposed 30% safeguard duty on imported solar cells and modules. The duty has been imposed for four years but will reduce by 5% every year. First 2.5 GW of imports every year shall be exempted from duties.

As per WTO laws, imports from specified developing countries shall also be exempt from duties up to 3% of ‘total imports’ for individual countries and up to 9% of ‘total imports’ cumulatively for all such developing countries. This provision is a silver lining for Indian manufacturers as India is one of the exempted countries. Assuming that the US imports 10 GW cells and/or modules every year, Indian manufacturers can export up to 300 MW of modules per year with a healthy pricing advantage. This is an attractive opportunity but the small scale is not credible enough to support manufacturing in India.

One big unknown is the impact of this decision on US module demand and ultimately, the international prices. The level of duty imposed is less than the US International Trade Commission (US ITC) recommendation and final solar system prices are expected to go up by only between 6-10%. That makes us believe that final impact on US demand and module prices elsewhere would be minimal.

The US decision could still have one important implication for India. India is in the midst of its own trade investigations to consider safeguard and/or anti-dumping duty on cells and modules. We feel that the Indian government has a much tougher call as the downstream market is extremely price sensitive and any price shock would detract from the vastly ambitious target of 100 GW by 2022. Nonetheless, the US decision would ring loudly in the ears of Indian policy makers, who may take a cue from the US in imposing duties of about 20-30%.

Gujarat Urja Vikas Nigam Limited (GUVNL), Gujarat government holding company for power distribution and transmission businesses in the state, announced a new 500 MW solar tender last week. The tender has an innovative provision in the form of a 500 MW green-shoe option. If GUVNL deems the lowest auction tariff attractive, it can exercise an option to increase the tender capacity up to 1,000 MW provided bidders are willing to match the tariff. With this tender, total new RE capacity tendered in India from December 2017 onwards has gone up to 12,755 MW.

High RE demand would be difficult to sustain as total power demand growth remains stuck in low single digits;

Connectivity to national grid is allowing greater RE access for land and resource constrained states but likely to build up grid stability challenges;

Procurement agencies may be set for tariff surprises as growing viability concerns and reducing competitive pressure may finally lead to tariffs going up;

The new tender rush is in stark contrast to the only 7,200 MW of new capacity tendered in the 11 months from January – November 2017. MNRE’s pressure on states to accelerate RE procurement seems to be working although we believe that the actual numbers would still be way short of the MNRE plan to auction 21 GW by end March 2018. Power demand growth in the country remains steady at about 4% as per the latest numbers available. The good news is that RE growth is beginning to make aconsiderable dent in thermal power demand and capacity addition.

SECI has issued seven of the fifteen new tenders totalling 7,295 MW (57% of total tendered capacity) since beginning of December 2017. Three of these tenders are for 2,000 MW each, where bidders can elect to build projects anywhere in the country and connect to the national grid. Most such projects are likely to be located in Gujarat, Tamil Nadu (for wind) or Rajasthan and Madhya Pradesh (for solar). Details of ultimate offtakers are not available at this stage but we expect most of this power to be bought by hinterland states including Punjab, Haryana, Uttar Pradesh, Bihar, Jharkhand and Chhattisgarh. It is an appealing route for these land and resource constrained states to buy RE power at low cost. But concentrating more capacity in select states may pose problems from a grid stability perspective in the future and the policy makers need to be watchful on this front.

Most of the other new location-specific tenders have been issued by Karnataka (2,260 MW), Maharashtra (1,800), Uttar Pradesh (1,275) and Andhra Pradesh (750)

All figures in MW

There are two other interesting developments in recent new tenders. With the threat of safeguard and/or anti-dumping duty looming, Gujarat and Karnataka have chosen to offer change-in-law protection to developers insulating them from this risk. We expect other states and even SECI to follow suit. The other one relates to benchmark ceiling tariff, set at INR 2.93/kWh in Andhra Pradesh and Karnataka, 3.00 in Maharashtra and 3.43 in Uttar Pradesh and Assam. Expectations have been set low after the recent auction results. But what if tariffs start rising in response to growing viability concerns and reducing competitive pressure? Procurement agencies may be set for some surprises on this front.

The Indian Finance Minister announced budget for the financial year 2018-19 last week. Being this government’s last budget before general elections due in early 2019, the focus was unsurprisingly on populist measures related to agriculture, rural development and health. But we still found it remarkable how little attention was paid to the entire energy sector.

Focus is on rural electrification, but funding provision seems inadequate for various ongoing and proposed schemes;

Increase in customs duties on lithium-ion batteries is expected to hamper storage prospects;

Slippage down the government’s priority list is not a good sign for the sector;

RE received precious few mentions in the budget. Those were limited to rural electrification and solar irrigation pump schemes. But here again, the funding allocations seem too small and less than expected – INR 8,485 million for off-grid solar for FY 2018-19 is 14% lower than the revised estimate for FY 2017-18. Moreover, initiatives to devise a mechanism for DISCOMs to buy surplus power from farmers seem insincere.

For FY 2018-19, the budgeted allocation is INR 51.5 billion, 6% lower over last year. Around 39% of monies are earmarked for grid interactive solar projects. Bulk of this allocation is expected to go towards solar park capital expenditure and rooftop solar subsidies but the amount seems short of promised support under ongoing and proposed schemes.

Source: Union Budget 2018-19 documents, BRIDGE TO INDIA researchNote: Others include expenditure on human resource development and training, autonomous bodies under MNRE including National Institute of Solar Energy (NISE), National Institute of Wing Energy (NIWE), National Institute of Bio-Energy (NIBE) and SECI.

Despite a steep slowdown in wind energy installations during the last year, budgetary allocation for wind energy remains unchanged.

In line with other hikes in import duties, customs duty on lithium-ion batteries has been increased from 10% to 20%. That is not helpful for growth of storage business, which is already struggling with viability challenges.

Overall, it is disappointing for such a vital sector of the economy to receive such little attention. There is a dearth of new ideas and little attempt is being made to harness new technologies and business models – gasification, electric vehicles, storage, smart grids – to achieve India’s energy transition. The budget confirms our view that energy is slipping down the government’s priorities in the fog of elections and other ‘more important’ concerns.

Karnataka announced results of an 860 MW state solar tender last week. 11 developers have won 48 projects aggregating 760 MW at tariffs ranging between INR 2.94 – 3.54/ kWh. Big winners include Shapoorji Pallonji (185 MW), Acme (106 MW), ReNew (99 MW), Asian Fab Tech (85 MW) and Greenko (45 MW). Prominent losers include Aditya Birla, Avaada, Orange and EdF. 100 MW of the allocated capacity was reserved for domestic module manufacturers, but we expect this to be cancelled in view of the ongoing WTO dispute. We understand that no bids were received for the remaining 100 MW capacity

Karnataka is the first state to absorb complete risk of any change in duties and we expect other procurement agencies to follow suit;

Taluk-based bidding model remains unique to the state;

The state’s aggressive RE procurement is puzzling as its total RE capacity is set to exceed base load by 32% by 2019;

In a big relief to developers, Karnataka offered to assume complete risk of any change in taxes and duties arising after submission of bids. As we commented in our recent report on anti-dumping duties, duties pose a major risk to financial viability of solar projects. No other state or central agency including SECI has offered this concession so far but we expect Karnataka’s position to become an industry standard position over time. Lack of a solar park and direct DISCOM offtake meant that the tender was dominated almost entirely by local developers, who accounted for most of the 4x subscription. Moreover, winning bidders were selected on the basis of the lowest bids. Absence of e-auctions provided much-needed respite to developers as the winning tariffs are amongst the highest in more than 16 months.

