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India Renewable Sector Update – November 2022

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This video presents a summary of major sector developments including tender issuance, auctions, policy and regulatory developments, financial deals and related market trends in November 2022.

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2022 review | Corporate renewable market coming of age

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India added 3,761 MW corporate renewable capacity in first nine months of the year, 61% more than in whole of 2021. The numbers are especially pleasing because of a series of recent adverse developments including increase in construction costs, imposition of BCD and ALMM, and high policy uncertainty. The jump has come mainly from spurt in solar open access (OA) capacity addition of 2,608 MW in the first nine months. In comparison, both OA wind and rooftop solar have been struggling with total capacity addition of only 1,153 MW.

Figure 1: Corporate renewable capacity addition, MW

Source: BRIDGE TO INDIA research

OA growth has been led by Tamil Nadu (750 MW) and Karnataka (643 MW) together accounting for 49% of capacity addition in the 9 months to September 2022. These two states have been mainstay of the business for a few years. The major positive is emergence of other bigger states like Maharashtra (386 MW), Gujarat (336 MW) and Rajasthan (203 MW) as growth engines.

OA market resilience can be attributed to two developments. There is a paradigm shift in consumer behaviour with larger corporates driven more by decarbonisation push rather than cost savings. That has made a big difference at a time when costs and tariffs have been inching up. Adoption of net zero and other such pledges like RE100 is leading to pressure to increase renewable penetration as evident from recent deals by Vedanta, Amazon, ArcelorMittal, Adani and Reliance. We understand that Reliance alone plans to install 20 GW captive solar generation capacity by around 2027.

Figure 2: Major renewable OA project announcements

The corporate push, in turn, is giving way to a more favourable policy environment. The central government has taken the lead with new green OA rules, new RPO trajectory until FY 2030, ISTS waiver and relaxation of transmission connectivity procedure. The recently launched green open access portal has already seen 2,210 project applications being approved. Even state governments and DISCOMs, historically resistant to the market, are beginning to bow to consumer demand – Gujarat and Maharashtra being prime examples in that regard. Karnataka, Madhya Pradesh, West Bengal and Punjab have already issued draft policies consistent with green OA rules. Five states including Haryana, Madhya Pradesh, Chhattisgarh, Himachal Pradesh and Punjab have proposed to accept revised national RPO trajectory.

BCD, ALMM and shortage of high efficiency modules domestically still pose considerable short-term hurdles. But to compensate, we expect CERC to effect ISTS waiver for OA projects in the coming few months. That, together with module supply situation easing from H2 2023 onwards, should provide a further boost to the market. We expect the OA market to grow at a CAGR of 25% plus in the next five years.

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2022 review | Lack of home-grown technology a gaping vulnerability

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In a recent note, we identified land, transmission and technology as the most acute supply side challenges for the renewable sector. Dependence on overseas technology is a key risk specifically for the Indian renewable sector. However, technology receives little attention in the discourse on sector dynamics.

It is well known that about 90% of modules used in India’s solar sector have been imported historically. But the country’s technology dependence on external parties goes far beyond this. The entire inverter supply comes from outside India although some of these suppliers now assemble products in India. It is the same story for other key solar project components like trackers and robotic cleaning. For wind turbines, Indian suppliers together account for about 50% market share but all technology is sourced internationally. In any case, most critical turbine components are still imported. Global battery manufacturing capacity has grown rapidly to cross 1,000 GWh, whereas India is just entering the race. There are billions of R&D dollars being deployed in clean energy technologies but again India’s share is negligible.

Figure: Leading suppliers for projects commissioned between 2017-2021

Source: BRIDGE TO INDIA research Notes: Capacity figures are stated for grid-connected projects in MW AC. Data excludes rooftop solar and other distributed renewable systems.

The Make in India thrust should help but it does not sufficiently address the core question of technology dependence. All fundamental technology know-how and even manufacturing lines and installation personnel for new PV cell and module lines, being set up currently, are coming from overseas suppliers. The downside of such heavy technology dependence is vulnerability in times of trade wars, geo-political disturbances and material shortages. We have already witnessed that when polysilicon capacity became constrained recently, module supplies to India were terminated and shipments were diverted to other countries willing to pay higher prices. Boom in clean energy demand worldwide is creating increasing fragility in international supply chains. Other countries are entering into a competitive race to attract investments and technology.

