Category: Projects

The Indian government has released final Goods and Services Tax (GST) rates under the new indirect tax regime proposed to be rolled out from July 1. The biggest surprise for the power and renewable sector is the announcement of 18% tax rate for solar modules as compared to a present effective rate of zero. In contrast, GST rate for coal has been lowered to 5% as against current rate of 11.69% and most other renewable projects and equipment including wind mills, waste to energy plants, tidal energy plants and bio-gas plants and even solar power based devices or generating systems have been classified under the 5% rate bracket.

The new regime will result in an increase of 18% in module cost, about 12% in inverter cost and 3% in all service costs – increasing overall project cost by about 12%;

New rates would hit more than 10 GW of ongoing utility scale projects and pose a threat to their viability;

It is critical for MNRE to step up and play a coordinating role with central and state regulators to ensure that the process of tariff adjustment is as smooth as possible;

As of today, most states levy a 5% Value Added Tax (VAT) on solar modules. However, in practice, the actual tax rate levied is zero because of waiver on import duty and VAT in many states. Effective tax rate on solar inverter imports will also go up from 5.15% to 18%. The new regime will therefore result in an increase of 18% in module cost, about 12% in inverter cost and 3% in all service costs – increasing overall project cost by about 12%. Importantly, we do not believe that the new rate structure will give any advantage to domestic manufacturing as cost of import of raw material, including cells and wafers, will go up in the same proportion.

There was widespread expectation that solar modules would be classified under zero or 5% bracket to continue growth momentum in the sector. However, sharp reduction in equipment costs and solar tariffs seems to have convinced the government that the sector doesn’t need any more financial incentives.

Nonetheless, more than 10 GW of ongoing utility scale projects would be hit badly by the new rates. The Ministry of New and Renewable Energy (MNRE) has been verbally assuring the industry that it will be insulated from any GST impact by passing any burden through to the offtakers. But we believe that this process will be complex and challenging. First, there are multiple templates for power purchase agreements (PPAs) in the country with huge variation in change in law provisions. Second, the DISCOMs will obviously resist any tariff increase particularly when tariffs for new auctions are reaching all-time lows. Third, the entire process for tariff determination, ratification and documentation amendments would easily take up to 6 months or even more. Meanwhile, developers will be under pressure to complete projects on time and lenders will be unwilling to fund extra costs. It wouldn’t be surprising if this process leads to cancellation of some projects altogether.

It is critical for MNRE to step up and play a coordinating role with central and state regulators to ensure that the process of tariff adjustment is as smooth as possible.

We believe that the long-term prospects of the industry would not be impacted by GST move as an increase in tax rates will be quickly offset by falling costs. A commercially viable, non-subsidy dependent sector is naturally more sustainable in the long run. However, we do wonder why solar equipment is attracting higher taxes than coal or other power equipment.

Last week, Solar Energy Corporation of India’s (SECI) 750 MW utility scale auction in Bhadla solar park saw tariffs fall to a new astounding low of INR 2.44 (US¢ 3.79)/ kWh. This comes after much brouhaha over tariffs falling to INR 3.25/ kWh (levelized) and INR 3.15/ kWh in Rewa, Madhya Pradesh and Kadapa, Andhra Pradesh respectively in the last three months. At the same time last year, tariffs for most tenders were observed around INR 4.60 (US¢ 7.1)/kWh mark. What explains a tariff reduction of almost 50% in one year or 25% in just three months?

Module prices fell by 30% in the last one year and developers seem to be counting on a similar fall next year;

Competition amongst developers has intensified due to easing up of new tender announcements and greater private sector interest;

The industry is evolving at break-neck speed and catching policy makers, DISCOMs and even developers unawares;

Winning bidders for the two tenders in Bhadla include ACME (INR 2.44/kWh, 200 MW), Softbank (INR 2.45/kWh, 300 MW), Phelan (INR 2.62/kWh, 50 MW), Avaada (INR 2.62/kWh, 100 MW) and Softbank (INR 2.63/kWh, 100 MW).

A key obvious contributor to falling tariffs is sharp reduction in module prices, down almost 30% in the last one year. And developers seem to be pricing in similar price reduction going forward – at about US ¢ 23/Wp in the next 10 months. Although module industry dynamics remain benign, it seems a very bold call to price such reduction in base case.

Fall in Indian debt cost by up to 1.00% per annum over the last year (equivalent to tariff reduction of approximately INR 0.10/ kWh), higher irradiation in Bhadla (INR 0.15/ kWh), lower solar park charges (INR 0.05/ kWh) and stronger Rupee go some way in explaining the tariff reduction. Another relevant factor is improvement in SECI’s credit rating. The participating bidders’ list in Bhadla tender shows that both Indian and international developers are growing comfortable with SECI offtake risk.

But the other very important factor is increased competition amongst developers due to fewer new tenders and complete lack of pipeline visibility over the next year. We have maintained for some time that the Indian solar market is getting overheated and that these tariffs are unsustainable.

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.

The pace of new tender announcements and completed auctions has slowed down significantly in the last year (-68% and -59% respectively). Southern states have frontloaded capacity buildout – Andhra Pradesh (installed plus tendered capacity of 74% as against March 2022 target), Telangana (70%), Karnataka (69%) – and are bound to slow down. Amongst other large states, Maharashtra and Gujarat, like many others, have surplus power availability and remain unenthusiastic to large solar procurement programs.

Some states that have completed auctions with prices of INR 4.00-5.50/kWh in the last 6-12 months are refusing to sign PPAs creating uncertainty in the market;

Visibility for new tenders has dropped sharply because of surplus power supply in most parts of the country;

Gujarat and Uttar Pradesh could be the two major demand drivers for solar power in the coming years;

Rewa and Kadappa tender results have given new food for thought to policy makers, DISCOMs, project developers and investors. Greenfield solar power at current prices of INR 3.00- 3.50 (US 5¢)/ kWh should create strong demand pull in the medium-to-long term. But in the near term, it is leading to buyer’s remorse for projects already built and under development. In particular, states that have completed auctions with prices of INR 4.00-5.50/kWh in the last 6-12 months (Jharkhand, Andhra Pradesh, Haryana) are refusing to sign PPAs, which is creating uncertainty in the market.

With states unwilling to sign new PPAs, both National Thermal Power Corporation of India (NTPC) and Solar Energy Corporation of India (SECI) are delaying proposed tenders and the pipeline of tenders is running dry. Recently, Gujarat also dropped its plan for setting up a new 4,000 MW coal-based power project because of sufficient supply of power. But encouragingly, the state has indicated that it wishes to focus on renewable power for future procurement. Gujarat is setting up two new solar parks for 500 MW each but the state’s price expectation is believed to be around INR 3 (US 4.7¢)/ kWh in the wake of recent auctions.

BRIDGE TO INDIA believes that as one of the few large states with high power deficit, Uttar Pradesh (UP) could be a major demand driver for solar power in the coming years. The state has the largest peak demand-supply gap in the country and rural electrification rate is as low as 60%. Even though UP has historically been a tough state for private businesses because of poor law and order situation and highly erratic power supply, the state is making steady progress under central government’s UDAY scheme. The new BJP government also seems more business friendly and has made reliable power supply as one of its core policies.