Figure: Winning tariffs in recent solar auctions

Source: BRIDGE TO INDIA research

Karnataka is a pioneering state in the solar sector in many respects. It is the largest state in the country in terms of policy-based, utility scale installed and pipeline capacity totalling 3,754 MW as of December 31, 2017. The state also has a uniquely attractive open access policy. And it remains the only state in the country to adopt taluk-based bidding. The 860 MW tender is only the second tender of its kind, where up to 20 MW capacity is proposed to be developed in each of the 43 earmarked taluks across the state (a taluk is a sub-district level administrative area) in a bid to evenly spread solar capacity across the state and manage grid stability issues.

All this still begs the question – why is Karnataka installing so much solar capacity? Including this 860 MW tender and other ongoing SECI and state tenders, Karnataka will have procured a total of 5,810 MW of solar power by 2019. By that time, the state is expected to have a further 1,500 MW of open access solar, 200 MW of rooftop solar and almost 4,000 MW of wind capacity, raising total RE capacity in the state to 11.5 GW. By comparison, the state’s average power requirement is only 8.7 GW. The state is storing up big trouble for the years to come.

2017 was an extraordinary year in many ways for the Indian RE sector. The year will be known for record capacity addition, drastic fall in tariffs and start of the new trade investigations by Indian government into imports of cells and modules. We look at 5 charts summarizing key trends for the sector in 2017.

Sector added record new capacity

2017 RE capacity addition is estimated to touch a record 13.3 GW (+61% over 2016) – utility scale solar added 8.2 GW (+110%), rooftop solar 0.8 GW (+60%) and wind 4.0 GW (+11%). This was also the year when solar outpaced all other sources of power for the first time. We believe that 2017 will be a record year for RE capacity addition in India for some years to come.

Chart: Annual capacity addition, MW

Source: BRIDGE TO INDIA researchNote: Thermal capacity addition numbers are ‘net’ of decommissioned plants. Also, these numbers are for financial years from Apr-Mar. 2017 thermal power capacity addition number is for Apr-Dec.

Tariffs continued to go down despite rising costs

SECI’s 750 MW of utility scale auction in Bhadla solar park saw tariffs fall to a new low of INR 2.44 falling below the previous lows seen in Rewa and Kadapa tenders. Intense competition meant that tariffs went up only marginally in subsequent auctions despite significant increases in module costs, GST and import duty. Wind tariffs fell even lower to INR 2.43, beating all market expectations, in December 2017.

Chart: Tariffs hit record low even as cost rise

Source: BRIDGE TO INDIA researchNote: Wind tariff for Q4-2016 is taken as the average of feed-in-tariff for select states.

Tender pipeline remained sluggish because of weak power demand

Weak power demand growth meant that DISCOMs were relatively reluctant to buy new power despite falling tariffs.

Chart: Tender issuance and auction completion, MW

Source: BRIDGE TO INDIA research

Commissioning delays badly affected state tender projects

Commissioning delays affected the sector badly as developers grappled with various issues related to land acquisition, connectivity, completion permits and GST etc. Worst affected tenders include Karnataka’s 1,200 MW tender and Telangana’s 2,000 MW tender. The following chart shows cumulative scheduled and actual commissioning status of Karnataka’s 1,200 MW, 920 MW SECI and 500 MW NTPC tenders, Uttar Pradesh 215 MW tender, Telangana 2,000 MW tender and Madhya Pradesh 300 MW tender.

Source: BRIDGE TO INDIA research

India continued to be heavily reliant on imported modules

Despite DCR and other incentives offered to domestic manufacturers, India remained heavily dependent on imported cells and modules with Chinese suppliers dominating the market because of low prices and huge capacity. That has put pressure on the Indian government to consider trade protection measures to support Indian manufacturing.

Chart: Source of modules procured for the projects commissioned in 2017

Source: BRIDGE TO INDIA researchNote: This data is for 8.2 GW of modules used in utility-scale projects commissioned in 2017.

A mix of policy uncertainty and slowing pipeline is forcing Indian project developers, suppliers and contractors to look for opportunities anew – inorganic expansion, looking at other business segments, new markets outside India or even diversification into other parts of the energy sector.

Private sector players have scaled up hugely in anticipation of rapid year-on-year growth but if the market slows down permanently, there is a risk of many of them turning away to other opportunities;

Many developers, suppliers and contractors are looking to shift focus to the rooftop solar and open access markets;

Larger players are even looking to tap fast-growing emerging markets in the rest of Asia and Africa;

The Indian industry has scaled up significantly in expectation of rapid year-on-year growth based on the government targets. The most obvious way to deal with growth challenges now is to look for inorganic opportunities. Well-capitalized developers like Greenko, ReNew, Hero Future, Sprng, Hinduja and Macquarie have been actively scouting for acquisition opportunities. Valuation expectations of the sellers have soared but we still expect some significant closures for Ostro Energy (1,000 MW including under construction assets), Essel Infra (710 MW), Orange Power (600 MW) and SkyPower (350 MW) assets in the coming months. Some of the larger players are even looking at diversification into transmission and power distribution businesses.

Other recurring theme is to look at allied business opportunities in the private power sale market – both rooftop solar and open access. 2017 was a bumper year for both these markets – rooftop solar capacity addition grew by 44% to about 800 MW and open access by 190% to 644 MW. That is attracting attention from large scale IPPs, contractors and manufacturers including Tata Power, Mahindra, Sterling & Wilson, Hero, Azure, Trina, Shell and Engie. A notable example is Azure, which seems to be laying a lot of emphasis on the government rooftop solar market. It has been participating actively in these tenders and has so far, won more than 110 MW of new capacity. The company is now believed to be also focusing on the off-grid market particularly after launch of the SAUBHAGYA scheme for 100% electrification across India.

Other nascent and emerging international markets in Middle East, Africa and Southeast Asia are also attracting a lot of interest from Indian players. These markets are collectively expected to add over 11 GW of new solar utility scale capacity in 2018, up 67% over 2017. Sterling & Wilson is the pioneer here, having built up substantial EPC presence in countries such as South Africa, Saudi Arabia, UAE, Philippines and Vietnam. Both Amplus and CleanMax Solar have also set up offices abroad. Tata Power, Hero Future, Hindustan Power, Mahindra and Jakson are some of the other names believed to be actively looking at international business opportunities.

Over the last three years, India became a magnet for international investors and utilities as they entered the Indian RE market attracted by strong government commitment and clear growth roadmap. It is unfortunate that businesses are now forced to reconsider their investment plans and go abroad in search of greener pastures. The Indian government would need to act decisively to curb this trend.

In our last few bulletins, we have written extensively upon the recent challenges faced by the RE sector. Here, we take a look at what to expect in 2018. The year has obviously started on a shaky note with the 70% provisional duty recommendation on cell/module imports. The trade investigations are likely to drag on for a few months and we expect an eventful year ahead, dogged by uncertainty, disputes and litigation. We already see many developers and contractors slowing execution as even a marginal duty imposition will make many projects unviable.

Capacity addition is likely to fall sharply

2017 RE capacity addition is estimated to touch record levels of 13.3 GW (+61% over 2016) including utility scale solar (8.5 GW, +110%), rooftop solar (0.8 GW, +60%) and wind (4 GW, +11%). We believe that 2017 will be a record year for RE capacity addition in India for some years to come. Our best-case estimate for total RE capacity addition in 2018 is 6.5 GW, a sharp drop of 51% over previous year. Utility scale solar capacity addition including open access projects is expected at 5.2 GW (–39%). Rooftop solar capacity addition is expected to remain static whereas open access will see a substantial slowdown after Karnataka’s attractive policy expires at the end of March 2018. Wind will see an almost complete collapse in activity with all recently tendered projects not due for completion until end 2019.

