Category: Projects

The Indian solar market is being tested to its limits. GST has increased execution costs. Module prices have shot up when bidders were factoring in another 20% price decline by the end of this year. Chinese module suppliers are even reluctant to supply to India. The government is considering anti-dumping duty petition to support domestic solar manufacturers. But perhaps, the biggest challenge facing the sector is slowing power demand. Lack of visibility over project pipeline is forcing developers to bid aggressive tariffs and reconsider strategic options including consolidation. It is therefore relevant to ask what does the future pipeline scenario look like?

Seven states – Karnataka, Andhra Pradesh, Tamil Nadu, Telangana, Rajasthan, Madhya Pradesh and Punjab – together make up over 80% of India’s total installed and pipeline capacity of 27 GW;

Other states continue to lag and progress is expected to be slow because of surplus power situation in the country;

After peaking at about 8 GW in 2017, India’s utility scale solar capacity addition is expected to stabilize at a much lower level of 5-6 GW per annum for next few years;

The ten largest states in India have power consumption greater than 50 billion units each and together, they account for 75% of India’s total power demand. These states, located mainly in central and southern India, should also account for bulk of solar power demand in the country. Five of these states – Karnataka, Andhra Pradesh, Tamil Nadu, Telangana and Rajasthan – have led the sector growth so far and tied up more than 3 GW of solar capacity each. Madhya Pradesh and Punjab have tied up another 2 GW and 1 GW respectively. These seven states together make up for over 80% of India’s total installed and pipeline capacity of 27 GW. They have front-loaded their solar power demand and are well ahead of their annual targets determined by the Ministry of New and Renewable Energy (MNRE). Solar activity in these states is inevitably expected to slow down going forward and indeed, some of them are already cancelling ongoing tenders.

Source: BRIDGE TO INDIA research

In contrast, combined installed and tendered pipeline capacity of the three largest power consuming states, Maharashtra, Uttar Pradesh and Gujarat, is lower than that of Karnataka on a stand-alone basis. In May 2017, we predicted that Uttar Pradesh could be a dark horse for India’s new solar allocations. Since then, it has issued a 750 MW tender under SECI scheme and is believed to be considering further tenders. Maharashtra’s power consumption is almost three times that of Andhra Pradesh but its installed solar capacity is just one-third in comparison. Gujarat, a solar frontrunner back in 2012-13, is also lagging way behind. It added a paltry 211 MW in the last two years against almost 1 GW in neighbouring Rajasthan and 2 GW in both Andhra Pradesh and Telangana.

Unfortunately, the prevailing power surplus situation in India suggests that slowdown in solar power demand may continue for 3-4 years. We expect India’s utility scale solar capacity addition to peak in the current year (at about 8 GW) and then stabilize at a much lower 5-6 GW per annum for the next 2-3 years. Rooftop solar is expected to, however, provide some relief by continuing to grow at a healthy rate and becoming a 3 GW per annum market by 2020.

NLC India Limited, a government of India owned coal mining company, recently completed auction for a 20 MW solar project integrated with 28 MWh storage capacity in Andaman & Nicobar Islands. This is the first utility scale storage tender in India to announce results. The tender includes provision of complete EPC and O&M services for twenty-five years. Mahindra Susten won the auction with a final all-in price of INR 2.99 bn (USD 46 mn).

Replacement of diesel fired power is the most obvious application for solar cum storage plants both commercially and environmentally;

Large variation in bid prices suggests inconsistent understanding of technical specification amongst bidders;

Utility scale storage adoption in India is expected to be slow as DISCOMs are highly cost sensitive and lack awareness of its technological potential;

There have been four other utility scale storage tenders in India until now by Solar Energy Corporation of India (SECI) and NTPC in the states of Andhra Pradesh, Karnataka and Andaman & Nicobar Islands respectively. But all these tenders, with aggregate capacity of 35 MWh, have been scrapped without any reasons being given.

Andaman & Nicobar Islands is a group of islands in the Bay of Bengal with a total population of 400,000 and aggregate peak demand of 67 MW. The islands get their power mainly from diesel gensets and replacing them with integrated solar cum storage plants is highly desirable from an economic and environmental perspective. As seen in the US, Australia and elsewhere, replacement of diesel fired power is the most obvious application for solar cum storage plants. High cost of storage is not a deterrent because of the very high cost of diesel fired power of about INR 15/ kWh (USD 0.23).

The NLC tender has fairly stringent technical specification with performance warranties and associated penalties for full 25-year duration of the contract. Despite that, the auction received an enthusiastic response from players across the solar (Mahindra, Adani, Hero, Sterling & Wilson and Ujaas, amongst others) and storage (Exide, BHEL) spectrum. There was a huge variation in prices particularly for the EPC component – ranging from INR 1.79 bn for Mahindra Susten to INR 3.42 bn for Hero – suggesting inconsistent understanding of technical specification. SECI’s storage tenders have also faced this problem in the past with bidders struggling to interpret technical requirements.

It is encouraging to see this tender progress but as we stated in a recent note, India is doing very little to capture energy storage opportunity. The underlying problem is a mix of high cost sensitivity and lack of awareness about technical potential of storage. DISCOMs believe that they can use a mix of power cuts and curtailment to balance power demand and supply rather than committing to the use of expensive storage solutions. Our view is that storage will need 3-4 years of techno-commercial advancements before finding scale in India.

Solar Energy Corporation of India (SECI) completed a 1,000 MW wind project auction last week. Tariffs fell to a new low of INR 2.64 (US¢ 4)/ kWh. Winning bidders include ReNew (INR 2.64, 250 MW), Orange Power (INR 2.64, 200 MW), INOX Wind (INR 2.65, 250 MW), Sembcorp Green Infra (INR 2.65, 250 MW) and Adani (INR 2.65, 50 MW).

This auction comes 7 months after the first wind auction in India when tariffs were observed to be around INR 3.46 (US¢ 5.3)/kWh, implying a price reduction of 24% in a relatively short time.

Parity in prices means that there is likely to be further alignment between wind and solar power procurement policies and regulations;

The main reason for the reduced tariffs is simply increased competition;

Rapid reduction in tariffs makes wind power more attractive but also increases dissonance risk for DISCOMs who have agreed to previously pay much higher feed-in-tariffs;

Developers will sign 25-year, fixed price PPAs with SECI, which will in turn sell power to DISCOMs in Uttar Pradesh, Bihar, Jharkhand, Assam and Goa. The developers are free to locate projects anywhere in India and connect to the more reliable inter-state transmission network.

Fall in tariffs makes wind power competitive with solar power (last auction tariff of INR 2.64/ kWh in Gujarat last month) and significantly cheaper than other greenfield sources including thermal, hydro and nuclear. It helps in boosting growth prospects of wind power, which has been struggling vis-à-vis solar power. Wind capacity addition in FY2017-18 is expected to slow down to a mere 1,000 MW or even less in comparison to 5,300 MW of capacity addition in FY2016-17. Price parity also means that there is likely to be further alignment between wind and solar sectors in procurement policies and regulations.

With inter-state transmission charges waived until December 2019, resource rich states in western and southern India can continue to build more capacity to supply power to inland states in north, east and north-east (mainly Punjab, Haryana, Uttar Pradesh, Bihar and West Bengal). Hopefully, cheaper power will pave way for more demand from these states as they continue to lag behind in power supply as well as RPO compliance.

The latest auction was an intensely fought affair going into early hours of next morning. The inevitable question is what explains the 24% tariff fall in just seven months? Wind turbine prices have declined about 8-10% because of the slowdown; debt cost has also come down slightly by about 0.50% in this period but that together accounts for only about 7% tariff reduction. Another relevant but subjective factor is change in offtaker from PTC India, a power trading company (partly owned by the Government of India) to SECI, which enjoys better credit rating. But the main reason is simply increased competition. After the end of feed in tariff regime, states have been slow in coming out with new tenders. This slowdown is forcing developers to be more aggressive to win capacity and meet commitments made to their investors.

We believe that the new wind tariffs are too aggressive. As we stated in a recent blog, fall in tariffs makes renewable power more attractive for consumers but is creating risks for investors and lenders. It also further increases dissonance risk for DISCOMs, which had previously agreed to pay much higher feed-in-tariffs.