To know more about the performance of various Indian states and our long-term estimates for the market including results from our latest India Solar CEO Survey, read our newly released report – India Solar Handbook 2017.

“We are going to introduce electric vehicles in a very big way,” India’s Minister of Power, Piyush Goyal, stated last week. The Ministry of Heavy Industries and the NITI Aayog are working on a comprehensive policy for promotion of electric vehicles. This policy is expected to provide support for both domestic manufacturing and scaling consumer demand.

India’s electric vehicles industry is nascent with just 0.1% global market share and almost no competitive advantage;

Other countries, particularly China, are spending billions of dollars subsidizing local companies to push them at the forefront of storage and electric mobility technologies;

Growth in electric vehicles can facilitate greatly in energy transition but the market poses formidable infrastructure and financing challenges for Indian policy makers;

India has made little progress in electric mobility since the announcement of the National Electric Mobility Mission Plan in 2013 aiming for over 6 million electric/hybrid vehicles by 2020. As per available government data, only 790 battery operated electric passenger cars were sold in India in 2015-16 (global market share of 0.1%). The National Electric Mobility Mission Plan provides financial incentives of up to INR 138,000 (USD 2,100) for electric and hybrid vehicles. But the budget of INR 1.75 billion (USD 27 million) for FY 2017-18 is too low considering that the ministry’s own estimate for the program is INR 140 billion (USD 2.2 billion) annually.

Many automotive groups including Mahindra, Toyota, Maruti Suzuki, BMW and Volvo already sell battery operated electric or hybrid models in India. Other suppliers are expected to join this market soon but these companies are looking to rely almost completely on imports for key components including batteries. So far, the only exception is a recent announcement from Suzuki Motor Corporation, Toshiba Corporation and Denso Corporation to manufacture lithium-ion battery packs in India.

In comparison, China is a world leader in electric vehicles with over 50% global annual market share. Local manufacturers such as BYD and BAIC are world leaders in this market. The country is considering ramping up progress even further and wants 8% of all vehicles to be electrically powered by next year. China is spending billions of dollars subsidizing local companies to push them at the forefront of electric mobility technologies. It accounted for half of the USD 16 billion in subsidies offered to new-energy car makers in the past decade.

Electric vehicles market is growing rapidly worldwide fueled by stricter environmental measures, technology improvements and cost reduction in energy storage. It is also seen as a vital link in achieving energy transition. That explains the lead taken by the power minister, Piyush Goyal, on the electric mobility initiative despite automobiles falling under the ambit of the Ministry of Heavy Industries. Growth in sales of electric vehicles will lead to more demand for (renewable) power, help in creating a flexible demand source to tackle intermittency issues of renewable power and reduce reliance on (mostly imported) oil.

The ambitions now need to be backed with actions. But while India has a large domestic market, it lacks the fiscal capability and ambition of China and the technology expertise of Japan or South Korea. There are also formidable infrastructure and financing challenges and addressing these will not be easy.

First round of bids was submitted for Solar Energy Corporation of India’s (SECI’s) 750 MW tender in Bhadla Solar Park, Rajasthan last week. A total of 33 developers are believed to have submitted bids for an aggregate capacity of 8,750 MW – an oversubscription of almost 12x. Coming in the wake of intensely competitive bidding in Rewa and Kadappa tenders, the signs are that competition for new projects is getting fiercer particularly as the supply of new projects has slowed down in the last twelve months.

The large oversubscription in Bhadla can be attributed primarily to easing up of new tender announcements and greater private sector interest in the sector;

Lower solar tariffs should ideally provide demand boost for solar projects but ironically they are adding to short-term slowdown as central and state governments reconsider procurement policies;

We expect a slight reduction in new solar capacity addition in India in 2018 before activity picks up again from 2019 onwards;

Most of the active project developers in India including Adani, ReNew, Acme, Azure, SolaireDirect (Engie), FRV, Sembcorp, EDF, Canadian Solar, Aditya Birla, Shapoorji Pallonji, Mytrah, Fortum and Trina Solar have participated in this tender. Notably, Welspun has made a comeback after the sale of its assets to Tata Power. ReNew, SoftBank and Saudi based Alfanar have submitted bids for the entire 750 MW capacity. Adani and SolaireDirect have bid for 550 MW and 500 MW respectively.

We believe that the large oversubscription in Bhadla tender is primarily due to slowdown in new tender issuance but improved credit rating of SECI is also a relevant factor.

The Indian government’s announcement of 100 GW solar target led to a big surge in new tender announcements in H2/2015 and H1/2016 with some large states front-loading their solar power procurement programs. At the peak of tender activity in 2016, SECI tenders were oversubscribed by only about 2x (Maharashtra 450 MW, Andhra Pradesh 400 MW) or even undersubscribed (Odisha 300 MW, Karnataka 950 MW). But growing interest from many large global and domestic solar developers in the sector combined with slowdown in new tenders is leading to a tough competitive environment for project developers.

Figure – Solar tender auction completion

The main problem here is sustaining a high level of new solar power demand from states when many of them are facing power surplus. Solar tariffs in the sub-INR 3.50/ kWh (US¢ 5.4) range should provide huge demand boost for solar power in the long run but ironically, lower tariffs have led to unique challenges in the short-term. Central and state governments are reconsidering their procurement policies leading to postponement of some tenders. Meanwhile, some DISCOMs, having completed auctions with higher tariffs (notably Jharkhand and Odisha), are now having second thoughts on signing PPA’s.

We believe that this short-term lull will lead to fierce competition for new tenders and a slight reduction in new solar capacity addition in 2018 before activity picks up again.

India achieved a record low solar tariff of INR 3.29 (US¢ 5.1)/kWh in the Rewa tender in February. That record was surpassed last week in an auction conducted by National Thermal Power Corporation (NTPC) for a 250 MW project in Kadappa, Andhra Pradesh, where Engie’s Solairedirect submitted the winning bid of INR 3.15 (US¢ 4.9)/kWh. The project will be built in a solar park, developed by the state government. Ostro, Canadian Solar, Greenko, Azure Power, Adani and Mahindra were some of the unsuccessful bidders.

Given that the overall Rewa tender structure was seen as uniquely beneficial to the developers, it is somewhat perplexing to find that tariffs have fallen even further so soon;

Slowdown in new tenders is putting pressure on developers, who are anxious to deploy capital and scale up quickly to monetize previous investments;

With module prices expected to keep falling through 2017, we are likely to see progressively new lows being achieved throughout the year;

Overall risk profile for Rewa and Kadappa projects is somewhat similar although it can be argued that the Rewa tender is more beneficial to project developers. It incorporates many unique provisions such as state government guarantee, deemed generation benefit and extended construction period of 18+12 months (additional reduction in module costs). It is therefore difficult to explain why Kadappa tariff has come even lower than the Rewa tariffs particularly as solar park charges are relatively higher in Kadappa.

One logical explanation for a new low is that Kadappa was the last of the 3,000 MW solar PV projects tendered by NTPC, the best offtaker in the Indian solar market. We had recently highlighted that pace of new utility scale solar tender announcements and project allocations has slowed down considerably to just 4.2 GW and 6 GW respectively, down 70% and 33% between FY 2015-16 and FY 2016-17. This slowdown is putting severe pressure on the 30-40 active developers in the market. The developer community is hungry for more projects to meet their internal targets and to scale up to monetize previous investments.