Tariffs unlikely to fall further

Despite intense competition in the sector – the recent Karnataka 860 MW state tender has been oversubscribed four times – we believe that both solar and wind tariffs have no more room to fall during the year. Developers remain hungry but risk-reward on auctions has been stretched to the maximum.

Manufacturing will remain high on the news charts but see little real progress 

Trade investigations will ensure that manufacturing will continue to attract a lot of attention. But we do not expect any material progress on the government’s new manufacturing policy or any significant boost to domestic manufacturing in the year. Some Chinese and Indian companies would announce plans but ultimately, only 1-2 Chinese manufacturers would perhaps go ahead with actual investments.

Module prices will decline gradually from Q2 onwards

Last year, we failed miserably in reading the module market as unexpectedly strong demand from China and the US resulted in prices going up significantly. This market remains very difficult to call but our belief for the new year is that prices will stay reasonably firm in H1 with some continued softening beginning from around May/ June. We expect the year to end with imported module prices at around USD 0.30/ Wp, an annual decline of 16%, before taxes and duties.

Central government budget will be a non-event for the sector

The Indian government is set to unveil annual budget for the next financial year on February 1, 2018. This will be the Modi government’s last full budget before general elections in 2019. Anticipation is building up but we don’t expect any significant announcement pertaining to the RE sector. The key thing to look out for is if any budgetary allocations would be made in line with the recent provisional announcements on manufacturing subsidies and financial support to DISCOMs for rooftop solar.

India still has a long way to go to meet the 175 GW target. But as we have maintained for some time, sector growth has been uneven and front loaded. Muddled policy environment and weak power demand mean that rather than building on the successes of 2017, we are headed for a year of disappointments.

Last week, we wrote a special bulletin about safeguard duty and its implications for various ongoing and under tender projects. The Director General of Safeguards’ recommendation for provisional duty of 70% has put the industry on tenterhooks. Investors, developers, contractors and manufacturers anxiously await final decision as they worry about navigating through an extended period of uncertainty.

The government has a difficult decision to make but the longer this investigation drags out, the more harmful it will be for the whole sector. We believe that the final duty decision will take about 8-10 months and activity is bound to slow down across the sector until then. Barring projects where modules have already been ordered/delivered, it will be natural for developers to slow work on their under-construction projects because of the severe impact on their financial viability. Meanwhile, MNRE’s new tender announcement plan is also likely to be hit adversely as issuing new tenders does not make sense in these market circumstances. Already, 4.3 GW of project development tenders are awaiting final bid submission and allocation. But we don’t expect these tenders to make meaningful progress until announcement of the final duty decision.

Even the proposed beneficiaries of duties, the domestic manufacturers would be unwilling to firm any investment plans until there is sufficient long-term clarity about government policy. That means completion of all ongoing investigations, announcement of a final duty regime as well as the new manufacturing policy for the sector. Unfortunately, that could easily take up to 12 months.

The government needs to move swiftly to mitigate adverse impact of the duty investigations. First, it should accelerate the investigation time-table and issue final decision as soon as possible. Second, it should provide clarity on applicability of duties to different projects, depending on their bid status, to ensure continued progress on the tender pipeline. MNRE has stated informally on various occasions that allocated projects would not be subjected to any duties, but this stance should be formalized with consent from the Ministry of Finance. Finally, if indeed a duty is to be imposed, the duty structure should be designed to minimize an immediate shock. Duties could be scaled up over time allowing both manufacturers and developers to prepare and adjust to the new regime.

Weak power demand growth to further dent RE prospectsMeanwhile, as per the latest numbers released by the Central Electricity Authority (CEA), total power generation (proxy for power demand) during April-December 2017 was up by a disappointing 3.8% over last year. That does not bode well for growth of the renewable sector when coal (capacity – 193 GW) and gas (25 GW) projects are struggling with average PLFs of about 60% and 21% respectively. The government initiatives to improve operational performance of thermal projects would have a further negative impact on RE growth prospects.

India’s Director General of Safeguards (DGS) has proposed a provisional duty of 70% for a period of 200 days on solar cells and modules. It has issued its recommendations in a preliminary report, completed within just a month of submission of the petition by five Indian manufacturers including Mundra Solar, Indosolar, Jupiter Solar, Websol Energy and Helios (formerly, Moser Baer). The duty is proposed to be levied on imports from all countries except developing countries other than China and Malaysia. In effect, that covers around 90% of cells and modules used in India. The decision has come as a major shock and risks causing major ructions in the sector besides upsetting the government’s 100 GW solar target for March 2022. Coming after the moves to levy 7.5% import duty on modules and GST ranging between 5-18% on various input costs, the recommendation also betrays lack of policy consistency and clarity in various government departments.

The decision process and rationale seem fundamentally flawed to us

The DGS recommendation is based on a very weak premise that rising cell and module imports have caused an injury to the domestic manufacturers. That is self-evident but not, in itself, a reason to protect the domestic industry. More important issues to consider, in our view, are why have the Indian manufacturers failed to scale up, upgrade plants or integrate backwards? Do they have the technical and financial capacity to meet growing demand in the sector? Why is their cost of production higher than the cost of imports? It is a policy failure that rather than addressing these substantive issues, the Indian government is proposing to create trade barriers to support domestic manufacturers. Moreover, DGS report expresses concern about loss of jobs in the manufacturing sector. But it fails to take into account the tens of thousands of jobs created in the downstream design, construction and operation of solar plants because of cheap imports. It is very clear that the sector growth – about 900% in last three years – has been largely underpinned by sharp fall in costs. A trade duty of 70%, or even, say 30%, would result in a substantial slowdown in the sector and lead to loss of many more jobs than potentially to be created on the manufacturing side.

RE is moving down policy priority list

The Indian government is grappling with various challenges, many of them inter-connected and conflicting in nature – a bid to revive economic growth and shore up manufacturing sector under its signature Make in India campaign; improve employment opportunities for more than 15 million people entering workforce every year; pressure to contain fiscal deficit in the face of falling tax revenues; and provide reliable 24×7 power across the country. Upcoming general elections, due in 2019, mean that the political stakes are high. Clearly, MNRE and the 100 GW solar target are struggling to get the desired attention in this complex set of circumstances. MNRE has been making soothing noises but the events of last six months are not reassuring.

Best case scenario for the developers is to get relief for pipeline projects

There has been a strong sense in the industry that some form of duty protection is imminent for domestic manufacturers. After speaking to various public and private sector stakeholders, we feel that a duty decision could be announced as early as in four-six weeks. Developers seem resigned to the decision and their best bet seems to be to: i) delay the final decision as long as possible so that under construction projects are not affected; and/or ii) to get relief for projects already auctioned and awarded. But as we commented in our report on anti-dumping duty, the likelihood of government granting a simple waiver of duties on projects in pipeline seems slim. If such relief is not available, up to 4,500 MW of projects risk becoming unviable and/or abandoned.

Project tariffs would need to increase by about 35% at 70% duty level

There are currently about 4,800 MW of tenders awaiting allocation and MNRE wants to bring out several new tenders in the coming months. A final duty of between 30-70% would mean that tariffs would need to go up by between 17-35%, or about INR 0.45-0.90/ kWh, to maintain financial returns. But some of these tenders have a prescribed tariff ceiling of as low as INR 2.93/ kWh. The DISCOMs are obviously not keen on tariffs going up substantially from current levels creating uncertainty for all new tenders.

Private rooftop solar and open access market would be hit badly by duties

Private market, both rooftop and open access solar, is likely to be the worst affected in our view. Most end consumers are in no hurry to build projects and would prefer to wait until there is complete clarity on duty decision and final costs are acceptable. We believe that this segment could see volumes declining by as much as 50% if a duty exceeding 20% is imposed.