There is another dimension to dependence on global technology. Most technology R&D is focused on developing products for a specific use case, ambient conditions and financial capacity typically for customers in rich western countries or perhaps China. As we have seen in multiple sectors including electronics, automobiles, healthcare amongst others, India’s demand is of an altogether different nature. Germany may need high powered 4-W EVs with large batteries performing ideally in cold temperatures, whereas India mostly needs smaller vehicles travelling shorter distances in a hotter, dustier environment. Dependence on other countries often means overpaying for sub-optimal technology from an Indian viewpoint.

By various estimates, India is going to invest over USD 300 billion in this decade on clean energy. Consulting firm McKinsey estimates the country’s total spend on decarbonisation by 2050 at between USD 7-12 trillion. It cannot afford to spend all this money being completely beholden to foreign technology. The government needs to take the lead by developing domestic research capability, providing R&D grants, signing international technology transfer agreements, incentivising use of new technologies and making technology a key focal point of all policies. As an example, power procurement framework needs to evolve from simply choosing the lowest tariff to paying a premium for more efficient technology that uses less land and water resources, and more locally available, eco-friendly materials.

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2022 review | Land and transmission: the permanent Achilles heel

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Of the four main supply side factors for renewables – land, transmission, technology and financing, the first two are the most critical – always in short supply and on critical time path due to long lead times, complex regulations and increasing cost. Despite multiple government initiatives including solar parks, green energy corridors and renewable energy zones (REZs), there are persistent delays in acquiring land and transmission connectivity.

It’s an obvious problem. Renewable projects require huge parcels of land – more than 150,000 acres every year to meet national targets (about 4 acres per MW). The land must have attractive renewable resource, suitable topography, be contiguous and accessible, located close to transmission network and low cost. With most attractive sites already utilised, government authorities and project developers are increasingly forced to seek uneven parcels of non-contiguous land, often with swampy or rocky terrain in extremely remote locations increasing execution cost and timeline uncertainty. These project sites also frequently encroach on ecologically or socially sensitive areas creating thorny conflicts (link, link, link). Extending transmission system to these remote locations further amplifies the associated problems. According to a government report in October 2020, 18 out of 42 transmission projects by Power Grid Corporation were facing delays due to land acquisition problems, difficult terrain, natural obstacles, geological surprises, contractual disputes, and environmental and forest issues.

Efforts to set up a 13 GW wind-solar-storage hybrid project in Leh with inhospitable climate and no infrastructure are illustrative. A 5 GW transmission line along with 1 GWh grid storage capacity is being developed to evacuate power to Haryana at an estimated cost of INR 247 billion (USD 3 billion) and completion timeline of 5 years. To defray the high cost for consumers, the government is mulling providing subsidy worth INR 99 billion, 40% of the project cost.

All government schemes intended to tackle land and transmission challenges have been beset with multiple hurdles.

Solar park schemeThe scheme was launched in 2014, aiming to develop solar park infrastructure for 20 GW capacity, later increased to 40 GW, by March 2022. Multiple reasons have slowed progress – slow land acquisition, delays in statutory approvals, poor infrastructure and inflated costs. Only 10,001 MW project capacity was commissioned as of June 2022.

Figure 1: Status of solar park scheme as of June 2022, MW

Source: MNRE, BRIDGE TO INDIA research

Green energy corridors The first phase was launched in 2015 with a target to evacuate 20 GW renewable energy at a cost of INR 101 billion (USD 1.6 billion). Inter-state transmission works, mostly in Rajasthan and Gujarat, were completed on time but intra-state works have been delayed despite deadline extension by over two years. Phase II of the scheme was launched in March 2022 to evacuate 19.4 GW renewable power from seven states over the next four years at a cost of INR 120 billion (USD 1.6 billion).

Figure 2: Green energy corridor phase I progress as of October 2021

Source: MNRE, BRIDGE TO INDIA research

Renewable energy zonesThe REZ scheme was launched in 2019 to provide land and transmission infrastructure for 66.5 GW renewable project capacity across seven states – Rajasthan (20 GW), Gujarat (16 GW), Andhra Pradesh (8 GW), Maharashtra (7 GW), Karnataka (7.5 GW), Madhya Pradesh (5 GW) and Tamil Nadu (3 GW). Current status is not known.

Land and transmission issues are expected to intensify over time presenting one of the most serious challenges to growth of the renewable sector. Unfortunately, the policy makers have missed a trick by ignoring potential of rooftop solar, agri solar, other distributed renewables and floating solar. A recalibration of the sector growth plan along with long-term, proactive planning is essential to address these problems.

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India Renewable Sector Update – September 2022

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This video presents a summary of major sector developments including tender issuance, auctions, policy and regulatory developments, financial deals and related market trends in September 2022.