Tariffs for NTPC projects have declined by about 32% in the last eighteen months since its first auction in Andhra Pradesh in November 2015 for the 500 MW project won by SunEdison. This sharp decline is largely due to steep fall in module costs (33% in the respective period) and intense competition in the sector. We expect the trend to continue in the upcoming 750 MW auction by Solar Energy Corporation of India (SECI) in Bhadla solar park in Rajasthan.

Energy transformation has arrived in India. According to the Ministry of New and Renewable Energy (MNRE), India’s total renewable capacity including solar, wind, bio-mass and small hydro grew by around 11.2 GW in FY 2016-17, at par with thermal capacity addition, which registered a decline of 50% in the year.

The country added 5,526 MW of new solar capacity (up 83% over FY 2015-16) and 5,400 MW of new wind capacity (up 63%) in the year. While these numbers are impressive, it is worth noting that the solar capacity addition including rooftop solar is almost 50% below the annual target of 12,000 MW. In contrast, wind capacity addition was +35% over the 4,000 MW target.

Figure – Renewable and thermal power capacity addition, MW

Sources: CEA, MNRE, BRIDGE TO INDIA research

India added 5.8 GW of renewable capacity in a single month as implementing agencies pushed for commissioning of projects before the close of the financial year;

There has been a downward trend in new renewable allocations in FY 2016-17 and the 2017-18 target of 20,450 MW will be impossible to meet;

As renewables continue to grow, prospects for thermal capacity addition seem limited and we expect renewables to decisively beat thermal capacity addition in the coming years;

The figures released by MNRE suggest that March was a blockbuster month with addition of 5.8 GW renewable capacity in a single month (more than the combined figure for previous eleven months). While financial year end is always busy, we suspect that there was considerable pressure on implementing agencies to boost March numbers to show respectable addition numbers. Second, the developers would also have been keen to bring numbers forward to take advantage of the many financial incentives including generation wind based incentive (GBI) for wind projects, accelerated depreciation and 10-year tax holiday that are going to be significantly cut or phased out completely from April 2017 onwards.

The sector performance on some other measures has been much weaker. Pace of new utility scale solar tender announcements and project allocations slowed down considerably at just 4.2 GW and 6 GW respectively, down 70% and 33% over last year. This downward trend in new allocations is likely to continue, perhaps for another six months, as the government seem to have gone back to drawing board to incorporate learnings from the Rewa tender and India’s first wind tender.

With an even more ambitious target of 20,450 MW for 2017-18 for the renewable sector, it is clear that much more needs to be done to spur further growth. Falling prices will undoubtedly be of major help, but better regulatory enforcement of renewable purchase obligations and the UDAY scheme is critical. Overall, BRIDGE TO INDIA expects 2017-18 to register a very modest growth in renewable capacity addition, which should nonetheless easily come ahead of thermal capacity addition.

BRIDGE TO INDIA is launching India Solar Price Indices, a series of indices to track and monitor key price trends in the Indian solar market. Our objective is to publish pricing data specifically applicable to the Indian solar market – devoid of exchange rate movements or source of equipment. We expect the indices to bring more transparency to the sector and provide reliable, independent information to all key stakeholders including government and regulators, financial institutions, developers, equipment suppliers and contractors.

We plan to release updated price indices every quarter across for four categories:

Modules

Inverters

Utility scale EPC cost (excl land and transmission connectivity costs)

Rooftop solar EPC cost

Methodology

We aim to get pricing information by conducting interviews with a diversified group of 6-10 leading project developers, EPC contractors and module suppliers. Final pricing is obtained by taking a simple average of all responses while ignoring any outliers.

BTI India Solar Module Price Index

This index aims to provide pricing information for multi-crystalline PV modules from tier 1 Chinese suppliers for delivery in the next 3 months with a minimum order size of 50 MW.

Based on the methodology described above, our module price index for March 31, 2017 is INR 22/ Wp (US 33¢/ Wp). This price is CIF India, net of any further port or inland transportation costs.

Note: Prices for past quarters are based on BRIDGE TO INDIA research.

Module prices have been falling steeply due to oversupply and quarterly demand fluctuations in China. Prices have declined 29% y-o-y and 8% over the last quarter.

BTI India Solar Inverter Price Index

This index aims to provide pricing information for central inverters assembled in India for delivery in the next 3 months for a minimum order size of 50 MW.

Based on the methodology described above, our inverter price index for March 31, 2017 is INR 1.9/ Wp. This price is CIF India, net of any further port or inland transportation costs.

Note: Prices for past quarters are based on BRIDGE TO INDIA research.

Inverter prices have fallen considerable in last two years because of increasing competition and entry of new players like TBEA, Huawei and Sungrow. Prices have declined 21% y-o-y and 5% over the last quarter.

BTI India Solar EPC Price Index

This index provides lumpsum EPC price information for utility scale solar projects of 50 MW size. The price excludes land, transmission infrastructure and all soft-development costs.

Based on the methodology described above, our EPC price index for March 31, 2017 is INR 35/ Wp.

Note: Prices for past quarters are based on BRIDGE TO INDIA research.

EPC prices have declined 22% y-o-y and 8% over the last quarter.

BTI India Solar Rooftop EPC Price Index

This index provides EPC price information for a 500 kW rooftop solar project on an industrial pre-fabricated metal structure. Our rooftop solar EPC price index for March 31, 2017 is INR 45/ Wp.

Note: Prices for past quarters are based on BRIDGE TO INDIA research.

Rooftop EPC prices have declined 21% y-o-y and 6% over the last quarter.

India’s first ever wind power auction has resulted in a record low wind power tariff of INR 3.46 (US¢ 5.2)/kWh, just marginally higher than the record low levelized tariff of INR 3.29 (US¢ 4.9)/kWh in the recent Rewa solar auction (refer). Mytrah, Sembcorp, Inox and Ostro are the winning bidders and will be awarded 250 MW each. Successful bidders will sign 25-year PPAs with PTC India, a power trading company (partly owned by the Government of India), which will sign back-to-back PPAs with DISCOMs.

The old model of wind procurement had become dysfunctional and significant delays in signing PPAs, rising incidence of grid curtailment and payment delays of up to 18 months were hurting the developers very badly;

The sector is likely to shift entirely towards auction based allocation route but this transition may lead to a short-term hiatus in the market;

It remains to be seen if investments in transmission grid can keep up with increases in renewable generation capacity and inter-state flows of power;

Historically, states have been procuring wind power under a preferential regime with feed-in-tariffs ranging between INR 4.00-6.00 (US¢ 6-9)/ kWh. The move to auctions and replicate solar model has been very successful with tariffs falling below the critical INR 4.00 (US¢ 6)/kWh mark as predicted by BRIDGE TO INDIA (refer). Inevitably, there are questions about the viability of these tariffs. We believe that the fall is attributable to two main sets of reasons. First, the old model of wind procurement had become dysfunctional. Significant delays in signing PPAs, rising incidence of grid curtailment and payment delays of up to 18 months were hurting developers very badly and damaging sector prospects. By dealing with these risks, the tender has managed to attract intense competition from bidders. The tender also provides a template for locating projects in high wind resource states, Tamil Nadu and Gujarat, and reducing power costs for other states – as with Rewa solar projects supplying power to Delhi Metro Rail.