Acme Solar and Sembcorp have announced plans to access capital markets for raising equity capital. Acme has filed preliminary papers for an INR 22 bn (USD 336 mn) initial public offering (IPO) with Securities Exchange Board of India (SEBI). Sembcorp has said that it may list its Indian unit either in India or elsewhere. Azure Power was the last Indian renewable IPP to list on New York Stock Exchange (NYSE) about 12 months ago. Our understanding is that Renew Power is also keen to launch an IPO sometime in the coming year.

Financial investors looking for exits and developers looking to raise capital for new projects is creating urgency in equity market activity;

Deals are held up because of mismatch in pricing expectations and portfolio performance, investors are likely to take a cautious view because of poor performance of previous issues from both conventional and renewable IPPs;

Investors are driving hard bargains and closures are likely only for credible developers at the right price levels;

Solar sector has seen significant capacity addition and allocations in the past two years and developers are scrambling to raise capital to sustain business growth. Nine private developers have built up solar portfolios exceeding 500 MW in the past couple of years – Adani (2,038 MW), Acme (1,713 MW), Renew (1,659 MW), Greenko (1,407 MW), Tata Power Renewable (1,382 MW), Azure Power (1,102 MW), Essel Infra (710 MW), Engie (694 MW) and Hero Future Energies (540 MW) in addition to wind capacity as of September 2017. Financial investors, in particular, are looking for exits and that is creating urgency in primary and secondary equity market activity. Adani, Greenko and Tata Power Renewable, because of their large portfolio size, are the other potential candidates for an IPO in near future.

Unfortunately, the infrastructure investment trust (InvIT) and M&A routes do not appear very promising for renewable IPPs. The InvIT structure enjoys tax and regulatory benefits over conventional IPOs but poor performance of initial InvITs – IRB and India Grid, both trading at about 5% below their issue price – has spooked the markets. Investors, financial or strategic, are aware of key risks facing the sector – slowing pipeline and falling tariffs, poor DISCOM credit, uncertainty about grid availability, plant performance etc. They have burnt fingers in thermal power IPOs (Reliance, Jaiprakash, Adani) and even Azure Power has been trading at more than 10% below its issue price.

In such an environment, lots of portfolios, across market, are available for sale or IPOs but deals are held up because of mismatch in pricing expectations. Our view is that investors are driving hard bargains and closures are likely to happen only for credible developers at the right prices.

The US International Trade Commission (USITC) has unanimously agreed that solar imports have caused “serious injury” to local manufacturers. Suniva and SolarWorld are calling for duties of US¢ 40/ Wp on imported cells and a floor price of US¢ 78/ Wp on modules. But USITC may consider all possible remedies including new tariffs, minimum prices or import quotas. Solar industry in the US is against the suggested trade remedies, which they say will lead to market contraction and substantial job losses. USITC has the deadline of November 13 for finalizing its recommendations to the President, who has the authority to accept, reject or modify the recommendations.

Trade barriers are expected to have a huge negative impact on the downstream solar industry without any guarantee of positive impact on the manufacturing industry;

Past protectionist measures in the US, Europe and India have almost completely failed to meet their objectives;

It is highly unlikely that new manufacturing investments will be made at a time of long-term policy uncertainty in an industry facing global oversupply and rapid change;

The reason for a rare use of Section 201 for this investigation is that existing anti-dumping duties on solar imports from China and Taiwan were easily circumvented. But Section 201 is viewed as a relatively blunt instrument, open to challenge under international trade laws. The last Section 201 investigation on steel imports in the US in 2001 resulted in tariffs, which were later withdrawn following a successful challenge by China at WTO.

It appears unlikely that the solar trade case will stand up to scrutiny in the long-term or that it will lead to a genuine long-term solar manufacturing revival in the US. Analysts have pointed out that trade barriers would have a huge negative impact on the downstream solar industry without any guarantee of positive impact on the manufacturing industry. It is also abundantly clear that protectionist measures such as anti-dumping duties in the US and Europe or Domestic Content Requirement (DCR) in India have almost completely failed to meet their objectives.

The Indian government may feel compelled to support domestic manufacturing believing that the solar industry can absorb anti-dumping duties in light of steep fall in solar equipment costs. But duties on imports from four countries (China, Taiwan, Malaysia and the US), currently under investigation, can be easily circumvented. Leading Chinese suppliers such as Trina Solar and GCL Poly have manufacturing facilities in other countries such as Thailand and Vietnam, which are not part of the investigation. As in the US, any trade barriers in India are likely to result in market uncertainty and downsizing, not ideal conditions for making new manufacturing investments in an industry facing global oversupply.

Gujarat 500 MW tender result

Last week, Gujarat conducted auction for a 500 MW state policy tender. The lowest tariffs were quoted between INR 2.65-2.67/ kWh by GRT Jewelers (90 MW), Gujarat State Electricity Corporation Limited (75), Gujarat Industries Power Company Limited (75) and Azure Power (260). These prices may suggest a market correction after the intensely competitive Bhadla auction at INR 2.44/kWh. But our calculations show that these prices are even more aggressive because of changes in market circumstances – implementation of GST, non-availability of solar park, spike in module prices and the threat of anti-dumping duties. In fact, most prominent developers including Fortum, Renew and Orange Renewables stopped bidding at around INR 2.80/kWh mark and the auction was closed in record 74 minutes.

Average clearing price for power on the energy exchange has been inching up from INR 2.61/kWh seen on 2rd September 2017 and spiked up to a high of INR 9.91/kWh last week. Current prices are in the range of INR 5.00 – 6.20/ kWh range. These high prices are in stark contrast to the past two years, when power was selling at near a ten-year low of INR 2.20-3.80/kWh. Exchange prices are regarded as a barometer of overall power demand-supply balance in the country and low prices have been seen as an indicator of excess supply situation.

The current spike in spot prices has come about largely because of supply side issues rather than any sustained pick-up in demand ;

Shortfall arising from scheduled maintenance of 10 GW of thermal and nuclear capacity, reduced wind and hydro generation and an uptick in demand could not be compensated through India’s underutilized thermal fleet due to a seasonal coal shortage;

The spike sends a signal to consumers and DISCOMs that they need to proactively manage their power procurement plans and that reliance on short-term trading comes with its own set of challenges;

DISCOMs meet bulk of their power requirement through long-term purchase contracts under fixed or cost-plus prices. Volume of power traded in the market is only about 150 million units per day, around 4 per cent of total generation of around 3,750 million units per day. Despite low trading volumes, spot prices can be a very useful indicator of supply-demand situation in the country.

Power deficit in India has reduced consistently over the past 5 years. This is primarily because power demand growth has been sluggish even as India continued to add generation capacity at a rapid pace. Co-relation between spot prices of power and power deficit can be seen in the chart below.

Figure – Power spot prices and deficit

The current spike in spot prices has come about largely because of supply side issues rather than any sustained pick-up in demand. There have been slippages in hydro and wind power generation owing to reduced water levels in reservoirs in south India and shortfall in wind resource at the end of monsoon season. This, combined with scheduled maintenance of some thermal and nuclear plants with capacities adding up to 10 GW, and a demand pick from agricultural and air-conditioning loads, has led to a short-term power deficit in the country. Thermal power plants were operating at 58% utilization rate in August but they have been unable to pick up the slack due to seasonal shortage of coal during monsoon season.

Most analysts are unanimous that spike in spot tariff is likely to be temporary given the moderate demand growth and low utilization of thermal projects.

What are the implications for the solar sector? Existing projects are unaffected because they mostly sell power under fixed price, take-or-pay agreements. Demand for new solar projects, which has been affected by the surplus power situation, is linked to secular growth in demand and unlikely to get any boost from the shot-term price movements. But the spike does send a signal to consumers and DISCOMs that they need to proactively manage their power procurement plans and that reliance on short-term trading comes with its own set of challenges.