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Macro-economic tide turns away

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After more than a decade of exceptionally benign macro-economic environment, the global financial markets are facing greater disturbance and volatility. With natural steady state of the economy shaken first by COVID and now the Ukraine war, a domino effect is in play affecting inflation, cost of capital and exchange rates across countries. Inflation has soared to recent highs due to a combination of factors including increase in oil & gas and other commodity prices, trade wars and supply side disruptions. Monetary tightening by central banks has led to interest rates spiking up around the world. The 10-year Indian gilt yield has widened to 7.4% since touching a low of 5.9% last year. The Rupee has been falling sharply against USD, now down 11.5% since January 2022 and an annual average of 4.6% over last ten years. Yields on USD-denominated green bonds, the mainstay of debt financing for larger project developers, have more than doubled in last six months to 10-11% levels.

The last decade was unprecedented in macro-economic terms – extremely low inflation and interest rates on account of ample monetary easing by central banks and shift in manufacturing to China. But now that the economy has turned, the investors are in a state of panic. There are concerns about mounting deficit and leverage at both sovereign and corporate levels. There is greater risk aversion and migration of capital to safe havens further compounding volatility in asset prices and risk premia.

Figure 1: Exchange rate and bond yields

Figure 2: Annual changes in inflation indices, %

Source: S&P Global, RBI, BRIDGE TO INDIA research

For the renewable sector, timing of these developments coming on top of increase in equipment costs, supply side blockages, BCD on solar cells and modules, ALMM, transmission line stay order in Gujarat and Rajasthan besides the usual policy uncertainty in open access and rooftop solar markets is far from favourable. Project financial models have long done away with any contingency for macro-economic parameters. On the contrary, project developers have been building overly optimistic assumptions on inflation (5% or less), interest (8% for Rupee debt) and exchange rates (limited hedging, 3% annual depreciation). We estimate combined effect of adverse movements in macro-economic parameters at around 15-20% of project value.

Table:  Impact of recent macro-economic developments on renewable project values

Note: Inflation impact excludes increase in price of core products like solar modules and wind turbines.

The macro-economic tide has added to the aggravation caused by sector specific issues. There are some signs of commodity price easing but it seems fair to assume that overall geo-political and economic volatility is here to stay for some time. The industry needs to re-calibrate its approach to macro-economic risks and build sufficient buffers to guard itself.

Finally, we wish all our subscribers a joyous Diwali with lots of happiness and good health!

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Conflicting policy signals not helpful

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CEA, the apex power sector planning agency in the country, has released draft National Electricity Plan with a detailed assessment of sector requirements for the next ten years (until FY 2032). The plan, revised every five years, lays out generation and transmission capacity growth roadmap to aid system planning and facilitate coordination between various government departments. The plan is based around two core sets of assumptions – demand growth and share of renewable power in the total energy mix.

Energy requirement and peak demand are projected to grow at CAGR of 6.3% and 6.0% from FY 2022 to 2,538 billion kWh and 363 GW respectively in FY 2032. Share of renewable energy is consistent with the new RPO targets (43.33% in FY 2030) and accordingly, CEA has estimated capacity addition for solar, wind, hydro, thermal and nuclear power as 279,480 MW, 93,600 MW, 21,839 MW, 35,014 MW and 15,700 MW (see figure below).

Figure: Planned growth in generation capacity, MW

Source: Draft National Electricity PlanNotes: Figures inside the chart indicate planned capacity addition in each five-year period. Thermal capacity addition numbers are net of planned retirements totalling 4,259 MW capacity by FY 2027. Biomass capacity numbers (10,682 MW as of Mar-2022) are excluded.

Other key highlights of the plan:

Average annual solar and wind capacity addition of 34,516 MW over next 5 years is about 3.5x the rate over previous five years.

Offshore wind capacity addition is pegged at 10,000 MW by FY 2032.

Gas-fired power output is assumed as static at current levels (16% PLF), a missed opportunity to recoup investment and improve grid stability.

Back-ending of storage capacity: Only 2 GW of new pumped hydro capacity and nil BESS are anticipated until FY 2027, going up to 10 GW and 52 GW respectively in the next five years to FY 2032. Total battery storage requirement of 258 GWh by FY 2032 is significantly at odds with the Energy Storage Obligation (ESO) target recently laid out by MOP.

To us, the entire exercise appears utterly surreal because of the overly optimistic power demand growth assumption of 6.3% set against the decarbonisation context and when viewed against historic trend – 4.0% over last ten years and 5.0% over last twenty years. As a result, all generation numbers look overblown. The fear is that such numbers provide support to new thermal power investment plans particularly because of long lead times and multiple execution, financial and policy related challenges faced by the renewable sector. NTPC and other public sector entities have already started new rounds of fresh thermal project investments. Coal India is working to boost coal production at a CAGR of 4.3% to 1,058 million tonnes by 2032. Indeed, the Union Ministry of Mines is planning to double coal production by 2032. Investment in these expensive legacy assets risks further undermining growth of the renewable sector.