Second, the preferential tariff regime was used by some wind turbine manufacturers to bundle together land, turbines and EPC work. This allowed them to command significant price premium and dominate the market. Auctions will provide more transparency to the sector, break wind turbine manufacturers’ domination and make the wind turbine market more efficient.

Reduction in tariffs will spur demand and also force a drastic rethink of how wind power is procured in India. The sector is likely to shift entirely towards auction based allocation route. Indian government wants to tender out 4 GW of wind capacity next year but capacity addition through the tendering process often takes a long time. This may lead to a short-term demand hiatus in the market.

Concentrating projects in resource heavy states will also put more strain on the transmission grid. It remains to be seen if investments in grid can keep up with increases in generation capacity and inter-state flows of power.

Madhya Pradesh government has come out with a new decentralised renewable energy policy focusing primarily on rooftop solar

BRIDGE TO INDIA published the 2016 edition of its India Solar Map last week. The report shows that India’s total installed solar capacity has grown by over 80% in the year ending June 2016 to reach 8.1 GW. Out of the 3.6 GW capacity added in this period, 75% has come from four southern states and Tamil Nadu now ranks number 1 for commissioned capacity. An additional 14,842 MW of projects are under development where auctions have already been completed. The majority (56%) of this pipeline is concentrated in the three southern states of Karnataka, Andhra Pradesh and Telangana.

Total commissioned plus pipeline capacity, split nearly 40:60 between central government and state government policy projects, has grown to 23 GW, +70% over last year

Despite growing market, project development space is getting more concentrated wherein top 15 developers have gained nearly 50% market share; most players have 2-4x more capacity under development than their commissioned capacity and their ability to scale up will be critically tested in the coming year

Amongst the equipment suppliers, top players include Canadian Solar and Trina Solar for modules and ABB, TMEIC and Hitachi for inverters

With 460 MW capacity commissioned in the last year, Adani ranks number 1 amongst project developers followed by Acme and Welspun. Going forward, Adani, Acme and ReNew are likely to continue to be dominant players with each of them having a pipeline of over 1 GW. Most large developers have 2-4x more capacity under development than their commissioned capacity. It will be interesting to see how many of them can successfully meet the financial and operational challenges to scale up as required. Interestingly, the list of top 10 developers is dominated by Indian corporates/ IPPs with First Solar and SunEdison the only international players. Strong concentration effect is also evident despite entry of many new players in the sector; more than 50% of total commissioned plus pipeline capacity is accounted for by top 15 developers.

Leading players based on capacity deployed in 12 months up to June 2016

Amongst module suppliers, Canadian Solar, Trina and First Solar take the first three spots. 7 out of top 10 module suppliers in India are now from China as against just 4 out of top 10 in the previous year. Big change is significant pick up in market share by new Chinese suppliers including JA Solar, GCL Poly, BYD, Talesun and Risen. These companies had a very marginal presence in the market previously but now have a combined market share of 22%.

ABB continues to dominate the inverter market with a commanding 35% market share. Japanese players, notably TMEIC and Hitachi, have also gained a significant market share. It is worth noting that all three companies are assembling their products within India. Chinese inverter suppliers such as TBEA, Sungrow and Huawei are also in the top 10 and becoming more aggressive in the market.

The role played by third party EPC players continues to diminish. 48% of the capacity commissioned in the last year (up from 31%) was executed by in-house EPC teams. This business is dominated by a mix of Indian corporates and specialist players with top spots held by Mahindra Susten, Sterling & Wilson and L&T. Gamesa is the only international EPC player in the top 10.

The Indian solar market is expected to continue to grow at a strong pace at least for the next couple of years. Most of the strain caused by aggressive bids has been eased by rapid reduction in module costs. Longer term, sustainable growth will depend on growth in national power demand and robustness of the transmission grid to cope with an increasing share of renewables.

The report contains lots of other vital information on state-wise and policy-wise progress of the Indian solar market along with tariff trends and performance of companies (download it here for free).

Results were announced last week for 1,050 MW of projects tendered by Solar Energy Corporation of India (SECI) in Karnataka (950 MW) and Chhattisgarh (100 MW) under the Viability Gap Funding (VGF) scheme. These projects will be set up outside solar parks and will have no module sourcing restrictions. Adani (350 MW), Hero Future Energies (200 MW), Energon (100 MW), Acme Solar (160 MW) and Solar Arise (30 MW) are the big winners in Karnataka with Adani winning the entire 100 MW capacity available in Chhattisgarh.

Recent tenders show that level of oversubscription and/or bidding intensity has come down markedly over the last 6 months

While international developers have won a majority (58%) of NTPC projects, 62% of SECI pipeline and 51% of state policy pipeline has been allocated to Indian corporates

As many of the leading developers get occupied with execution and/or capital raising, reduction in bidding intensity should provide an attractive bidding opportunity to newer players

Both tenders saw limited participation and the level of oversubscription and/or bidding intensity has come down markedly over the last 6 months. With an extraordinary 12 GW of projects in pipeline where tender process has already been completed, developers appear to be getting more selective and disciplined in their bids. The winning VGF in Karnataka is in the range of INR 6.8m/MW to INR 7.35m/MW and the Chhattisgarh project has been won at a VGF of INR 5.9m/MW. These levels are considerably higher in comparison to VGF quoted recently in Andhra Pradesh in May 2016 where the lowest VGF was INR 4.45m/MW. However, it is interesting to note that Hero Future Energies and Adani submitted more aggressive bids in Karnataka and Chhattisgarh tenders respectively with other bidders refusing to match their levels.

The other key trend we see is that with NTPC coming close to completing its target of 3,000 MW of project allocations, the Indian corporate houses are playing a leading role in the sector. Both tenders were dominated by Indian developers. Adani has been a dark horse in the sector. It entered the market only about a year back but is now on track to build a portfolio of 1.2 GW, amongst one of the highest in the country. In contrast, many of the large international developers, interested primarily in NTPC tenders, are relatively quiet.

Our analysis shows that Indian corporates are leading the charge in SECI and state tenders particularly where there is no solar park availability. They are understandably more willing to take higher offtake and development risk. While international developers have won a majority (58%) of NTPC projects, Indian corporates have won the majority of SECI pipeline (62%) and state policy pipeline (51%).

SECI is expected to announce new tenders in Andhra Pradesh and Maharashtra very shortly. As many of the leading developers get occupied with execution and/or capital raising, reduction in bidding intensity should provide an attractive bidding opportunity to newer players.

In other sector news, capital raising seems high on the agenda of many developers. Welspun has just agreed to sell its 990 MW portfolio to Tata Power again affirming the growing appetite of Indian corporate houses in the sector. Meanwhile, Azure and ReNew Power are busy with preparations for IPO.

Last week, three e-auctions of solar projects were completed by National Thermal Power Corporation (NTPC). Our summary observations are as below:

Competition continues to be intense with Softbank-Bharti group JV winning 350 MW in Andhra Pradesh at a price of INR 4.63/kWh. Interestingly, despite winning the previous allocation of 500 MW at INR 4.63/kWh, SunEdison didn’t qualify for the second round in this project.