Andhra Pradesh recently became the latest state to notify forecasting, scheduling and deviation settlement regulations for solar and wind power generation. It joins Karnataka, Chhattisgarh, Jharkhand and Uttarakhand, who have already announced these regulations. Six other states including Rajasthan, Gujarat, Madhya Pradesh, Tamil Nadu, Odisha and Manipur have announced draft regulations. Together, these states account for about 70% of operational and under development solar capacity. The primary objective of the new regulations is to make generators more accountable through enhanced forecasting requirements and penalizing them for deviation. Once operational, this should help facilitate large scale grid integration of intermittent renewable power while maintaining grid stability.

Industry experts believe that compliance cost for a single project, including penalties, may be around INR 0.02/kWh;

Generators can comply with the regulations on an individual basis or on a ‘virtual pool’ basis by joining others;

The regulations are highly desirable and developers would happily bear additional compliance cost in return for reduced curtailment risk;

The national power regulator, Central Electricity Regulatory Commission (CERC), first announced a regulation for deviation settlement mechanism back in 2014 and has made three subsequent amendments. All state regulations essentially follow the CERC regulation with some minor variations. For example, CERC regulations apply to wind farms with capacity greater than 10 MW and solar projects with capacity greater than 5 MW but Tamil Nadu and Andhra Pradesh regulations state applicability to all wind and solar generators selling power within the state. Similarly, penalties and permissible deviation limits vary marginally from state to state.

Under the new Andhra Pradesh regulations, power generators are required to provide State Load Dispatch Centre (SLDC) with day ahead and week ahead schedule in 15-minute time blocks with effect from 1 January 2018. They can revise their schedule once every ninety minutes – maximum 16 times a day for wind and 9 times a day for solar power. Penalties are proposed for deviations exceeding 15%. For deviations above 15%, penalties can be as high as INR 0.50-1.50/kWh.

Forecasting and scheduling regulations are commonplace in most of the western countries. As a result, there is abundant and growing expertise in technical and statistical modelling techniques, which can be replicated in India. Compliance will entail investment in new systems, upgradation of IT infrastructure and potential cost of penalties. Industry experts believe that the compliance cost for a single project, including penalties, may be around INR 0.02/kWh.

Generators can also come together to form ‘virtual pools’ to minimise group level deviations and reduce penalty cost risk. New plants expected to be commissioned after 1 January 2018 will not be allowed to commence commercial operation without the required forecasting mechanism in place.

The regulations may be seen as a new operational and financial burden for the sector but are an acknowledgement of its growing importance. Developers would be happy to bear this compliance cost than face greater risk of curtailment. We believe that these regulations are highly desirable as better forecasting and scheduling will enable integration of growing renewable capacity and pave way for future growth.

In a major cabinet reshuffle yesterday, India’s erstwhile Minister of Power and Renewable Energy, Piyush Goyal, demitted office to become the new Minister of Railways. R.K. Singh, an erstwhile bureaucrat and now a Member of Parliament, has been appointed as the new minister. During the 40 months of his tenure, Piyush Goyal initiated important supply side reforms including allocation of coal linkages, increase in domestic coal production, solar parks policy and green corridors program. In this time, thermal power capacity has grown by 60 GW, renewable power capacity by 23 GW and transmission capacity by an aggregate of 25%. Not accounting for latent power demand, these steps have turned India from chronically power deficit to a power surplus country.

Surplus power situation, if not addressed through adequate demand side reforms, will affect renewable sector prospects;

Rural electrification is unlikely to result in any tangible growth in power demand but may actually increase financial burden on DISCOMs;

The incoming minister’s priorities should be to rationalize pricing of power, enforce operational improvements in DISCOMs, deal with the ‘Make in India’ conundrum and improve investor confidence in the sector;

However, power pricing and demand side reforms have not kept pace. Despite UDAY scheme’s success in eliminating USD 36 billion of debt from DISCOMs and rapid electrification agenda, power demand has grown by a CAGR of only 4.5% in the last three years. Thermal power plants are now operating at average PLF of less than 60% as against an expected 75-80%. Resulting stress is percolating to other parts of the sector including renewables where many tenders have been scrapped and PPAs face the risk of renegotiation. The Finance Ministry has called for rationalization of renewable capacity addition and we believe that utility scale solar capacity addition will slow down over the next two years. Now, the government is moving to restrict open access market (elaborated below). These quick fixes may help thermal IPPs and DISCOMs in the short-term, but are bound to hurt renewable energy prospects.

As the government pushes ‘Make in India,’ focus for the new minister should be power pricing reforms to make manufacturing more competitive and boost power demand. It is worth noting here that power tariffs for industrial consumers are higher in India than in many western economies.

Other pressing issues of the hour are anti-dumping duty petition for solar module imports and flagging investor confidence in the sector. Many leading international and Indian investors have entered this market attracted by large scale and strong government commitment. They need validation of their business strategy and reassurance that contracts will be duly enforced to protect their interest.

Consultation paper on open access seeks to further restrict the market

The Ministry of Power has released a consultation paper on open access market. The paper primarily focusses on issues faced by DISCOMs as a result of liberalizing open access – loss of business, stranded assets and other operational difficulties. The paper contends that cross subsidy surcharge (CSS) and additional surcharges are not being calculated correctly leading to under recovery of expenses by DISCOMs. It recommends more stringent scheduling restrictions for open access customers and makes suggestions for computation of CSS, additional surcharge and standby charges. We believe that these recommendations will further increase complexity and cost of open access based power.

InvITs are infrastructure investment trusts set up pursuant to SEBI Regulations 2014 for investment in infrastructure projects. Money raised from InvITs is used to repay external debt and buy back equity investments in underlying project companies. Recently, IRB and Sterlite power successfully launched the first two InvITs for road and power transmission projects by raising INR 50.3 Bn (USD 775 million) and INR 22.5 Bn (USD 345 million) respectively. Other infrastructure and energy asset developers are expected to follow suit later this year.

SEBI regulations mandate a minimum of 80% of assets under an InvIT to be revenue generating for at least a year and at least 90% of distributable cash flow from underlying projects to be transferred to the InvIT unit holders. Thus, unit holders are assured periodic payments from distributable cash flows. An InvIT can only borrow up to 49% of its asset value on a consolidated basis. The overall InvIT structure is akin to a yieldco with tighter regulatory oversight because of its trust structure and attractive tax benefits:

 Tax benefits SPV·         Exemption from dividend distribution tax
 
 
·         Interest payments to InvIT not subject to withholding tax
InvIT·         Exemption from corporate income tax
 
 
·         Exemption from dividend distribution tax
·         TDS of 5% (subject to Double Taxation Avoidance Agreement) on interest payments to non- resident unit holders

These tax benefits are worth an estimated additional yield of 0.5–1.0% on total investment.

Some solar developers are also believed to be exploring possibility of launching solar InvITs. Certainly, the structure has some advantages in comparison to conventional IPO route because of the various tax and regulatory benefits. An additional benefit is that by retiring bank debt in existing projects, the InvIT sponsors can free up bank debt appetite for their pipeline projects.

We understand that the IRB InvIT with an enterprise value of INR 59 Bn and average post tax EBITDA of INR 7.3 Bn results in a pre-tax yield of around 12.5% for its unit holders, while Sterlite’s InvIT with an enterprise value of INR 37 Bn and average post tax EBITDA of INR 4 Bn offers pre-tax yield of about 11%. The lower yield expectation from transmission projects is possibly due to their more stable cash flows compared to road projects where revenues depend on traffic growth assumptions. The two InvITs were oversubscribed in primary market, but fall in their prices post listing indicates a stronger yield requirement from the secondary market.

The key issue for solar InvIT feasibility is the return expectation and/or risk perception of solar projects in the institutional investor market, which demands low-risk, stable returns. We expect such investors to seek a higher pre-tax yield (12-14%) from solar InvITs because of the various sector risks – mainly grid curtailment, DISCOM payment risk and long-term plant performance risk. As a result, we believe that the InvIT route will be available only to highly credible developers with strong track record of executing solar projects with best-in-class standards.

Indian solar developers typically factor in a 15-20% annualised fall in the cost of solar modules when bidding for new projects. The assumed price decline may have been even higher in some of the recent auctions. Price increases in the last 2-3 months, therefore, have come as a shock to the sector. Against an expectation of USD 0.28/Wp, prices for the current quarter are being quoted at about USD 0.34/Wp. Goods and Services Tax (GST) rate of 5% has further added to the cost increase. Higher costs and constrained supply as Chinese suppliers renege on module supply contracts are presenting new challenges for Indian developers.