In conclusion, a knee-jerk response to duty petitions risks damaging investor confidence and undermining achievements of the last three years. The government needs to act in concert across different departments and provide long-term policy visibility to ensure continued growth in the sector.

Last few weeks have seen feverish activity in the RE sector with several bold announcements from the new MNRE leadership, keen to address the multiple complex issues facing the industry. After announcing a new RE rollout plan entailing tenders of 91 GW of new solar and wind projects by March 2020, MNRE has issued a new concept note on rooftop solar envisaging capital subsidies for residential customers and financial support to DISCOMs – aggregating to INR 235 billion (USD 3.7 billion) – for encouraging growth of this market. It has also issued a concept note for building 10,000 MW of integrated module manufacturing capacity in the country with an incentive package of INR 110 billion (USD 1.7 billion). Lastly, it has issued two expressions of interest for development of 20,000 MW of projects using domestic modules and another 10,000 MW of floating solar projects, both for completion by March 2022.

The move to make DISCOMs the primary nodal agency for rooftop solar and providing them with milestone-linked financial support is highly desirable;

Other initiatives for promoting domestic manufacturing and floating solar plants are poorly conceived and unlikely to take off in our view;

Priority should be to improve policy enforcement and improving execution rather than coming out with newer, more radical ideas;

The most critical aspect of the concept note on rooftop solar is to make DISCOMs the primary nodal agency for this sub-sector. It has two main components – first, it seeks to provide financial support of between 5-15% of capital cost (estimated at INR 5.50 million/ MW) to DISCOMs for up to 35,000 MW of new rooftop solar capacity commissioned across non-residential consumer segments in their respective regions after March 2018. In turn, they are expected to undertake various initiatives for demand aggregation, data compilation and consumer awareness etc. to facilitate growth of rooftop solar. Second, the concept note aims to expand the budget for 30% capital subsidy for residential customers to INR 90 billion. The target is to build 5,000 MW of residential rooftop solar capacity by March 2022. To put that in perspective, we estimate current residential rooftop solar capacity at only about 390 MW.

DISCOMs are indeed best suited to play the central implementation and facilitation role for rooftop solar. Positioning them as a key stakeholder and supporting them financially is a sensible move and addresses one of the biggest challenges facing this market. BRIDGE TO INDIA had recommended this move in a study on rooftop solar about two years ago. But the scheme needs much more work to make it effective and the 40,000 MW target for March 2022 is still highly unconvincing.

The concept note on manufacturing contains a patchwork of old ideas to support domestic manufacturing – assured demand of 12,000 MW for public sector projects, 30% capital subsidy or 3% interest rate grant, tougher quality standards and greater role for public sector.

The sector is facing harsh times as we had commented in our last weekly. It is promising to see MNRE showing signs of earnestness. But apart from the move to incentivize DISCOMs for growth of rooftop solar, most of the new plans including integrated manufacturing and development of floating solar projects are poorly conceived and unlikely to take off in our view. Unfortunately, the sector’s problems are far from over.

Domestic module manufacturers want further protection

After submitting a petition for imposition of anti-dumping duty (ADD) in July 2017, the Indian manufacturers have submitted a new petition for imposition of safeguard duties on all cell and module imports into the country for four years. The Director General of Safeguard (DGS), Ministry of Finance, has already commenced an investigation and sought responses from all stakeholders by January 18, 2018. The safeguard duty petition is a new twist to the ongoing ADD investigation and interestingly, Mundra Solar (Adani), the largest domestic manufacturer, is one of the applicants unlike in the ADD petition. We believe that it is a sign of growing confidence in the domestic manufacturers, who have been encouraged by the government’s response to import duty on solar cells and modules and progress in the ongoing ADD investigation. Solar project developers should brace for more problems.

Three major auctions were completed last week – two for solar projects by SECI (Bhadla solar park 500 MW and 250 MW respectively) and one for wind projects by Gujarat Urja Vikas Nigam (GUVNL, fully owned by Gujarat government) (500 MW). The solar projects were won by Hero Future (300 MW), Softbank (200 MW), Azure (200 MW) and ReNew (50 MW) at tariffs between INR 2.47-2.49/ kWh (USD 0.04), a very slight increase over the previous auction tariff in Bhadla solar park back in May 2017. Wind tariffs, on the other hand, fell even further to INR 2.43-2.45/ kWh. Projects were won by Sprng (owned by Actis, 197 MW), KP (30 MW), Verdant (100 MW), Engie (30 MW), Powerica (50 MW) and ReNew (93 MW).

Figure: Recent bid tariffs for solar and wind tenders

Note: NTPC 250 MW DCR (domestic content requirement) auction in October 2017 is not shown as it has unique pricing fundamentals.

In the previous Bhadla auctions in May 2017, tariffs had touched an all-time low of INR 2.44/ kWh. Since then, module prices have risen by around 20% to USD 0.36/W. Including other cost inflationary factors such as 7.5% import duty on modules and 5% GST, capex has increased cumulatively by about 20% in the last six months. It is remarkable that tariffs have remained relatively unchanged despite such significant increase in capex and a very real risk of anti-dumping/ safeguard duties on modules. There is no material change in any other factors including solar park charges or financing costs in this period.

As per our analysis, module prices would need to fall to an impossible USD 0.16/W (55% reduction in 10 months) for winning bidders to earn a project IRR of 11%. This ignores the impending risk of anti-dumping duties.

The fall in wind tariffs, 33% in just ten months is equally stunning and hard to explain. There is no underlying industry trend that justifies such a significant tariff reduction.

The only way to explain the latest tariffs is that the developers, concerned by slowdown in power procurement, are anxious to win capacity at any cost. We have maintained for some time that renewable auction tariffs are becoming unsustainable, but the problem is getting even worse. Clearly, the industry is not convinced by the MNRE’s new exuberant plan of auctioning 17 GW of solar and 3-4 GW of wind projects by March 2018. But not only are the developers taking undue risk in these auctions, there is also a growing hazard that as and when there is a tariff correction, the DISCOMs would walk away creating challenges for projects yet to come.

As the year 2017 comes to an end, we take stock of the progress made by the Indian renewable energy sector. It was an eventful year, during which annual capacity addition is estimated to touch record levels of 10.9 GW (+66% over 2016) including utility scale solar (9 GW, +110%), rooftop solar (887 MW, +60%) and wind (4 GW, +11%). Utility scale solar capacity addition actually exceeded our original estimate by 17% because of timeline extensions given in some states (Telangana, Karnataka) and large capacity addition in Karnataka under open access and farmers’ schemes (total 450 MW).

Figure: Renewable capacity edition in India, MW

HIGHS

New, improved competitive bidding guidelines were issued for solar projects. The new guidelines did not receive much attention but incorporate some fundamentally important protections for developers including better payment security, strict timelines for completion of solar parks, termination compensation and lender substitution rights. More importantly, the guidelines mandate use of standard contract documents for projects across India.

Private sale business, both utility scale open access and rooftop solar, grew substantially during the year. Karnataka’s liberal open access has already resulted in new capacity addition of over 200 MW this year and another 1,000 MW is expected to come online in the next 3 months. Meanwhile, rooftop solar OPEX capacity is estimated to grow by 270 MW in 2017, y-o-y growth of 157%. We see growing investment interest in this business, in part because of slowdown in utility scale segment.

ReNew, Greenko and Azure Power accessed the green bond market on their own for the first time and raised a total of USD 2.1 billion between themselves. The funding allows them to diversify their debt sources and release banking lines for future expansion.

LOWS

Weak power demand in the country resulted in continued slowdown in new solar tender activity. Tender issuance during the year fell to 7 GW, down 37% over 2015. Notwithstanding the new bullish plan of the new Power Minister, we believe that DISCOMs remain reluctant to buy more power and total renewable capacity addition will stay below 2017 levels until at least 2020.