BRIDGE TO INDIA expects tariffs to go down further for upcoming auctions in Rajasthan (420 MW) and Karnataka (600 MW) with some possible upward adjustment in the market thereafter.

Projects with domestic module stipulation see price premium of 11%.

The three auctions completed last week were for the following projects:

A 350 MW solar project in government solar park at Gani-Sakunala, Andhra Pradesh was won by a Softbank-Bharti group JV on PPA basis at a price of INR 4.63/kWh;

3 x 50 MW projects in government solar park at Gani-Sakunala, Andhra Pradesh were won by Azure Power (100 MW) at INR 5.12/kWh and Adani Group (50 MW) at INR 5.13/kWh respectively on PPA basis – these projects had the stipulation of using domestically manufactured cells and modules;

4 x 65 MW projects were won by Vikram Solar (130 MW at INR 56.28 million/MW), Jakson (65 MW at INR 56.34 million/MW) and Tata Power (65 MW at INR 56.40 million/MW) on EPC basis in Bhadla solar park, Rajasthan again using domestically manufactured cells and modules – these projects will be developed and financed by NTPC.

After announcing the 100 GW target, Indian government is walking the talk. Auction process has already been completed for over 10 GW of solar projects and a further 6.5 GW of solar projects are expected to be allocated in the next three months. This frenetic pace of activity is a big step-up in contrast to historic solar capacity addition of approximately 1 GW per annum over last three years.

Despite the huge pipeline, the auctions continue to see intense competition with tariffs coming down sharply. Several developers including Indiabulls, FRV, ReNew, Reliance, Azure Power, Orange Renewables and Acme have shown appetite to win projects at tariffs of less than INR 5/kWh.

While several market participants have expressed concerns at such low tariffs, BRIDGE TO INDIA believes that competition has been particularly intense for these projects as they offered the best risk profile for international developers in India – no land acquisition or transmission connectivity risk combined with possibly the best India off-take risk in the form of NTPC. It is also worth noting that: i) these projects were the first to be auctioned under National Solar Mission after a gap of about two years; and ii) projects have been auctioned in such large sizes for the first time in India providing developers with significant scope to optimize operating costs. Earlier auctions typically had a cap of 50 or 100 MW per developer. Both these factors added further to the intense competition.

BRIDGE TO INDIA expects strong competition to persist for solar park based bidding in Rajasthan (420 MW) and Karnataka (500 MW open and 100 MW DCR) organized by NTPC. These auctions are due in next two months. Indeed, tariffs could go down even below INR 4.63/kWh as solar park charges for these states are lower than that in Andhra Pradesh. Going beyond that, we expect competition to ease slightly for projects tendered by Solar Energy Corporation of India (SECI).

On 20th November 2015, Karnataka Renewable Energy Development Agency issued a request for selection (RFS) for allocating 1,200 MW of solar PV projects. Karnataka has already allocated 690 MW of solar projects previously in phases (130 MW in 2012, 60 MW in 2013 and 500 MW in 2014). According to BRIDGE TO INDIA research total capacity commissioned in Karnataka is 126 MW under state policy. With 564 MW in pipeline and another 1800 MW under allocation process (including 600 MW by NTPC), we expect Karnataka to become the second leading state in terms of capacity (MW) allocated by states, next only to Telangana (refer).

Salient features of the tender:

Projects will be allocated through a reverse bidding process and allocation would be done Taluk-wise.

The size of each project is specified as between 3-20 MW and there is no upper limit specified for bids by individual developers.

Up to 100 MW capacity has been reserved for module manufacturers in Karnataka.

Benchmark tariff, the highest that a developer can bid, is INR 6.51/kWh (10 US cents).

Time allowed for commissioning is 18 months.

Developers are required to identify and acquire land on their own.

A list of 60 Taluks has been identified (out of a total of 177 Taluks in Karnataka) and each such Taluk can have a maximum capacity of only 20 MW. The Taluk based bidding process is unique with the rationale seemingly being that the state wants to disperse solar capacity across different regions rather than creating large concentrated capacity. This is desirable from the point of view of reducing stress on transmission infrastructure but will create many complications in bidding and lead to inconsistent competition as some Taluks may be more lucrative than others (differences in radiation, transmission infrastructure and land prices). It is also not clear what will happen if some Taluks get multiple bids at a very competitive price, say INR 5/kWh and another Taluk gets the lowest bid at INR 5.50/kWh.  Will the state be willing to pay a price premium?

Reserving capacity of up to 100 MW capacity for local module manufacturers  is also highly unusual. No other state or central policy has ever imposed such a condition previously. Major module manufacturers in Karnataka are Emmvee and HHV.

Last allocation of 500 MW in Karnataka in 2014 was oversubscribed by 3 times with successful bids falling in the price range of INR 6.71-7.12/kWh. Ongoing projects under state and central schemes are receiving aggressive bids in the range of INR 4.63-5.98/kWh. However, with restrictions on capacity developed under each Taluk it would be difficult for developers to scale up projects and we might actually see higher tariff bids for this tender.

Mr. Piyush Goyal, Minister for New and Renewable Energy, announced last week that the government plans to waive interstate transmission charges for electricity generated by renewable sources (refer). This waiver was earlier included in the proposed amendments to the country’s existing tariff policy of 2005 (refer), but the amendments are yet to be approved. However, for speedy promotion of renewable energy projects, the central government is actively moving to implement amendments such as the waiver of interstate transmission charges that are under its control.

To meet the 60 GW of utility scale solar target, interstate power transmission is essential and needs to be encouraged.

Waiver of interstate transmission charges will allow developers to install solar projects in states with cheaper land (wasteland) and higher irradiation.

The grid infrastructure will need to be strengthened to evacuate power. Waiver of transmission charges is a positive short term support for the sector but it is more important to make the necessary investment commercially viable for sustainable growth of the sector.

At present, solar projects are usually developed close to consumption centres within the same state. If the interstate transmission charges are waived, greater number of solar projects will be installed in states which are providing better economics to project developers, leading to higher concentration of solar projects in those select states, for example, Rajasthan, Gujarat, Madhya Pradesh, Andhra Pradesh and Telangana. However, these states cannot necessarily absorb the higher capacity of intermittent power in local load centres. The role of interstate transmission of power will thus become crucial as the penetration increases. The incentive in the form of free transmission of power will therefore provide a major boost to the solar sector.

Figure 1: Target of 60 GW utility scale segment by 2022

A good example of the benefit of this waiver will be solar power procurement for the state of Delhi. Land in Delhi is expensive and scarcely available. The power distribution companies of Delhi plan to buy solar power from projects set up in states such as Madhya Pradesh and Rajasthan. Waiver of transmission charges could result in lowering of solar power tariff by up to 10%.

Obviously, free transmission is a positive move for the sector but this policy should be seen only as a short term incentive. The inter-state transmission corridors need massive investment, estimated at INR 430 bn covering the states of Tamil Nadu, Karnataka, Andhra Pradesh, Gujarat, Maharashtra, Rajasthan, Himachal Pradesh and Jammu & Kashmir (refer). This investment needs to be commercially viable to make the long-term prospects of solar energy sustainable.