Explosive capacity addition, coupled with a reduced polysilicon supply in China is primarily responsible for module price increases;

Up to 1 GW of projects, due for completion in the remaining year, may get delayed as a result of higher prices and/or uncertain supply status;

Projects also face the risk of imposition of anti-dumping duties, which could be announced as early as September 2017;

China was expected to add 33 GW of solar PV capacity in 2017 but it has already added over 34.9 GW in the first seven months, with 24 GW being added in June and July alone. This explosive capacity addition, coupled with reduced polysilicon supply, has led to drying up of inventories and price increases across the value chain. However, China demand is expected to slow down for the remaining part of the year to just 5-10 GW. A significant part of this new capacity is to be added under the Top Runner program using high efficiency mono and mono PERC solar modules. That should mean a return to an oversupply situation for poly-crystalline modules used in India.

However, some manufacturers insist that prices will continue to be high until the end of the year. They expect strong demand from the US as the Trump administration explores imposition of safeguard duties, which would come into effect in January at the earliest. The prospect of duties is forcing developers in the US to rush ongoing projects or even stockpile modules for future projects.

For India, increased module prices have led to a slowdown in new orders as developers delay procurement in the hope that prices will start falling at some point in the near future. Over 3.8 GW of new capacity is scheduled to come online in H2/2017. This includes state policy projects in Andhra Pradesh and Telangana and central policy projects in Rajasthan, Gujarat, Maharashtra, Karnataka and Uttar Pradesh. These projects were allocated 12-18 months ago at tariffs over INR 4.43/kWh and should be financially viable even at current module prices. Nonetheless, we believe that up to 1 GW of project capacity may get delayed as developers wait for better pricing and/or assured supplies.

A larger risk to Indian projects comes from a possible imposition of anti-dumping duties at home. There is a possibility that Indian authorities could recommend a provisional anti-dumping duty as early as September 2017.

The Ministry of Power has issued new “Guidelines for tariff based competitive bidding process” for solar power plants. The guidelines shall be applicable to all projects equal to or greater than 5 MW for supplying power directly/ indirectly to DISCOMs subject to approval from the respective central or state regulator. For the first time in the sector, the government also proposes to issue standard bid documents including request for selection, PPA and other ancillary documents.

The proposed changes, while still not going far enough, are a major improvement on the current framework. Introduction of standard documentation, in particular, will be of major help to developers and investors. Significant changes are discussed below.

Readiness of project site:

The guidelines specify strict timelines for completion of land acquisition, transmission connectivity and other approvals in a timebound manner to avoid project delays. If the power purchaser retains responsibility for these in the form of a solar park, then it must ensure that: i) at the time of bidding, 100% of land is identified and proof of in-principle availability of 25% of land is in place; and ii) within one month of PPA signing, 90% of land is acquired and balance 10% is acquired in the next two months. All statutory clearances and transmission connectivity feasibility should be available prior to PPA signing.

If there is no solar park available, the developer must identify 100% of land requirement at the time of bid submission and complete full land acquisition within 7 months from the date of PPA signing. It must also ensure that environment/forest clearances, approval for water and transmission technical feasibility are available as required by the power procurer.

Payment security mechanism:

In addition to a letter of credit for one-month billing, the power purchaser (DISCOM or an intermediary buyer such as NTPC/SECI) needs to establish a payment security fund equivalent to three-month billing amount. This is a major improvement over current practice and will help in reducing DISCOM payment risk perception.

Where DISCOMs are buying power through an intermediary entity such as NTPC/ SECI, they are required to procure a state government guarantee in favour of NTPC/ SECI if a tripartite agreement between the respective state government, Reserve Bank of India and the central government is not in place.

Termination compensation:

It is unbelievable that most solar PPAs in India today do not have any provision for termination compensation for a power purchase default. The new guidelines specify that the developer can terminate the PPA in case of a power purchaser default. It shall be entitled to: i) either sell the plant to the power purchaser and seek compensation equivalent to total debt outstanding plus 150% of adjusted equity, or ii) retain ownership of the plant and seek compensation equivalent to six months billing amount. The introduction of this clause will serve as a major deterrent against default and protect the developers from DISCOMs seeking to unilaterally cancelling or re-negotiating PPAs.

Compensation for offtake constraints:

The guidelines recognise that grid backdowns/ curtailment are becoming a bigger problem for the sector and seek to provide compensation to developers for the same. In the event of generation loss due to evacuation infrastructure not being ready or being unavailable for more than 50 hours in a year, the developers are allowed to sell equivalent amount of extra power over subsequent three years. In the event of back-down requests from DISCOMs, 50% of revenue shortfall will be met by the DISCOM. However, there is no compensation for any backdowns due to grid instability or safety reasons.

These clauses are positive but they still do not provide sufficient protection to the developers from curtailment or back-down risks.

Lender substitution rights:

The new standard PPA will allow substitution if the developer defaults on payments to its lender(s). Previously, substitution was permissible only if the developer had defaulted on its PPA obligations.

These changes have come after extensive consultations and aim to protect developer and investor-lender interests. As we saw with the recent Rewa tender, improved contractual documentation and risk allocation can provide more confidence to the sector and lead to a win-win arrangement for all parties.

India’s Ministry of Finance has released a mid-year macro-economic assessment of the country in the form of second volume of the Economic Survey 2016-17. The Survey reflects work of various government departments and provides valuable guidance to future policy making. The chapter on climate change and energy reiterates recent Central Electricity Authority (CEA) projections – capacity addition for coal based power is expected to be around 50 GW between 2017 and 2022 and nil between 2022 to 2027. As for renewables, the Survey takes a curiously negative view and recommends that India should ‘calibrate’ investments in renewables.

– The Survey assesses social cost of renewable power to be around 3 times that of coal power at INR 11 per kWh;– Underutilization of coal fired power stations causing losses for investors and lenders is classed as the most significant contributor to “social cost of renewables”;– The Survey’s ambivalent messaging betrays lack of clarity between different parts of the government, which is a very worrying sign for the sector;

The Survey argues that various sources of energy should be prioritized based on an analysis of their holistic impact (“social cost”) on the economy. It defines social cost of a power source as an aggregate of actual cost of power generation, grid related costs, opportunity cost of land utilized, environmental and health costs from carbon emissions together with, remarkably, the opportunity cost of stranded conventional power assets. Environmental and health costs of coal usage in the sector are estimated on the basis of USD 2.9/ ton of carbon emissions (source: Revisiting the social cost of carbon – William D. Nordhaus) and USD 4.6 billion due to 115,000 pre-mature deaths every year (source: Scientific American). Not much explanation or numbers are available for other costs except that underutilization of coal fired power stations causing losses for investors and lenders is classed as the most significant contributor to “social cost of renewables”. Accordingly, the Survey concludes that social cost of renewable power is around 3 times that of coal power at INR 11 per kWh and recommends that India should ‘calibrate’ (read lower) investments in renewables to reduce this “social cost”.

We welcome the holistic approach to future planning but the Survey’s methodology is opaque, selective and debatable. It is difficult to comment on it without having full details but in our view, underutilization of coal-fired power stations is down to poor planning by various government agencies as well as shoddy investment decisions made by private developers and lenders. It is completely wrong to attribute these problems to renewables.

The survey also cites the large land area requirement for setting up of renewable power capacity as a key barrier to its adoption. This is an old argument that has been debunked several times. Solar projects typically use low-cost, non-productive land and an analysis by BRIDGE TO INDIA shows how India can install as much as 1,000 GW solar capacity in just half the desert district of Barmer, Rajasthan (equivalent to 3.5% of India’s waste land).

We agree that the renewable sector has enjoyed several government incentives including preferential access to the grid. These special benefits need to be phased out gradually to make the sector viable on a stand-alone basis as also stated recently by the draft National Energy Policy.

Overall, the Economic Survey sends a negative signal to the renewable sector. It betrays lack of clarity between different parts of the government. That is a worrying sign for the sector already dealing with problems such as contract cancellations/ renegotiations, GST and prospect of anti-dumping duties.