Project developers, anxious to scale up, bid solar tariffs to all-time lows of INR 2.44 (down 44% in just 16 months) in the SECI Bhadla auction in May 2017. Steep fall in tariffs led to many tender cancellations (total 2.7 GW), tariff renegotiations and contractual uncertainty in many states including Uttar Pradesh, Jharkhand, Andhra Pradesh, Karnataka and Tamil Nadu.

India conducted its first wind project auction in February 2017 and again, the low bid tariffs – INR 3.46, about 25% lower than average FIT across the country – resulted in not only overnight cancellation of all FIT schemes, but also contractual uncertainty for all projects under construction. As a result, wind sector activity almost stalled after Q1. Tariffs fell to an unbelievable INR 2.64 in subsequent auctions.

There were many nasty surprises for developers on the execution side. Module prices started rising from May 2017 onwards and securing supplies even at USD 0.36/Wp (+20% in less than six months) became difficult. GST implementation and import duties on modules resulted in further increase of 10% in project cost.

UDAY, Government of India’s financial and operational reform package for DISCOMs, has been successful in improving their balance-sheets. But operational improvements – reduction in T&D losses, separation of agricultural feeders, transformer level metering – have proven much more difficult. Moreover, tariff increases have been below required levels meaning that overall, UDAY has failed to have the widely expected positive impact on power demand or payment track record of DISCOMs.

Domestic manufacturing continued in doldrums with imports meeting as much as 85% of total solar module demand in the last 12 months. The government seems keen to support manufacturing and is mulling over imposition of anti-dumping duty on solar cells and modules, creating another risk for project developers. But ironically, wind turbine manufacturing, a relative strength in the sector, suffered badly due to sharp fall in demand with manufacturers closing down plants and laying off workers.

International Solar Alliance (ISA), launched by India and France at COP 21 summit in November 2015, finally became a recognized organization under United Nations charter on December 6, 2017. It has initiated three programs so far – scaling solar applications such as solar water pumps and lighting systems for agricultural use, ensuring sufficient flow of affordable finance and promoting installation of solar mini grids. Another program on promoting rooftop solar on government buildings in member nations is believed to be in preparatory stage.

Majority of member nations are the least developed African nations or small island nations under threat from climate change;

Aggregation of demand through global tenders appears to be one of the central tenets of ISA to reduce cost and improve scale;

Securing large scale funding remains critical to ISA’s success but concrete commitments have not really materialized so far;

ISA was conceived with the objective of undertaking collective activities to ensure better access to finance and promotion of R&D, innovation and capacity building in the sector. The goal is to facilitate installation of 1,000 GW of solar capacity globally by mobilizing USD 1,000 billion in investments by 2030.

But turning the vision into tangible progress has been difficult. A total of 121 solar resource rich countries lying between the Tropic of Cancer and the Tropic of Capricorn had agreed to join the alliance. But so far, only 46 countries have signed up. And only 19 of these – mostly from Africa (Ghana, Guinea, Malawi, Mali, Niger, South Sudan, Somalia) and small island nations in Indian and Pacific Ocean (Fiji, Seychelles, Comoros, Cuba, Mauritius, Nauru, Tuvalu) – have ratified the framework agreement.

Using some lessons learnt from the Indian market, ISA plans to use aggregation of demand and global procurement to scale up deployment at reduced costs. There are talks of floating a global tender for installation of 500,000 solar water pumps in India, Bangladesh and Uganda. More details are awaited but we suspect that such schemes will face challenges because of differences in local requirements, technical specifications and payment systems.

As we stated previously, ISA’s real opportunity lies in raising international funding support to fight climate change. ISA has signed some tentative financial cooperation agreements with European Bank for Reconstruction and Development, European Investment Bank and the World Bank but there are no firm commitments.

It is not surprising that ISA is struggling to define its core agenda and rally support from other nations and international institutions. It is the first sectoral body of its kind. As a founding member, it is up to India to show clarity of vision and demonstrate leadership through progress in domestic market.

The UP state government has approved a new solar policy with a target of developing 10,700 MW of total solar capacity in the state by the year 2022. 60% of this target (6,400 MW) is proposed to be developed through utility scale projects and balance 40% is planned for rooftop solar systems.  The total target has been determined so as to achieve renewable purchase obligation of 8%. The policy has some attractive provisions on paper in line with many other states. But it lacks specifics and is very generic in nature leading us to question if it will make any material difference on-the-ground.

Key provisions are given below.

First 2,000 MW of capacity will benefit from ‘must run’ status with all subsequent capacity to be subject to merit order desptach;

Inter-state sale of power shall be eligible for waiver of 50% transmission/ wheeling charges and 100% electricity duty (for 10 years);

The state shall provide single window clearance and 100% waiver of stamp duty charges on purchase of land to all solar projects;

Rooftop solar systems can avail of net- or gross-metering connections although the policy is silent on tariff payable for power injected into the grid;

Rooftop solar systems shall be exempted from building bye-law requirements. Plus, systems less than 10 kW in size shall not require clearance from Chief Electrical Inspector;

Residential rooftop solar systems shall be offered state capital subsidies of up to INR 30,000 (USD 460) on top of the 30% subsidy available from central government;

It is notable that UP is one of the largest, most populous and poorest states in India. It is also the second largest power consuming state after Maharashtra. The state has a population of 200 million (16.5% of total) and a peak load requirement of around 17,000 MW (11%). It has one of the lowest per capita consumption in the country, less than half of leading states such as Maharashtra and Gujarat, and as much as 48% of the households are without access to grid power (source: Ministry of Power). Despite that, progress in renewables remains woeful – as of September 30, 2017, the land-locked state had solar capacity of only 500 MW (3.1%) and no wind capacity. In view of all these factors, it has a huge opportunity to leverage solar power to turn around the local economy. We have maintained for some time that UP could be a major demand driver for solar power in the coming years.

Unfortunately, UP remains a notoriously difficult state for doing business. Most project developers are wary of the state and the recent tariff renegotiation for a 215 MW state tender closed in 2015 has not helped alter that perception.

Tender floodgates set to open

After a prolonged slowdown and subsequent to MNRE’s recent announcement of a new RE rollout plan, we expect a flurry of new tender announcements in the coming months. Solar Energy Corporation of India has released a new tender for development of 2,000 MW wind power projects. Projects can be set up anywhere in India and will be eligible for connectivity to the inter-state transmission system. The premise is that projects would be set up in high wind zones for supply of power to hinterland states with no wind generation potential. Developers shall have 18 months for construction and can bid between 50-400 MW capacity. Auction is expected in about 3 months time.

Meanwhile, Karnataka has announced a new 860 MW solar tender for development of taluk-based projects along the lines of a similar tender two years ago. A list of 43 taluks (sub-districts) has been identified out of a total 177 taluks in the state and each taluk can have a maximum capacity of 20 MW. Tender documents are expected to be released shortly.

BRIDGE TO INDIA has released the latest edition of its India Solar Rooftop Map report. As per the report, India added new rooftop solar capacity of 840 MW in the 12 months ending September 2017. Total installed capacity as of September 2017 stood at 1,861 MW. The sector has grown at a CAGR of 83% from 2013 to 2017 but growth in 2017 is expected to slow down to 60%.

OPEX market share has risen to 30% from 19% in 2016 driven by higher capital availability and rapid scaling up by new players;

Maharashtra has overtaken Tamil Nadu to emerge as the biggest solar rooftop state with an 18% annual market share;

We are revising downwards our projection for total rooftop solar capacity addition by 2021 to 10.8 GW (-18%);

Our revised estimate for expected capacity addition in 2017 is 887 MW, 28% lower than our previous estimate. We attribute slower than expected growth to multiple factors – the anticipated boom in public sector segment has failed to materialize, sharp increase in module prices has slowed down pipeline with customers postponing investment decisions and net metering implementation is still a challenge in many states. We have revised our projections for the next five years with total estimated capacity addition of 10.8 GW by 2021 (down 18% over our previous estimate).