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India has made tremendous strides in the development of its solar sector in last 18 months. As of today, the country has a solar project pipeline of 13 GW. These are projects, for which either PPAs have already been signed or tenders are issued. Most of these projects should be commissioned by the end of 2016 or early 2017.

Southern states are most ambitious and drive solar under their own state solar policies. Telangana, Tamil Nadu, Andhra Pradesh and Karnataka jointly aim for more than 8.8 GW.

Under central allocations (National Solar Mission, Phase II), 3,600 MW are in the pipeline.

2016 will be the market’s transition year: annual solar installations could triple and India could become a top global solar market.

Figure 1: State wise new capacity additions expected, MW, as on September 30, 2015

Seeing the current pace of development, almost 50% of the cumulative solar capacity expected to be installed by 2017 will be in four southern states including, Telangana, Andhra Pradesh, Tamil Nadu and Karnataka, leaving behind Rajasthan and Gujarat.

Southern states are more aggressive because they still have the highest power deficits (in 2014-15, 6-7 per cent of peak deficit and expected to be 19.8% for 2015-16). The crisis is primarily the result of the ongoing slump in fresh thermal capacity addition, a historic dip in hydro reservoir levels feeding southern stations and decline in gas supply. Therefore these states see solar as a viable and attractive option as solar can be built up very rapidly and is driven mostly by private investment.

Other key reason is that the southern grid is connected to the eastern and western regions through asynchronous links, severely limiting the power transfer capacity. The transfer capacity between the western and the southern regions stands at 1,520 MW against 4,220 MW between the western and northern regions and 4,390 MW between the western and eastern regions. Because of this solar has increasingly started playing an important role in these regions and is expected to remain so in next 2-3 years also.

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The recent National Solar Mission (NSM) tenders have been delayed multiple times before and are again delayed now. This pattern of delays is not new.

Only one of the 30 odd bids in India has gone through without significant extensions or delays

Main culprits are process delays by implementation agencies and requests for time extension from developers – these delays affect sector development as many players, particularly the new entrants are not conditioned to respond to the way business is carried out in India

MNRE should play a key role in streamlining the somewhat disorganized tender process so as to improve the ‘ease of doing business’

Out of the approximately 30 solar tenders so far in India, only one has been submitted on the original date mentioned in the bid document – this was the 500 MW tender in Karnataka in June 2014. Other than this, most bids have been delayed by a few months. A bid for a 50 MW tender in Haryana was delayed by as much as five months.

Another cause for concern for the new NSM tenders is the decreasing accessibility under the online tendering process. Earlier, all new tenders were announced in the newspapers, on Ministry of New and Renewable Energy’s (MNRE) website and on the website of the tendering authority like NTPC Vidyut Vyapar Nigam Limited (NVVN) or Solar Energy Corporation of India (SECI). The openly available tenders allowed the media and the market to scrutinize and publicize them for the global audience. Under the new NSM bids released by National Thermal Power Corporation (NTPC), the announcements and the bid documents are only available on a paid portal. This paid portal and its somewhat complicated access procedures are an unnecessary hassle for developers.

With the floodgates on solar capacity allocations now open in India, there is an urgent need to streamline processes. By improving their internal planning and providing advance notice of (more realistic) bidding timelines, the tendering authorities can provide better transparency to the market and minimize delays. MNRE should also focus on improving the ‘ease of doing business’ by for example, developing a special online portal for launching all central and state solar project tenders in one place and possibly, spreading the tenders evenly over time.

We expect such measures to boost confidence in the sector and improve participation particularly from the international developers.

The Indian Parliament recently concluded a literally washed out monsoon session. The key Amendments for Electricity Act 2003, which the Parliamentary Standing Committee had already recommended was ready but not tabled (refer here to read why this matters for the solar sector). Another important proposal to amend the National Tariff Policy 2005 has been severely watered down (refer here to read about its proposed impact on the solar sector).

Amendments to the Electricity Act are ready but could not be introduced in the parliament.

Dropping of the compulsory adherence clause in the amendment to the National Tariff Policy will undermine the impact of the reform.

Written replies to questions raised by parliamentarians revealed several aspects of various government initiatives.

Amendments to the Electricity Act are the cornerstone – the legislation will reorder the regulatory landscape for the entire power sector in the country. This includes an enhancement of Renewable Purchase Obligation (RPO) targets, introduction of Renewable Generation Obligation (RGO) targets, penalties on RPO and RGO non-compliance, ease of doing business for renewable micro-grids for rural electrification and other, broader power sector reforms such as separation of content and carriage.

Amendments proposed for the National Tariff Policy 2005 originally had provisions to allow for cost-free interstate transmission of renewable power, procurement of bundled solar power by DISCOMs from conventional power generators on a cost plus basis, easy pass-through of RPO compliance cost and several other, larger tariff structure related reforms for the power sector. State regulatory commissions, however, claimed that several amendments were infringing upon the state rights. Subsequently, the government has dropped the compulsory adherence clause of the amendments, making it more of a guideline. BRIDGE TO INDIA believes that as a result, the impact of the reform will be undermined.

Interestingly, the written replies by the Ministry of New and Renewable Energy (MNRE) to questions asked by parliamentarians revealed a lot about the government’s thinking on solar. The government provided the latest breakup and timeline of the 100 GW target (refer, refer) and announced several plans to reduce the cost of financing for renewable projects (refer).  It also provided clarity on various initiatives for achieving  the 40 GW rooftop target solar plan and incentives (refer) and financial status of the National Clean Energy Fund (refer).

As the parliament session showed, the Indian political system has little appetite for big-bang reforms in the power sector. The central government is keen to drive change but it is dependent on state governments to come onboard.  The treacherous issues of high transmission, distribution and commercial losses, including theft, and insolvent DISCOMs remain the weakest links in the sector.

Financial bids were opened today (3rd August 2015) for the 2,000 MW solar tender in Telangana. This is the single largest allocation in the country till date. According to unconfirmed sources, the lowest tariff for this bid has been quoted at INR 5.17/kWh by SkyPower. Sky Power had also quoted the lowest tariff in Madhya Pradesh at INR 5.05/kWh.

Despite the manifold increase in the number and capacity of allocations in India, competition remains intense

Appetite of developers has also increased manifold and several new players have entered the market

We expect NSM bids for 420 MW in Rajasthan to witness even more intense competition

Bids for a total of 4,988 MW were submitted by 101 developers, i.e., an oversubscription of around 250%. Some of the prominent developers that had bid for these allocations include: SunEdison (580 MW), Acme Solar (510 MW of bids), Adani Power (492 MW), Renew Power (400 MW), Reliance Power (400 MW), Mytrah (350 MW), Suzlon (260 MW), Sky Power (200 MW), Shapoorji Pallonji (150 MW), Mahindra EPC (142 MW), Hero Future Energies (100 MW), Fonroche Energies (100 MW) and Energon Solar (100 MW).