We have released our latest report – India Solar Compass – a quarterly update on the Indian solar market. The report contains key information and analysis including tender and project updates, leading players, financing deal flow, policy and market trends etc for Q2 2017 as well as our market forecasts for the upcoming quarters.

Q2 2017 was a landmark period in the Indian solar sector with tariffs falling below the critical threshold of INR 3.00/ kWh making solar power the cheapest new source of power in India. But this has led to all sorts of problems. As we commented in a recent blog, “Falling tariffs are a double-edged sword for the sector. They make solar power more attractive for consumers but are also making investors and lenders jittery. In the near term, they are also creating uncertainty in the minds of policy makers and creating new risks for older projects auctioned at 2-3x higher tariffs.”

India is expected to become the third biggest solar market worldwide in 2017 with estimated utility scale and rooftop solar capacity addition of 8.4 GW and 1.1 GW respectively;

Rising competition is squeezing investor returns in both primary and secondary markets;

Even as long-term market prospects remain bright, the sector faces considerable headwinds from module price rises, tender cancellations, GST and anti-dumping duty related uncertainties in the short run;

India’s total installed solar power capacity reached 15,611 MW (13,951 MW utility scale and 1,660 MW rooftop solar) on June 30, 2017. After a bumper Q1 2017 (end of FY17) when India added 3,120 MW of utility scale solar capacity, pace in Q2 2017 was relatively slow at 1,437 MW against a scheduled capacity addition of 3,300 MW. Highest capacity addition as well as slippage was from the 2,000 MW allocation in Telangana. Around 1,680 MW was due to be commissioned in Telangana during Q2 but only 640 MW came online because of delays arising from land and transmission related issues.

Total utility scale project pipeline, projects allocated to developers, stood at 12,250 MW at the end of the quarter. More than 3,000 MW of new tenders were announced, greater than the aggregate of all new tenders announced in previous three quarters. But at the same time, eight tenders with an aggregate capacity of 2,130 MW were scrapped due to DISCOMs reconsidering their power procurement options.

We expect new utility scale capacity addition of 1,565 MW and 2,265 MW in Q3 and Q4 2017 respectively. Our expectation for total rooftop solar capacity for 2017 is 1,056 MW taking total 2017 capacity addition estimate to 9,443 MW.

Top developers in Q2 2017, on the basis of new capacity added, are Acme Solar, NTPC, ReNew, Adani and Azure. Similarly, Talesun, Hareon, JA Solar, Waaree and Lanco are ranked as top module suppliers for Q2 and ABB, Hitachi, Sungrow, SMA and TBEA are ranked as the top inverter suppliers.

Other key market trends observed during Q2:

Module prices have spiked up to US ¢ 32-33/ Wp against expectations of about US ¢ 28/ Wp due to demand pick up in China and the USA. But inverter prices have been stable at around INR 1.80/ W.

1,500 V systems market is picking up and we expect a near-complete transition to 1,500V systems in India within two years.

Trackers have been gaining market share in India – we estimate this market to grow from 450 MW in Q2 to 800 MW in Q3. However, sharp fall in module prices is likely to hurt this market in future.

Actis committed USD 500 million to SPRNG, a new solar platform in India. Debt conditions have continued to soften with interest rates coming down and lenders looking at debt tenors of up to 20 years.

M&A deal flow is expected to pick up substantially as many PE funds (Ostro, Orange and Equis, amongst others) are looking to sell out and the primary project pipeline is relatively small.

The new GST regime became applicable from July 1, 2017. Solar power systems and equipment will be taxed at 5% but there is still confusion on GST rate on equipment other than modules.

The recently released draft National Energy Policy anticipates withdrawal of all incentives and support mechanisms for renewable energy over time.

Overall, 2017 business volumes are expected to grow by 90% Y-o-Y, making India the third largest solar market worldwide. But it is still an unnerving time for project developers and investors as rising competition forces tariffs down and the sector faces headwinds from module price rises, tender cancellations, GST and anti-dumping duty related uncertainty.

NITI Aayog, India’s central planning agency, recently released the draft National Energy Policy (NEP). The document sets out national objectives and planning framework for the energy sector for the next 23 years (up to 2040). It comes at an opportune time when India is going through a critical energy transition period. Its main thrust is to let market-based mechanisms guide growth in various energy sources with minimal government intervention. And while a document of this nature is inevitably high-level in its scope, it comes across as simplistic and wishful due to lack of detail, reasoning or prioritization of different plans.

By envisioning the share of variable renewable energy (RE) in the electricity generation mix to increase from 5% in FY17 to 24-29% by 2040, the policy sets an optimistic tone for RE growth;

The policy suggests gradual withdrawal of all incentives including ‘must run’ status, renewable purchase obligation (RPO) and inter-state transmission charge waiver for the RE sector;

Emphasis on traditional large hydro as a source of balancing power and just a passing mention of storage, smart grids and electric vehicles doesn’t fit with the fast-changing technology landscape;

The policy envisions RE capacity (excluding large hydro) to grow from 58 GW at present to 597 GW by 2040 (solar 367 GW, wind 187 GW) at a CAGR of over 10% and RE share of total power output to increase from 5% at present to 24-29% by 2040. While the policy sets an optimistic vision for RE, it does not provide any specific measure to support this growth. It envisages gradual transition towards market-led growth in RE sector, which is desirable for efficient functioning of the energy market as well as long-term growth of RE. However, there needs to be greater clarity on the mechanism and time of withdrawal of incentives such as RPOs, must run status and tax benefits provided to the sector to avoid a negative impact on sector’s growth. For example, we believe that sudden withdrawal of must run status would dampen investor confidence in the market.

On RE integration issues, the draft policy proposes a combination of grid expansion, automation and smart grid based approaches. It also suggests shortening of scheduling and dispatch interval times from 15 minutes, at present, to 5 minutes and development of an ancillary services market. For grid balancing, it proposes reliance on large hydro power plants and gas-based generation.

There are two glaring deficiencies in the policy document. One, it fails to examine past problems and proposes new solutions. For example, it argues correctly that poor financial health of DISCOMs is caused due to tariff subsidies and high T&D losses but the proposed solution – entailing separation of content and carriage – has been mooted for many years without any success. Second, the document largely ignores critical role of new technologies. It vaguely suggests setting up of renewable energy management centers and roll out of smart grids across India but the most promising new technologies – electric vehicles (EVs) and energy storage – have not received the required attention. While the government is considering setting an ambitious target of 100% EVs by 2030, the draft policy’s only suggestion for EVs is to implement time-of-day tariffs.

Similarly, while other countries are already taking long strides in development of energy storage technologies through investments in R&D, incentives for manufacturing and installation of large scale storage facilities, the draft NEP merely mentions ‘the need to push development of storage technologies’.

Overall, the draft energy policy is a missed opportunity to achieve necessary transformation in the Indian energy sector.

Greenko and Azure Power have together raised USD 1.5 billion from sales of green bonds in the last two weeks. Other offshore green bond issuances by ReNew Power, NTPC, Rural Electrification Corporation (REC), IDBI Bank, Axis Bank, Yes Bank and L&T Infrastructure Finance mean that India is amongst the top ten green bond markets in the world with a cumulative issuance of over USD 4 billion. In the first seven months of 2017, India’s green bond issuance reached USD 2.1 billion, sufficient to fund debt for over 3.5 GW of new renewable energy projects.

Indian renewable sector needs a significant amount capital (about USD 150 billion) to achieve the ambitious 175 GW target and there is abundant capital available internationally;

Renewable assets in India are still considered too risky by global funds due to poor offtaker ratings, frequent payment delays and weak regulatory enforcement;

The Indian government should try to reduce risks for private investors but the recent trend of PPA cancellations and renegotiation attempts is not helpful in this regard;

In 2015, the Securities and Exchange Board of India (SEBI) had endorsed the internationally recognized green bond principles, providing regulatory clearance for Indian renewable assets to tap into offshore green bonds. Indian renewable sector needs a significant amount capital (about USD 150 billion) to achieve the ambitious 175 GW target. There is plenty of capital available internationally with sovereign wealth funds, pension and insurance funds but expectations need to be tempered.