Commercial and industrial (C&I) consumers remain the biggest market segment accounting for 63% of total capacity and 66% of new capacity added in the last 12 months. Capacity addition in this segment grew at 86% in the 12 months. These consumers are driven by attractive savings of 20-50% offered by power from rooftop solar in comparison to grid power as well as growing capacity of OPEX providers such as CleanMax, Amplus and Cleantech Solar. Private capital is flowing more easily to this market – CleanMax raised equity capital of USD 70 million from Warburg Pincus and IFC and many more international utilities and PE investors are looking actively at entering this market. Rapid growth in the C&I segment has also helped in Maharashtra becoming the biggest rooftop solar state, leapfrogging Tamil Nadu, by adding new capacity of 148 MW (18% market share) in the last year.

Residential rooftop solar grew at a more sedate pace of 45%. But the major disappointment is low uptake in the public sector, which added only 173 MW in the last 12 months against our estimate of 200 MW. The Government of India is providing capital subsidies of up to 25% for building rooftop solar systems across all government facilities and identified total potential of over 7 GW. But progress has been slow because of complicated tender based allocation process and execution challenges. It is noteworthy that SECI’s 1,000 MW public sector rooftop tender, launched in December 2016, was subsequently scaled back to 500 MW and the final allocation, made one year after tender issue date, is only 226 MW.

In terms of market performance, CleanMax (15.8%), Cleantech Solar (15.0%), Amplus (9.5%), ReNew (8.9%) and Azure (6.6%) are the clear leaders in OPEX category. Delta (30.6%) and SMA (20.6%) have maintained their dominance in the inverter market but we expect SunGrow, Huawei, SolarEdge and Fronius to compete aggressively in future. The EPC sector, on the other hand, is getting ever more fragmented. Tata Power Solar is the clear market leader (6.2%) but it has lost market share. Combined market share of top ten EPC players is only 20%.

It is heartening to see rooftop solar market growing briskly but we believe that it is still performing below its potential. The government policy stance, apart from providing capital subsidies, has been lacklustre and much more needs to be done to improve net metering, support DISCOMs and launch customer awareness and quality assurance initiatives.

Since 2014, around 29 GW of utility scale solar tenders have been issued in India. Most of this capacity (81%, 23.5 GW) has been tendered by NTPC, Solar Energy Corporation of India Limited (SECI), distribution companies (DISCOMs) and other public sector entities for project development by private sector. But there is also a sizeable 19% (5.5 GW) tendered in the form of EPC contracts, where capital investment will be made by NTPC and other public sector companies including Karnataka Renewable Energy Development Limited (KREDL) and Andhra Pradesh Power Generation Corporation Limited (APGENCO).

It is interesting to note that actual progress on these two types of tenders is very different. For project development tenders, 36% (8.5 GW) of total issued capacity has been commissioned and 7% of the capacity has been cancelled. In contrast, for EPC tenders, only 18% (930 MW) has been commissioned and as much as 29% stands cancelled.

Figure: Status of projects under project development and EPC tenders issued since 2014

Source: BRIDGE TO INDIA research

The poor progress in EPC tenders is as predicted by us last year. Despite that, public sector companies continue to bring out more EPC tenders – more than 50% of new tenders issued in Q3 2017 were structured as EPC contracts.

Power from EPC tender based projects is significantly more expensive than from project development tenders;

Most EPC tenders issued by public sector companies face long or indefinite delays in allocation;

Participation of state-owned companies at a time of aggressive competition among private companies is difficult to understand;

As against an average 2-5 months taken between announcement and allocation of project development tenders, allocation of EPC tenders by public sector companies has taken an average of 6-8 months. Some of these tenders including NLC Tamil Nadu 500 MW and NLC Odisha 250 MW were issued almost a year ago but they have not yet been allocated. Moreover, some tenders including CIL 200 MW and KREDL 200 MW have been issued, cancelled and subsequently reissued with modified requirements. The frequent cancellations as well as delays reflect low market interest for such tenders.

EPC tenders from public sector companies stipulate more stringent technical specifications resulting in higher execution costs (and presumably, better quality). Moreover, many EPC tenders have domestic content requirement (DCR) stipulation again resulting in 5-7% extra capital expenditure. Higher capital expenditure coupled with conservative financial assumptions means that the final tariff offered to the DISCOMs is about 20-30% higher than that offered by private sector developers, who are willing to make more aggressive operating and financial assumptions. DISCOMs are understandably not too keen on buy such power.

Perhaps because of slow progress in EPC tenders, we have observed a strange practice where public sector companies are now bidding aggressively against private sector competitors in project development tenders. Recent cases include NLC winning 709 MW capacity in the Tamil Nadu 1,500 MW tender and Gujarat Industries Power Company Limited (GIPCL) and Gujarat State Electricity Corporation Limited (GSECL) together winning a total of 150 MW in the Gujarat Urja Vikas Nigam Limited (GUVNL) 500 MW tender. As per our estimates, expected returns for both these tenders are significantly below market expectations.

There was a strong public sector role envisaged in development of solar projects back in 2013/14, when capital costs were much higher and investment appetite of private sector was not established. Today, when there is ample private capital available for the solar sector at very attractive terms and when there is a slowdown in tender issuance, there is absolutely no justification for public sector to crowd out private investments. The government needs to rethink the role of public sector companies in clean energy sector.

The Ministry of New and Renewable Energy (MNRE) has announced a new RE rollout plan entailing 91 GW of new solar and wind project tenders by March 2020. It is an ambitious attempt by the new MNRE administration to address private sector concerns about slowing project pipeline and lack of a clear roadmap. It envisages 67 GW of new solar project tenders and 24 GW of new wind project tenders by March 2020 as well as 20 GW of integrated solar module manufacturing capacity addition. With these planned projects, the new Minister for power and new and renewable energy, R.K. Singh, believes that India would “…comfortably achieve a rather conservative RE target of 175 GW by 2022 and even exceed it….”

The new plan provides new annual targets – 17 GW of solar projects are expected to be tendered out by March 2018, another 30 GW in the next 12 months and a further 30 GW in the subsequent 12 months. Similarly, 4 GW of wind projects are expected to be tendered out by March 2018, another 10 GW in the next 12 months and a further 10 GW in the subsequent 12 months. In total, it equates to issuing new tenders of 3.5 GW capacity every month – in contrast to an average of less than 0.6 GW every month in the last year. The plan includes development of up to 10 GW of capacity to come from floating solar power projects, offshore wind and hybrid solar-wind power systems.

The Minister has also separately laid out broad contours of a new domestic manufacturing policy– 30% capital subsidy is proposed to be allocated to integrated manufacturers (from polysilicon extraction to module manufacturing) on the basis of auctions. The winning bidders shall also be given priority in specific project development tenders.

Quite how the new plan makes sense in the current political and financial set up with weak power demand growth and stretched DISCOM finances is not clear to us. It seems more like a simple mathematical exercise rather than a well-considered, rigorously debated plan. We noted last week that the 175 GW target for 2022 is too ambitious in the context of India’s power needs and actual performance is lagging significantly behind targets compelling the government into making ever bolder announcements. The new plan has no detail on how it will address shortcomings of the earlier plan except the Minister stating that Renewable Purchase Obligations (RPOs) are mandatory and need to be adhered to strictly.