It is interesting to note that even though the tariffs are aggressive, most developers have bid at tariffs that are on a higher side as compared to those quoted in Madhya Pradesh last month (refer). The primary reason for this difference is that unlike the normal 11 or 12 months provided for commissioning of projects in most states, Madhya Pradesh allowed a generous 18 months for commissioning of projects. In Telangana, the projects will likely be commissioned within 2016, whereas, in Madhya Pradesh, projects will likely be commissioned much later, i.e. in Q3 2017. Developers have bid more aggressively in Madhya Pradesh expecting greater cost reductions over the extended period. Another reason for the more aggressive bids in Madhya Pradesh is the availability of government land for lease at a comparatively low costs. Also, the larger overall size of the allocation in Telangana might have taken some heat off the competition.

This argument also has a bearing on expected results from allocations planned under the National Solar Mission (NSM) starting this month for a total capacity of 1,420 MW. Even though NSM projects are most favoured by developers resulting in more aggressive tariffs, we expect NSM bids in Andhra Pradesh to be slightly higher than those in Madhya Pradesh because of the higher cost and implementation risk of solar parks infrastructure.

In general, despite the manifold increase in capacity allocations, competition remains intense because of increasing appetite of existing players and entry of many new players. We expect this trend to continue as the sector continues to attract further players and project sizes grow resulting in more efficient procurement.

Recently, the Ministry of New and Renewable Energy (MNRE) released a draft of the “National Renewable Energy Act” (refer). Along with the proposed amendments to the Electricity Act 2003 and the National Tariff Policy 2005 (refer), this act will create structural policy changes to help increase the share of renewables in India’s energy mix. In the first section, the document describes in detail how institutional structures would be created. However, it is the subsequent sections that have caught our attention. This is our take:

National, uniform and mandatory regulations will govern renewable purchase obligations

A “National Renewable Energy Fund” will be created and a fixed portion of the National Clean Energy Fund will be directly channeled into it

There will be guidelines for renewable energy procurement, including but not limited to competitive bidding processes

The first interesting point relates to getting India’s states on board. The Renewable Energy Act envisages that the central government and each state government will formulate a renewable energy policy and a renewable energy plan. As a part of a “National Renewable Energy Plan” a framework would be created for a national, uniform and mandatory renewable purchase obligation (RPO) trajectory for all obligated entities. Currently, each state fixes its own trajectory for RPOs and solar RPOs that have been set still relate to the earlier, lower national target of 3% (it is now 10.25%). This is in addition to earlier changes of the the Electricity Act and Tariff Policy amendments, where provisions have been made for imposing fines for non-compliance and easy pass through of costs through tariffs for effective compliance.

We understand that the fundamental problem that power is a concurrent subject still remains. However, the central government has several levers that it can use to get states to toe its line. Availability of funds and a clout in fuel supply, power generation and power transmission through central government owned companies are examples of such levers. In the past, the push for renewables from the central government has not been as strong as it seems now. Usually, state governments do not have a lot of incentive in deviating too far from the central government policies. We are hopeful that this on-going effort will yield results on setting up and implementation of obligations.

A second interesting point relates to India’s National Clean Energy Fund (NCEF). This fund is provisioned by an INR 200 cess on every ton of coal used in the country (the cess was just doubled in the last budget in February this year). The fund has a current corpus of INR 170 billion (USD 2.6 billion) (refer). However, only a small portion of this fund has been made available for renewables. In the past, it was used mostly for fiscal troubleshooting with very little transparency. The new Renewable Energy Act now proposes to set aside a fixed portion, yet to be determined, of the funds for a separate National Renewable Energy Fund. This fund will be under the control of the relevant implementing authorities, primarily MNRE. With more clarity on availability of funds, MNRE can set up more predictable support and policy schemes.

A third noteworthy suggestion relates to creating a more uniform project allocation process. Currently, most allocations in the country are based on tariff bidding against benchmarks set by various regulatory commissions. The proposed amendments to the National Tariff Policy 2005 provides for a provision for obligated entities procuring solar power on a cost plus basis from conventional power generators who need to meet their Renewable Generation Obligation (RGO). This can have huge implications on the solar market in India. It is essential that the process for such allocations is completely transparent and provides a level-playing field. In light of this, the draft Renewable Energy Act states that the ministry would publish guidelines for procurement mechanisms, including but not limited to competitive bidding processes.

With the proposed amendments to the Electricity Act 2003, the National Tariff policy 2005, the announcement of National Renewable Energy Act 2015, the expected announcements on the national and state Renewable Energy Policies and Renewable Energy Plans, a near complete demand creation framework for renewables is being formulated at the central government level.

All these bills need to first pass the hurdle of the legislative process in the Parliament. While the Electricity Act amendments have already been tabled, the Tariff Policy amendments and Renewable Energy Act should be ready by the winter or latest by budget session (later part of the financial year 2015-16). Following this Act, the central government would introduce a renewable energy policy and a renewable energy plan and also facilitate state level renewable energy policies and state level renewable energy plans.

It seems that this entire framework will require at least until the middle of 2017 to become operational. Until then, the government wants to provide an early push and allocate up to 15,000 MW of solar projects under the current framework.

From 2010 to 2013, solar costs have come down dramatically. For the past two years, experts had been saying that solar prices would remain stable. However, at least in India, cost reduction, while slowing, has not halted. Project implementation costs have fallen by almost 10% in 2013 and another 12% in 2014. While module costs have fallen by roughly 10%, a similar, if not higher, cost reduction has come from inverters, mounting structures and other BOS.

There are murmurs that Chinese suppliers may have asked for renegotiations with Indian developers because of the increased demand from within China

Supply capability of prominent mounting structure manufacturers and inverter assembly companies is limited and a spike in demand may lead to increase in costs

With increased demand, input costs may rise in the domestic market in the short term

Globally, solar installations have been growing at an impressive pace. A large share of growth has come from China, which is also the world’s largest solar modules supplier. On the modules side, global factors contribute more to the final cost of solar modules in India than what happens in the country itself. On one hand, there are murmurs that Chinese suppliers may have asked for renegotiations with Indian developers because of the increased demand from within China. On the other hand, polysilicon costs have fallen dramatically this year. The module costs can go anywhere from here. Most analysts have given a flat outlook for module costs.

Inverter costs in India are amongst the lowest globally. This has primarily been driven by local assembly and by intense competition. However, the local assembly capacity is limited. If the Indian market suddenly starts growing at 4-5 GW a year, up from the 1 GW in 2014, the existing capacity might not be able to ramp up that quickly. This would necessitate fully assembled imports that are more expensive, leading to an increase in inverter costs.

Falling cost for module mounting structures has been one of the biggest contributor to the fall in project cost. They have fallen by almost 60% in the past 4-5 years. The manufacturing of structures is a fairly consolidated market with the top five companies in India controlling 80% of the market share. These players have a cumulative capacity of 2,300 MW per year. This might seem like a solid base for future growth. However, the demand in India is cyclical and driven by policies. Timely deliveries for the entire 2,300 MW will already be an issue, leave alone catering to a 4,000-5,000 MW market. The costs for mounting structures can also go up if there is a spike in capacity addition. However, this increase will be short lived as companies can start buying parts of the structure from other steel fabricators.