First, renewable assets in India are still considered too risky by these global funds. While Greenko and Azure were successfully able to place their bonds, Morgan Stanley owned wind developer, Continuum, failed to do so. It launched a USD 400 million issue but failed to raise the money because of the weak credit profile of its customers (poorly rated DISCOMs). International investors are highly selective about risk and most Indian renewable IPPs, rated 2-3 notches below investment grade, are not deemed sufficiently attractive.

Second, Indian regulators impose strict curbs on offshore issuance of bonds – both by quantum and cost – limiting the prospects of this route. Even so, there is little cost advantage for developers in raising funds through green bonds. Greenko and Azure issues have been completed at rates between 5.0-5.5% resulting in all-in cost of over 9% including hedging cost. This is hardly attractive in comparison to domestic borrowing cost particularly when refinancing risk is taken into account. Main advantage for the issuers is diversification of their funder profile and freeing up of their bank credit lines in India.

To make green bonds more attractive for Indian issuers, the Indian government should try to reduce risks for private investors and developers. NTPC offtake, UDAY scheme, solar park policy and SECI payment security fund are good steps but much more needs to be done. Documentation and risk allocation framework needs to be improved to match international standards. More importantly, we need alignment of policy objectives between central government and states as well as strict enforcement of regulatory framework. Recent PPA cancellations (wind projects) and renegotiation attempts are not helpful in this regard.

India has initiated a new investigation to probe dumping of solar cells and modules from China, Taiwan and Malaysia. The petition for this investigation was submitted by Indian Solar Manufacturers Association (ISMA) on behalf of Indosolar, Websol and Jupiter Solar. The investigation covers both crystalline and thin-film technologies and will affect all imports making up more than 85% of total cell and module sales in India.

Proving dumping for solar imports should be relatively easy as Chinese suppliers have been selling modules in India at prices lower than in China;

The investigation provides a great test case for design of Indian policy making as there is no evidence from other countries of protectionist duties benefitting the prospects of domestic manufacturers;

But with solar capacity addition growing at 100% CAGR in last 3 years and cost of solar power crashing to INR 2.44/kWh, we feel that the government may be more sympathetic to the demands of domestic manufacturers this time;

Dumping is defined as exporting a product at a price that is lower than the domestic price for the same product. For solar imports, proving dumping may not be difficult as it is common knowledge that Chinese suppliers have been selling modules in India at prices lower than in China.

The latest petition follows an earlier probe in 2012-14 on dumping of solar cells and modules, which had recommended anti-dumping duties of USD 0.11-0.81/Wp on cells and modules imported from China, US, Malaysia and Taiwan. However, the Indian government decided not to act on this recommendation following intervention by the then newly appointed Minister for Power, Piyush Goyal as the duties were seen detrimental to the growth prospects of solar industry in India. Instead, domestic manufacturers were promised assured demand through a Domestic Content Requirement (DCR) regime. Loss in the case against DCR at WTO has brought events full circle back to anti-dumping duties.

The dumping investigation will be carried out by Directorate General of Anti-Dumping and Allied Duties (DGAD), who will consider a 15-month period from Apr-16 to Jun-17 to probe dumping and three-year financial data of the petitioning companies to analyse injury to domestic manufacturers. All other affected parties have a period of 40 days to share their response to the domestic industry’s application. While the investigation can take 12 to 18 months, a provisional duty can be announced as early as on 22 September, 60 days after commencement of the investigation. This coincidentally is the same date when the USA is expected to decide on a safeguard duty petition from Suniva.

ISMA has submitted a separate parallel petition to Directorate General of Safeguards to consider imposition of safeguard duty on solar cells and modules. Safeguard duty is defined as temporary measure in defense of the domestic industry which is injured or has potential threat of injury due to sudden surge in imports. Unlike anti-dumping duty, a safeguard duty is country agnostic, is imposed on all imports and can be implemented much faster. In a recent precedent, India imposed safeguard duty of 10 per cent on import of specified steel products.

As we have always maintained, we see little upside to imposition of anti-dumping or safeguard duties on solar cells and modules. There is no evidence from other countries of such duties resulting in any long-lasting benefits for domestic manufacturers. At the same time, any duties raise the risk of side-tracking India’s solar capacity addition target affecting more than 10,000 MW of project pipeline.

Unlike last time around, however, we believe that there is more sympathy within government for imposition of anti-dumping and/or safeguard duties. In our previous commentary, we had highlighted that with cost of solar power crashing to INR 2.44/kWh, there is a risk that the government may be tempted into a knee-jerk decision to protect domestic manufacturers at the cost of causing disruption in the solar market.

BRIDGE TO INDIA has released its latest edition of the India Solar Rooftop Map report. As per the report, India added 678 MW of rooftop solar capacity in FY 2016-17, growing at 81% Y-o-Y. Total installed rooftop solar capacity reached 1.4 GW as of March 2017. Strong market fundamentals including falling costs and improving debt financing mean that the market will continue strong growth trajectory for many years to come.

Commercial and industrial customers (C&I) remains the biggest market segment as economic viability is most pronounced for such customers;

OPEX model has been gaining market share, doubling from 12% in FY 2014-15 to 24% last year and large public sector procurement programs will drive further growth in this market in the next few years;

Yearly capacity addition is expected to scale up to over 2 GW by 2019 and over 3 GW by 2020 presenting attractive growth opportunities for all market participants;

With 65% of total installed capacity, C&I remains the biggest market segment. These consumers account for more than 50% of India’s total power demand and make savings of up to 50% through rooftop solar systems as their grid tariffs are typically between INR 7-10 (US₵ 11-16)/ kWh. Public sector segment is also expected to show robust growth in the coming years because of a strong government push combined with 25-30% capital subsidy. In contrast, the residential segment is expected to grow relatively slowly because of poor economic viability and lack of financing solutions.

OPEX (or BOOT) business model, where a third-party investor owns and builds the system under a long-term PPA with the site occupant, saw new capacity addition of 162 MW in FY 2016-17, accounting for 24% of total market (up from 12% in FY 2014-15 and 19% in FY 2015-16). This market is fairly consolidated as access to capital remains tight and on-the-ground execution is challenging. Top five developers account for over 60% market share – CleanMax Solar (24%), Cleantech Solar (12%), Azure Power (11%), Amplus Solar (8%) and Rattan India (5%). Going forward, we believe that this model will continue to grow but will be increasingly driven by tender-based public sector projects.

As seen previously, EPC for rooftop solar continues to be highly fragmented with over 1,000 registered installers and 35 largest players accounting for less than 35% market share. Only three companies have more than 2% market share – Tata Power Solar (6.4%), Sure Energy (2.5%) and Fourth Partner (2.2%).

In the inverter market, just two companies account for over 60% market share –  Delta Electronics (36%) and SMA (including Zever Solar, 25%). ABB, KACO and Fronius are other noteworthy suppliers with about 5-6% market share each. An increasing market share for ABB and entry of companies such as SolarEdge and Huawei may result in minor changes in the leaderboard in future.

Overall, we believe that rooftop solar market in India is beginning to realize its potential. Annual market size greater than 1 GW in the current year will be an important milestone for the market. We expect India to build a total rooftop solar capacity of 13.2 GW by 2021.

Two months ago, we wrote about how Uttar Pradesh (UP) could be the dark horse for solar power demand in the country. Since then, the state has announced a 750 MW tender with Solar Energy Corporation of India (SECI) in Bhadla and a new solar policy to build 10.7 GW of solar capacity by 2022. But UP can be a tough place to do business as proven yet again by the state renewable nodal agency, UP New & Renewable Energy Development Agency (UPNEDA), asking developers to reduce tariffs for a 215 MW state tender closed in 2015. UPNEDA claims to be acting on behest of the state electricity regulator (UPERC), which is apparently refusing to approve power procurement at tariffs ranging between INR 7.02 – 8.60/kWh even though the benchmark regulated tariff for the tender was INR 9.33/kWh.