We find it hard to take the new plan seriously when it probably doesn’t even have support from other parts of the central government. The state governments and DISCOMs will also fiercely resist any encroachment on their decision-making authority. It lacks sufficient detail, is off-putting for all stakeholders and instead of providing comfort to the private sector, it unfortunately presents a picture of disarray and confusion.

The Directorate General of Anti-Dumping and Allied Duty (DGAD) is currently completing an investigation into imports of solar cells and modules from China, Taiwan and Malaysia subsequent to a petition filed by The Indian Solar Manufacturer’s Association (ISMA). The petition is similar to an earlier petition filed in 2012, wherein DGAD had recommended an anti-dumping duty of USD 0.11-0.81/Wp on cells and modules but the Ministry of Finance ultimately decided to not impose any duties to protect downstream project development activity.

This time around, the industry is almost unanimously of the view that an anti-dumping duty will be announced soon as the government is keen to support local manufacturing. But the government still faces a dilemma as to how to balance the needs of solar manufacturers vs project developers and investors?

First, we should assess if the imposition of anti-dumping duty will provide the envisioned boost to domestic manufacturing? The Chinese manufacturers dominate Indian market because their products are about 10% cheaper than Indian counterparts. Most of the Indian manufacturers have sub-scale capacities, high cost base and are completely reliant on imported technology and raw materials. High cost of capital and electricity, poor infrastructure and lack of domestic eco-system means that the odds are stacked against them. Trade barriers may provide short-term relief but are unlikely to change long-term competitiveness of domestic manufacturers. That is why many leading Indian and international companies including Welspun, Sterling & Wilson, Trina Solar, Longi Solar, JA Solar etc have examined setting up manufacturing capacity in India but ultimately decided against it. Despite ten-fold growth in domestic demand in the last four years, Adani is the only new player to make a notable greenfield manufacturing investment so far.

Actual domestic production of modules and cells in FY 2016-17 was a mere 1,746 MW and 591 MW as against total demand of 9,188 MW. Though duties should provide existing domestic manufacturers with an opportunity to grow sales at profitable prices, the key question is whether India will be able to attract enough investments to create a thriving solar manufacturing sector. The European Union and USA have both imposed various protectionist measures in the past, but imports have kept rising and domestic manufacturing has not taken off. The Chinese have been expanding internationally and may be able to circumvent duties by routing exports from other locations.

As per our analysis, if anti-dumping duty is announced in the near future, it will impact about 10,000 MW of pipeline projects. Imposition of 30% duty will increase project cost by about 18%. Developers, already struggling with price rises due to GST and import duties, have no room to absorb additional costs. Unless these projects are grandfathered or the DISCOMs are willing to renegotiate PPAs, the risk of project abandonment for many of these projects is very high. The sector is already reeling from a slowdown in new project procurement and petition has increased uncertainty about the future of upcoming tenders.

The government faces a tough task of striking a right balance between the ambitious ‘National Solar Mission’ and ‘Make in India’ initiative. In our opinion, the imposition of anti-dumping duty will significantly disrupt the former without giving any material impetus to the latter.

Please read our full report on anti-dumping duty and its impact on different stakeholders.

Recently, there was a news report that the Indian government wants to issue a single 20 GW solar tender to boost solar project development and domestic manufacturing. R.K. Singh, the new Minister for Power and New and Renewable Energy, has also publicly stated that he wants to auction 4.5 GW of wind power contracts in the next few months followed by 20 GW in the next two years for expediting achievement of ambitious clean energy targets. To put these announcements in perspective, India’s total operational solar capacity is 18 GW and the maximum wind capacity commissioned in a year so far is 5.4 GW in 2016-17.

There was record solar and wind power capacity of 5.5 GW and 5.4 GW respectively commissioned in 2016-17 but that was still significantly below the combined yearly target of 16 GW. 2017-18 capacity numbers are also likely to come well under targets.The new central government regime, under pressure from slowing procurement and issues relating to GST, import duties and anti-dumping duty, seems compelled into making bold announcements. But these mega-announcements are not convincing.

The recent Economic Survey, prepared by the Ministry of Finance, argued that India should ‘calibrate’ (i.e. reduce) investments in renewables in view of the underutilization of coal fired power stations causing major losses to investors and lenders. We partly disagree with their methodology, but agree that the wider power demand-supply dynamics and inter-play between different sources of power will have an important bearing on RE demand in the coming years. India’s aggregate power demand has grown at a CAGR of 4% over the last five years, in contrast to 11% and 10% growth in coal-fired capacity and total power generation capacity respectively in the same period. Demand growth has actually slowed down to 3.7% this financial year (until September 2017) and the result is falling capacity utilization in the coal fleet and all-time lows for cost of power traded on the exchanges.

DISCOMs buy bulk of their power under long-term PPAs under a two-part tariff structure. So long as their requirement is met sufficiently from these PPAs and/or short-term power from the exchanges at prices below INR 3.50 (USD 0.05), they will be reluctant to buy new (variable) RE power. Unfortunately, the Renewable Purchase Obligations (RPOs) are not being enforced by regulators. A large majority of Renewable Energy Certificates (RECs) remain unsold. Our analysis shows that over the next 3-4 years, RE capacity will grow by only about 10 GW per annum in a status quo scenario, in contrast to the government target of over 20 GW per annum.

The current situation of low demand, increasing competition and falling tariffs is causing angst in the private investor community. Leading Indian and international investors have made large commitments to the sector drawn in by the 175 GW target but feel hamstrung. An overly ambitious target is off-putting for all stakeholders with the risk that nobody takes the government seriously. The government needs to provide strong policy vision and clarity to the sector by laying out a compelling path for realizing the 175 GW RE target, or revising it downward to make it credible.

M&A activity in the Indian renewable sector has been building up for some time but actual deals have been slow to materialize. Last month, Equis announced the sale of its 4.7 GW Asia pacific renewable IPP business to a consortium comprising Global Infrastructure Partners (GIP), China Investment Corporation and Public Sector Pension Investment Board of Canada. The Equis portfolio comprises over 600 MW of renewable assets in India including 414 MW of operational wind and 130 MW of operational solar assets. Meanwhile, First Solar sold its entire 190 MW of operational solar portfolio to IDFC Alternatives, an India based infrastructure PE fund in July 2017.

Sector M&A is highly desirable as it allows for optimal allocation of risk capital and consolidation in a highly commoditized sector;

Valuation mismatch has been preventing many deal closures but buyers have the upper hand;

Sellers need to be realistic as the longer they wait, the higher the risk of deals turning sour because of due diligence problems;

There are many positives from the M&A activity. First, the strong profile of buyers comprising sovereign wealth funds, pension funds and infrastructure PE funds brings more patient capital and is a sign of confidence in the Indian RE business. Second, the sellers free up their capital for potential use in development of further assets.

The big puzzle is that there are not more such M&A announcements. The RE business structurally lends itself to consolidation as it has almost no entry barriers and is highly commoditized. Scale brings important benefits in fund raising and portfolio management. With project development activity slowing down and the auctions becoming extremely competitive, it is natural for small to mid-sized developers to look to exit the business or simply churn their portfolio. Some of the rumoured sellers include Ostro Energy (portfolio of over 1,000 MW including under construction assets), Essel Infra (710 MW), Orange Power (600 MW), Shapoorji Pallonji (454 MW), SkyPower (350 MW), Fortum (185 MW) and FRV (100 MW). The buyers, on the other hand, are developers or investors that have raised substantial funds and are keen to deploy those to build up scale. Potential buyers include Greenko, ReNew, Hero Future, Sembcorp, Hinduja and Macquarie, amongst others.