Until now, tariff based bids have been very competitive. Far fewer projects have been allocated as compared to the development appetite of the private sector. This year, the central government wants to allocate 10 GW of capacity. Over and above that, Uttar Pradesh, Tamil Nadu, Karnataka, Maharashtra and other states have or might bring their own capacities. Tamil Nadu is signing PPAs at an attractive tariff of INR 7.01/kWh. With so much capacity up for grabs, the bids might not be as competitive as they have been in the past, where developers had to make do with sub-optimal returns. Margins along the value chain might recover. This, coupled with any increase in input costs might push the solar tariffs up, at least in the short term. In the medium to long term, the cost trend continues to be downward.

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

Over the past months, several international PV module manufacturers have announced plans to ‘Make in India’. While Trina Solar and Canadian Solar have declared that they are setting up manufacturing capacities in India, First Solar and SunEdison have stated that they are studying the viability of manufacturing capacity in India.  As per BRIDGE TO INDIA’s sources; at least two other large international manufacturers are seriously considering setting up cell and manufacturing capacities in the country. As per our estimates, around 2,000 MW per year of manufacturing capacity is in the planning stages.

Firstly the anticipated demand of solar in India is on the rise

Secondly financial incentive of up to 25% of the capital cost of module manufacturing facilities is available under the M-SIPS

Some of the state governments are providing further incentives for setting up solar manufacturing facilities

Several factors are attracting international interest in setting up solar manufacturing capacity in India. The most important factor, of course, is the rising anticipated demand in the country combined with India’s persistence with domestic content requirement policy for a part of the total capacity requirements. The second important factor is the availability of a financial incentive of up to 25% of the capital cost of module manufacturing facilities under the Modified Special Incentive Package Scheme (M-SIPS) of Ministry of Communications and Information Technology for applications submitted by the end of this month (May 2015). Minimum investment requirement for crystalline cell and module line is INR 1 billion (USD 15.7 m) and for thin-film line, it is INR 3 billion (USD 47.1 m). These requirements translate into a 60 MW crystalline cell and module manufacturing facility. Most international manufacturers are expected to be planning much bigger facilities of more than 200 MW each.

In addition, some state governments are providing further incentives for setting up solar manufacturing facilities. For example, Andhra Pradesh, which has one of the better policies, provides additional financial assistance of up to INR 2.5 million (USD 40,000) along with subsidy in power tariffs, exemption of stamp duty, VAT/CST tax exemption for first five years of operation and several other smaller grants and subsidies on aspects such as skill up-gradation, patent filing, certification and participation in international exhibitions. It also provides exemption from inspection under several local laws to improve the ease of doing business.

Depending on the availability of funds under the M-SIPS scheme and growth of the solar sector in India, up to 2,000 MW of module manufacturing capacity may come on stream over the next couple of years. If this capacity is globally competitive, it could be used to meet domestic demand and also cater to some export markets. But one thing is for sure – the existing manufacturers will need to up their game to compete with the new players.

BRIDGE TO INDIA understands that based on the rooftop solar target of 40 GW of by 2022, the Ministry of New and Renewable Energy (MNRE) is in advanced stages of working on a central government supported sub-target of 10 GW for rooftop and other small grid-connected solar projects by 2018. This is expected to further be divided into yearly targets of 2 GW, 4 GW and 4 GW for the three years.

The subsidy mechanism is expected to be replaced by an interest rate subvention scheme

BRIDGE TO INDIA hopes that quality of new projects is not adversely impacted by aggressive plans

Though some detail has started emerging on how the overall 100 GW target may be achieved, but market is still waiting for a coherent roadmap for the sector

And although the MNRE has recently approved capital subsidy allocation for around 300 MW of rooftop projects being planned by SECI, state nodal agencies and institutions such DMRC and IOCL (refer), we believe that it is in favor of completely scrapping the subsidy scheme. This step is being influenced by the inputs received during the stakeholder meeting organized by MNRE on 19th March 2015 (refer). The subsidy mechanism is expected to be replaced by an interest rate subvention scheme although it may take some time before that is finalized. As part of the interest rate subvention scheme, the MNRE is planning to reduce effective interest rate for rooftop solar projects to around 8.5% p.a. helping to reduce the levelized cost by around 10%. The MNRE is already believed to have received funding interest of EUR1 billion from kfW, USD 500 million from Asian Development Bank and USD 500 million from the World Bank. If this goes through, this should be enough to provide debt to around 2.5 GW of rooftop solar (or 25% of the 10 GW target by 2018). Our understanding is that the USD 500 million funding from World Bank is likely to be restricted to sale of power (or RESCO/OPEX) projects.

These targets are very ambitious from a short-term capacity ramp up perspective. Until now, India has been adding only around 50 MW of rooftop solar a year. Going from these numbers to 2 GW of new capacity addition in 1 year sounds implausible as there is simply not enough execution capacity (trained manpower, distribution network, financing) in the sector. By rushing through with such aggressive plans, we hope that quality of new projects is not adversely impacted.

The good news is that some detail has slowly started emerging on how the overall 100 GW target for 2022 may be achieved. The central government has already announced plans to develop 15 GW of utility scale projects by 2019. The bad news is that most of the new announcements seem to be ad-hoc. The market is still waiting for a larger coherent roadmap for the sector and an understanding of where and how these pieces of policy will eventually fit in.

Punjab had floated a tender in December 2014 (refer) for the second phase of allocations in the state for 250 MW of solar PV projects. The state received eligible bids for over 300 MW (our estimate 344 MW) but details have not yet been officially released. Projects were divided in three categories: category one was for a total of 50 MW with project sizes between 1 MW and 4 MW, category two was for 100 MW with project sizes between 5 MW and 24 MW and category three was for 100 MW with project sizes between 25 MW and 100 MW.

Despite severe land constraints in Punjab, developers prefer larger projects with comparatively lower transaction costs and more options for financial engineering

Among the prominent developers that have participated in the bidding were Solairedirect, Acme, Azure and Welspun

Post the Punjab allocations, new state level allocations are now expected only in Uttar Pradesh and Tamil Nadu

Based on unconfirmed information, the category one (for smaller projects) has been undersubscribed with eligible bids being received for less than 35 MW, category two (for mid-sized projects) has received bids for a little more than the available 100 MW and category three (for large projects) has been twice oversubscribed. Even in the second category of projects, almost all bids have been for 24 MW of capacity, i.e. the maximum possible allocation under that category. Despite severe land constraints in the state, this result underlines the trend that developers prefer larger projects with comparatively lower transaction costs and more options for financial engineering.

Among the prominent developers that have participated in the bidding were Solairedirect, Acme, Azure and Welspun. Interestingly, Punj Lloyd, which has not participated in other bids in the country after its early project under batch one of phase one of the NSM, has made a comeback. RattanIndia Power (formerly known as Indiabulls Power) also participated in the process (RattanIndia Power has also recently launched a rooftop solar subsidiary called “Apna Solar”). The lowest bid of INR 6.88/kWh (USD 0.11/kWh) has been submitted by Solairedirect for a 24 MW project under category two and a 30 MW project under category three.

In the six months preceding the allocations in Punjab, the states of Telangana, Andhra Pradesh and Karnataka had already allocated projects. With the closure of the Punjab allocations, new state level allocations are now expected only in Uttar Pradesh and Tamil Nadu. 2015 is likely to be dominated by central government allocations as states will likely take a back seat for most of this year.