Many project developers are already wary of entering UP and the state’s move to renegotiate tariffs after signing PPA’s will further damage its credibility;

It makes no sense for UP to renegotiate tariffs for a mere 165 MW of capacity when it wants to add more than 10 GW of solar capacity in the next 5 years;

Such unilateral, post-facto moves to renegotiate tariffs detract from the Indian government’s ambitious plans and need to attract more private capital in the sector;

Only 130 MW of projects have been completed under this UP tender so far and several projects have been granted ad-hoc extension. UPNEDA may feel that it is justified in seeking lower tariffs when capex costs/ tariffs having been falling across the sector. But such a move is short-sighted as the harm to the state’s credibility and the negative impact of this step on future tenders will far outweigh the benefit of any tariff reduction.

Project developers already attach a very high risk premium to UP. The state is notorious for poor law and order situation and has a low ‘Ease of doing business’ ranking, 14th among Indian states. Our recent report, Assessment of utility scale tender results in India, showed that UP tariffs have been higher than other state tariffs by up to 50% after adjustment for radiation, timing and other factors.

But UP is also the most populous state in India with a population of 220 million (17% of India’s population) and per capita electricity consumption of only 532 kWh as against 1,537 kWh for Gujarat and 1,192 kWh for Maharashtra. The new BJP government has a huge economic opportunity to turn around the state’s economy by exploiting cheap renewable power and reforming the local power transmission and distribution system. It has indeed made reliable power supply as one of its core policies. UP has already cancelled over 7 GW of planned thermal projects and is believed to be planning to procure another 1,500 MW of solar power in the near future. In such a scenario, it makes no sense for the state to renegotiate tariffs for a mere 165 MW of capacity.

Moreover, any unilateral, post-facto move by any state to renegotiate tariffs detracts from the overall national growth story and Indian government’s attempts to attract more private capital in energy and infrastructure sector. The national and state governments, together with the regulators, need to clamp down on such regressive short-term measures.

Three days into implementation of the Goods and Services Tax (GST), Indian solar industry continues to face uncertainty regarding GST rates. We know that GST will be applied to solar modules at a concessional rate of 5%. Central government officials including the Minister for Power, Piyush Goyal, have confirmed on multiple occasions that the 5% concessional rate will extend to all equipment for solar power generating plants. But operational clarity for these other capital goods used in solar projects is lacking in practice.

There is confusion in the market on how to avail of the concessional 5% GST rate when many of the same components are taxed at higher rates for use in other industries;

MNRE is still working to evolve a mechanism in consultation with Ministry of Finance to try and resolve this issue;

Net increase in project EPC costs is expected to be around 6% if the issue is not resolved;

We spoke to four inverter suppliers today – two of them said that the GST rate for inverters is 18%, one said that it is 5% and another one said that that it is 5% for end-users and 18% for EPC companies.

The reason for the rate confusion is that it is not clear how to avail of the concessional 5% GST rate – as defined and intended under chapter 84 of the rate schedule for goods – when many of the same components are taxed at higher rates for use in other industries. For example, transformers used for solar projects are intended to be taxed at 5% but they are taxed at 18% for other applications. In the absence of any specific notification for solar projects, GST rate varies from 18% for capital goods such as inverters and module mounting structures to 28% for cables and batteries.

We understand that MNRE is still working to evolve a mechanism in consultation with Ministry of Finance to try and resolve this issue. Almost 10 GW of India’s pipeline solar capacity is impacted by increase in indirect tax rates under GST and lack of clarity adds to the complexity. If all capital goods for solar projects are taxed at 5% rate, we expect overall increase in EPC cost at around 3%. If, however, only modules are taxed at 5% and other capital goods are taxed at rates between 18-28%, the net increase in EPC cost is expected to be around 6%.

With global solar module prices firming up this quarter due to extension of solar FIT deadline in China, GST comes at an unfavorable time for the sector. We expect project delays and cannot rule out the risk of litigation between project developers and DISCOMs over sharing of the additional cost burden. Adverse impact will also be felt in the rooftop solar market, where we expect market activity to slow down in the near future.

India imported 5.7 GW or about 89% of its total solar module requirement in FY 2016-17. Value of these imports is estimated at USD 3 billion, equivalent to 2.8% of the country’s total merchandise trade deficit. An increasing reliance on imports in a growing and strategically important sector is creating various stress points and raises the risk of a knee-jerk policy reaction by the government which has, until now, been unable to effectively support domestic manufacturing.

China dominates global manufacturing and is trying to secure control on the technology upgradation roadmap for solar PV;

Over reliance on a single country puts Indian solar sector at a risk of disruption in global supply chain and change in Chinese government policy;

The Indian government needs to consider long-term implications for the sector and draw up a well thought out plan for domestic manufacturing instead of introducing short-term support measures;

China has been pumping in billions of dollars in subsidies and other support measures to scale up solar PV manufacturing and dominate global market. The result is massive increase in manufacturing capacity from 23 GW in 2013 to over 70 GW today despite steep fall in prices. It has also been strategically providing support for new technologies through its ‘Top Runner’ program to encourage the industry to migrate to higher-efficiency products and secure control on technology upgradation roadmap for solar PV.

India couldn’t match China’s financial commitment to the sector but provided some breathing room to local manufacturers through Domestic Content Requirement (DCR) and also toyed briefly with anti-dumping duties. However, such protectionist measures have not helped local manufacturing anywhere in the world and share of imports in India has continued to go up from 74% in 2014-15 to 89% in the last year. Notwithstanding various high profile announcements of new manufacturing capacity creation, the only notable player to do so in the last two years has been Adani, which has also deferred its vertical integration plans.

The Indian government’s overriding priority in the sector, so far, has been increasing generation capacity and lowering tariffs. That focus has hurt the prospects of domestic manufacturers who are unable to compete with Chinese imports and have now filed a new anti-dumping duty petition. With cost of solar power crashing to INR 2.44/kWh, there is a risk that the government may be tempted into a knee-jerk decision causing confusion in the market.

We have consistently argued that protectionism will not solve the problems of Indian manufacturers. But ever-increasing share of imports for solar modules is a concern when India plans to meet a significant share of its power requirement from solar and a huge majority of modules are imported from a single country. The entire sector is exposed to the risk of a potential disruption in global supply chain and/or change in international political, trade or economic environment. We have seen how changes related to Indonesian coal production have severely affected some Indian thermal IPPs introducing a series of litigation and regulatory uncertainty.

Given the multi-faceted implications for project developers, investors, DISCOMs and other stakeholders, we need a larger debate on the role of domestic manufacturing in the sector. And instead of considering short-term response to this issue, the Indian government should consider long-term implications for the sector and send a clear policy signal to reduce uncertainty for all stakeholders.

BRIDGE TO INDIA has released the March 2017 edition of India Solar Map. As per our project database, India installed 5.5 GW of utility scale solar capacity in the last fiscal year reaching total cumulative solar capacity of 12.5 GW by March 2017. Another 12 GW capacity has been allocated to developers and is in various stages of development.

– We expect southern states to continue to dominate the sector in the short-term as 53% of total pipeline is concentrated in Andhra Pradesh, Karnataka and Telangana;– Adani remains the largest developer with a total portfolio exceeding 2 GW (780 MW commissioned and 1,250 MW pipeline);– Market volumes are likely to expand by 45% in the upcoming year but we don’t anticipate any new entrant to gain a meaningful foothold as India remains an intensely competitive market;

Southern domination continues in the sector with Andhra Pradesh replacing Tamil Nadu at the top with a commissioned capacity of 1,962 MW. We expect the southern states to continue to dominate the sector for the next 12-18 months as 53% of total solar pipeline is concentrated in the Andhra Pradesh, Karnataka and Telangana.Greenko, NTPC and ReNew Power are the top three developers on the basis of capacity commissioned during the year. Six project developers have built more than a gigawatt of portfolio in the Indian market including both commissioned and pipeline projects. Adani maintains its status as the largest developer with a total portfolio exceeding 2 GW (780 MW commissioned and 1,250 MW pipeline).

Trina Solar (25.7% market share), Hanwha (10.5%) and Risen (7.6%) are the top three module suppliers with all of them gaining significant market share over last year. Canadian Solar (7.4%) has slipped three places to fourth position. Domestic manufacturers’ combined market share fell to just 10.6% with none of them making it to the list of top 10 suppliers for the first time. With domestic content requirement (DCR) policy shelved, prospects for domestic manufacturers appear very bleak.