Slow progress in deal closures can be explained by two main hurdles. First, there is still a wide valuation gap between buyers and sellers. Second, due diligence on RE assets can often throw nasty surprises. Payment delays, grid curtailment, land acquisition and poor construction quality issues can scare away buyers. Valuation mismatch is the easier of the two hurdles. Buyers are holding out for leveraged equity returns of 14-15% and we believe that sellers have no choice but to give way for more deals. If they wait for too long, they run the risk of more due diligence issues arising over time and buyers turning away. Moreover, there is a view that debt financing cost, which has been coming down for last three years, may have bottomed out. In other words, if you are an interested seller, better move fast now.

There has been a significant lull in announcement of utility scale solar tenders from the Solar Energy Corporation of India (SECI). It has announced only one tender – Bhadla 750 MW – this year in comparison to around 5 GW of new tenders in 2016. There have been expectations of new tenders totalling in Odisha, Chhattisgarh, Delhi, Karnataka, Andhra Pradesh and Bihar but none of these have materialised until now. Furthermore, SECI has again extended bid submission timelines for the ongoing Bhadla-III (250 MW) and Bhadla IV (500 MW) tenders. These projects were supposed to be allocated to developers in Q3 2017. Meanwhile, NTPC has also not made any progress on new guidelines for development of solar projects.

Tendering delays have been caused by multiple factors. We have written extensively about weak growth in power demand affecting DISCOM appetite to issue any new tenders. But equally importantly, the new competitive auction guidelines announced in August 2017, which require use of standard bidding documents, have impacted the timelines. We understand that delays in finalization of these documents is holding up progress of many tenders. Our discussions with sector players also suggest that the Ministry of New and Renewable Energy (MNRE) decision making has slowed down considerably, possibly due to many changes in senior personnel, including appointment of the new minister.

But the developers are getting restless. Many of them have raised funding and are waiting on the side-lines for an opportunity to bid for new projects. These developers have been left high and dry due to reduction of solar power procurement. Due to the vacuum created in the project development landscape, there is a pent-up demand forcing auction tariffs down. They are also concerned about the “looming” anti-dumping duty imposition on solar modules and how it may affect bidding behaviour.

As for the Bhadla projects, it is likely that this tender submission will get delayed again and the reverse auction will take place early next year. Whether tariff bids will be as competitive as the previous Bhadla auction is debatable. Developers such as Acme, which won 200 MW at a tariff of INR 2.44/kWh (4¢) in the auction, has recently expressed “regret” as Chinese module suppliers have increased pricing over the last 3 months lowering return expectations. Other costs have also gone up on account of GST implementation. If there were to be an auction today, we would expect tariffs to move up to INR 2.80/ kWh. But rising tariffs will create another problem – the DISCOMs may walk away creating even more problems for the sector.

For more than 2 years, there have been persistent concerns that aggressive bidding in solar auctions is storing up trouble for the sector. Fortunately for the sector and the winning bidders, equipment costs kept falling more sharply than market expectations – 20% and 25% in 2015 and 2016 respectively.

Developers have ridden the wave of falling costs and project delays to make handsome profits. Example – at the time of bidding in Madhya Pradesh 300 MW tender in Q2 2015, module cost was USD 0.52/ Wp. Using this cost and median winning tariff of INR 5.35/ kWh gives us a project IRR of 13%. But by Q4 2016, when some developers actually constructed projects stretching time limits under the tender, module costs had fallen by over 30% and actual project IRR was up to 18%.

Unsurprisingly, bidding has become increasingly more aggressive over time. It is now standard industry practice to bid based on anticipated fall in costs. Analysis of Bhadla auction in May 2017 suggests that to achieve a project IRR of 12%, developers were banking on module costs falling to USD 0.22/ Wp. The aggressive behaviour has been worsened by slowdown in tenders making developers desperate to win projects at any cost. In our report titled, Analysis of utility scale solar tenders in India, we stated, “Low equity IRRs suggest that the Indian developers, in particular, are not pricing risks fully and too much faith is being placed on everything turning out positive. The sector has been very lucky with rapid falls in solar module prices easing most of the financial and execution challenges. Any dislocation in module supply chain or even a price stabilization will spell trouble for winning bidders.”

Indeed, module costs have inched up to USD 0.36/ Wp today (+20% over 6 months), when developers were assuming that costs would fall to USD 0.25/ Wp or even lower by this time. Unfortunately, that’s not all. GST implementation has increased total project costs by about 5% and developers are further forced to bear import duties of 7.5% on modules. There is also a tangible threat of anti-dumping duties. The result is that projects allocated in the last six months (Bhadla 750 MW, NTPC 250 MW, Tamil Nadu 1,500 MW, Gujarat 500 MW) are facing an uncertain future. Our calculations suggest that based on today’s cost levels, project level returns are down to low single digits in an optimistic scenario.

This challenge is not restricted to solar power sector. As wind moves to a competitive auction regime, it inevitably faces the same concerns. Could RE suffer the same fate as thermal power or roads, where irrational pricing led to many projects being abandoned or financially distressed? Our estimation is that because of their short gestation period, well-capitalized sponsor groups and relatively small project sizes, most RE projects will come online as planned. But investors will be praying for significant reduction in costs in 2018 and delays are highly likely. We also feel that the lenders will exercise sufficient caution ensuring that they are largely protected from any downside.

The Government of India has launched SAUBHAGYA scheme for providing universal electricity access to all households in India by March 2019. The government estimates that there are 46 million unelectrified households in India at present and this scheme will primarily target the 30 million below poverty line households not covered by other ongoing electrification schemes. Target households will be provided free or nominally priced connections (but not free electricity). Households in remote, inaccessible areas will be offered decentralised solar power generating systems of 200-300 Wp each with integrated batteries and 5 LED lights, a fan and a power socket.

The scheme would potentially have huge multiple economic benefits for the country although the government estimate of 7% demand growth is highly optimistic;

The government has announced multiple schemes with seemingly similar objectives and it is not clear how the SAUBHAGYA scheme will be different;

Despite provision of decentralised solar power generating systems for remote locations, the scheme is likely to deal a blow to the private off-grid businesses unnerving investors and consumers alike;

The new scheme is operational with immediate effect and is budgeted to cost INR 163 bn (USD 2.5 bn) at an average of INR 5,400 per connection (USD 84). Funds will be used to create last mile infrastructure including poles, cables and electricity meters. Up to 75% of the funding shall be provided by the Indian government (90% for some north-eastern states and union territories) with balance coming from respective DISCOMs, state governments and/or borrowings.

The scheme has been launched with much fanfare. Potentially, it is an important policy development as it would not only improve social, educational and economic status of millions of people but also lead to a much-needed power demand boost. The Ministry of Power believes that the scheme will grow power demand by 80 bn kWh (+7%). This estimate seems highly optimistic to us considering that most target households will be fractional users of electricity. Also, it is important to remember that electricity connection in India does not mean getting regular, reliable electricity. Power cuts are common across the country despite a power ‘surplus’ situation. We estimate actual uplift in power demand to be closer to 2%.

It is also difficult to understand how this scheme is different from multiple overlapping schemes announced in the past. The DDUGJY (Deendayal Upadhyaya Gram Jyoti Yojana) scheme was launched in 2015 with the aim of electrifying all 18,000 unelectrified villages by May 2018. The Modi government also launched the ‘24×7 Power for All’ programme in 2015 with the objective of providing 24×7 power to all consumers across India by 2019. It is hard to escape the conclusion that the SAUBHAGYA scheme is old wine in new bottle.

The provision of decentralised solar power generating systems with integrated batteries for households with no grid supply is a heartening feature although we remain cautious. Such systems would cost about INR 35,000 (USD 540) per household and given the limited funds availability, their use will be highly restricted in our view. On the contrary, launch of this scheme is likely to hurt prospects of multitude of off-grid operators offering market based solutions in the country.