In the inverter market, ABB has retained its position as the top inverter supplier with 28.6% market share for the year. TMEIC, Hitachi and SMA are close behind with a market share of around 16% each. Despite its premium pricing, SMA gained market share, up from 11.4% last year, with a single large sale to Greenko.

Outsourced EPC business continues to contract as most large developers rely on in-house execution capability. For the first time ever, self-EPC accounts for over half of the capacity commissioned in the year. Sterling & Wilson was the only EPC company with over 500 MW of deployment (around 9% market share).

Market volumes are likely to expand by 45% as we expect India to add 8 GW in the upcoming year. But we don’t anticipate any new entrant to gain a meaningful foothold in the extremely competitive market.

“In order to fulfill my solemn duty to protect America and its citizens, the United States will withdraw from the Paris climate accord,” US President Donald Trump said last week. The move has already been criticized extensively within and outside the US. No other country seems willing to support the US, and in fact, the action has prompted several countries to reiterate their commitment to the climate accord. The reason simply is that renewable energy has crossed the point of no return. It is financially and operationally viable and the old ‘carrot and stick’ approach is fast becoming irrelevant. We see a limited short-term impact of this announcement within US and almost no impact on India.

Most states and end-consumers, even within the US, will continue to accelerate adoption of renewable energy and other green energy programs because of their improving techno-commercial merits;

As the US can only exit the accord after three years, many analysts point out that the decision could be overturned by a new US President before it is implemented;

The US decision to withdraw from the Paris accord is unfortunate but largely, a non-event for India’s renewable energy sector;

Soon after President Trump said he would pull out of the Climate Agreement, governors of California, Washington, New York, Massachusetts, Vermont, Connecticut and Rhode Island, representing 15% of the country’s emissions, banded together to continue to work toward the global climate accord target. In addition, 30 leading US corporates including Citigroup, Coca-Cola, Corning, Dow Chemical, DuPont, General Electric, Goldman Sachs, also committed to continue meeting their targets. More states and businesses can be expected to follow suit. Equally important is the fact that according to Article 28 of the agreement, each country that enters into it must remain for three years. They may subsequently choose to withdraw but with one more year of notice. Many analysts point out that a new US President in early 2021 (or earlier) could overturn this decision before it is implemented. Overall, we believe that fallout from the Trump decision on renewable energy and electric vehicles will be very limited even in the US. There may be a limited short-term impact on new investment plans, which may, in turn, impact global supply chain and slow sector progress.

From India’s perspective, the Trump decision would, in all likelihood, be positive for attracting even more technology, investment and expertise from other countries. The US has been an important partner for Indian renewable sector. Overseas Private Investment Corporation (OPIC), the US development finance institution, has funded several Indian developers including Azure Power and ReNew Power. It has also recently committed to provide USD 400 million of financing as part of the US-India Clean Energy Finance Facility (USICEF) for rooftop solar. Meanwhile, United States Agency for International Development (USAID) has been supporting various capacity building and technical assistance initiatives (solar rooftop program for Indian Railways and Indian Oil, net metering programs in Bangalore and Jaipur, off-grid solar). However, the Indian government has maintained that the country’s renewable energy expansion is largely self-financed and the current level of financial support from developed nations is significantly below what was promised. We believe that India would be able to mitigate the impact by suitable planning and recalibration of various programs.

In our view, the US decision to withdraw from the Paris accord is unfortunate but largely, a non-event.

Last week, we wrote that the proposed 18% Goods and Service Tax (GST) on solar modules could cause major disruption in the industry and affect over 10 GW of projects. Following uproar in the industry, India’s revenue secretary, Hasmukh Adhia, has clarified that the rate of tax on solar modules should be 5% and not 18%. He said that an official clarification in this regard may be issued on June 3 when the GST council meets next. Earlier last week, secretary for Ministry of New and Renewable Energy (MNRE) had also issued a statement that the 18% rate on solar modules seems to be an anomaly and that it should be corrected.

Total project capital cost is likely to rise by about 4% as against 10-12% envisaged earlier;

Revised rate structure will not have any material negative impact on the industry and will allow project developers to proceed with construction;

MNRE needs to still play a hands-on advisory role for all affected entities to ensure smooth transition for the industry;

5% GST rate for solar modules sounds reasonable and consistent with government guidance leading up to the rates announcement. The new tax regime will result in effective rate of indirect taxes to go up from zero to 5% on solar modules and around 3% on engineering and construction services. Impact on inverters is still not clear. Our current estimate is that the total project capital cost will rise by about 4%.

BRIDGE TO INDIA believes that the revised rate structure will not have any material negative impact on the industry because of the buffer afforded by sharp fall in equipment costs. It will allow project developers to proceed with construction. Some developers may still file compensation claims but many of them might simply absorb the additional burden to avoid scrutiny of sensitive commercial information.

As we stated last week, MNRE needs to play a hands-on role by advising all affected entities – project developers, DISCOMs, equipment manufacturers and EPC contractors – to ensure smooth transition for the solar industry.

Other news highlights of the week:

Compensation for grid curtailment to benefit renewable sector

Adani Green Energy defers its polysilicon manufacture plans

UP government setting up 750 MW solar plant at Bhadla

ACME Group looking to raise capital through InvIT

India’s southern region comprising Andhra Pradesh, Telangana, Karnataka, Tamil Nadu and Kerala accounts for 25% of national power consumption but 45% of total wind and solar power capacity in the country. Penetration of variable wind and solar energy, defined as generation from both these sources as a percentage of electricity consumption, in the southern region was 9% in 2016-17 as against the national average of 5%. Such high rate of penetration raises concerns regarding management of the grid and can result in high grid curtailment rate. South India represents a test case for the country for integration of variable renewable energy into the grid.

Increased RE deployment is changing the energy landscape in southern region and raises concerns regarding grid stability and power curtailment;

While strides have been made in enhancing transmission connectivity, a lot still needs to be done to enhance grid flexibility and develop ancillary services market;

Lessons should also be learnt from successful international experiences in allowing high renewable energy grid penetration;

Enhanced transmission connectivity as well as rapid RE deployment has helped south India in considerably reducing its power deficit from 7.3% in 2013-14 to only 0.2% in 2016-17. But another 9 GW of wind and solar energy capacity is estimated to be under development. Tamil Nadu is already facing the brunt of such high RE generation with wind curtailment rate of as high as 33% in 2013-14.

Significant steps are being taken to enhance transmission connectivity under the government’s green energy corridor scheme. Work has already commenced on an 1,800-km ultra-high voltage transmission link between central and southern India. However, little attention is being paid to other equally important and effective solutions including more accurate generation and load forecasting, ancillary services development (for frequency and voltage stability) and improved flexibility of conventional power plants. For instance, Karnataka is the only southern state to have finalised a regulation on forecasting and scheduling of power. The region is also a laggard in development of ancillary services market. In the first six months of implementation of regulatory reserve ancillary services (April-September 2016), only 6% of the total energy dispatched under “regulation up” service came from southern region.

Lessons should be learnt from other countries including the USA and Germany, which have a similar or higher RE penetration levels. The Electric Reliability Council of Texas (ERCOT) in the USA was successful in reducing wind curtailment rate from 17% in 2009 to 0.5% in 2014 in its region despite the share of wind power generation increasing from 6.2% to 10.6% in this period. It did so by building more transmission capacity, reducing scheduling time interval from 15 minutes to 5 minutes, introducing fast frequency response reserves for instantaneous increase/decrease in power output and various demand response programmes along with rapid deployment of smart meters. Germany has also been successful in keeping curtailment rates below 4%, despite having a renewable energy penetration level of as high as 30%, mainly because of adoption of a variety of market-based mechanisms to enhance grid flexibility and provision of ancillary services. For instance, during periods of excess power supply, the German power trading market fixes a negative price for inflexible power units. Moreover, through retrofits to existing coal power plants, Germany has also made thermal generation more flexible to respond to changes in renewable energy generation.

In order for India to support ongoing renewable energy deployment, it is essential to learn from international as well as domestic experience and make urgent changes to the power system.