When viewed together with backtracking on renewable sector targets and Prime Minister’s announcement at COP 26, the National Electricity Plan is sending conflicting policy signals. The government is even refusing to confirm any firm targets for renewable power capacity. The need of the moment is for the government to be decisive, call a complete halt to new thermal investments and provide comprehensive support to the renewable power sector.

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First major storage auction, a milestone for the sector

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SECI has completed auction for a standalone 500 MW/ 1,000 MWh battery storage tender, the first of its kind. The project would be located in Rajasthan near Fatehgarh sub-station, a major solar power hub with total connectivity of 14 GW. JSW Energy has won the full capacity in a tight auction process with an availability-based tariff bid of INR 13 million (USD 162,000) per MW per annum. Other bidders in the auction included Acme, Hartree, Eden, Sterlite, NTPC, ReNew and Azure. In another standalone storage auction for a 10 MW/ 20 MWh project last month by Kerala State Electricity Board (KSEB), Hero’s bid of INR 13.5 million per MW per annum was declared the winner. Other bidders included O2 and Tata Power.

Figure: Bid results for SECI and KSEB storage tenders, INR million per MW per annum

Source: BRIDGE TO INDIA resaerch

We find both winning bids to be extremely aggressive in view of recent hikes in battery cost and stiff performance penalties. The winners may be banking on capital cost reduction but that seems unlikely in the foreseeable future. Key project parameters for SECI tender:  

Despite keen bidding, levellised cost of storage is estimated at over INR 10.00/ kWh raising immediate questions about viability for offtakers. In an amendment to the original tender, SECI had reduced contracted capacity of the project from 70% to 60%. POSOCO has committed in advance to contract 30% of total capacity suggesting strong government support for the project. We expect low interest from DISCOMs as tariff differential between peak and off-peak power on the exchanges, even though up sharply over last few years, is still well below the storage cost at about INR 4.50-8.00/ kWh (see figure below). It is likely that the government would intervene to line up support from some friendly states and/ or central PSUs for the remaining 30% capacity. The developer is required to find alternate uses for the 40% uncontracted capacity. Most likely, JSW Energy would use it for internal captive consumption in the group steel business.

Figure: Hourly prices on conventional Day Ahead Market, INR/ kWh

Source: Indian Energy Exchange, BRIDGE TO INDIA research

Another consideration in assessing demand is MOP’s recently recommended storage target as part of 43.3% RPO trajectory for FY 2030. The 1.5% target for FY 2025, going up to 4% by FY 2030, entails setting up storage capacity of about 35 GWh and 122 GWh by March 2025 and 2030 respectively. These are extremely ambitious numbers. While the government may line up all necessary support to see the first major storage tender sail through successfully, high cost is a significant barrier for future tenders. We believe that policy support should be initially weighted towards RTC tenders rather than standalone storage projects aided by a carefully planned carrot-and-stick approach to ensure demand from DISCOMs.  

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India Renewable Sector Update – July 2022

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This video presents a summary of major sector developments including tender issuance, auctions, policy and regulatory developments, financial deals and related market trends in July 2022.

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Global race for renewables heating up

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The US Congress has passed a landmark law which aims to provide a massive boost to the clean energy sector. The law seeks to reduce clean energy costs, spur technology innovation, create jobs, incentivise domestic manufacturing and adoption by consumers. Total funding provision over next 10 years is USD 369 billion (excluding loan guarantees) mainly in the form of tax credits:

Investment and production tax credits for energy generation from solar, wind, nuclear and geothermal sources, energy storage and green hydrogen facilities

Production tax credits worth USD 30 billion and investment tax credits worth an additional USD 10 billion for US manufacturers of clean energy products including solar panels, wind turbines, batteries, and critical minerals processing

USD 60 billion aid for disadvantaged areas affected by climate change including USD 27 billion for community clean energy projects

USD 100 billion loan programmes for financing production of EVs and up to USD 250 billion in loan guarantees for clean energy producers

Home energy rebate programmes worth USD 9 billion to reduce consumer costs

Tax credits and grants for industrial consumers transitioning to clean energy

Investment of USD 20 billion in climate-smart agriculture and USD 2.6 billion to protect and restore coastal habitats

Even though the final law is a sharply pared back version of the original draft, it is mammoth in scope and ambition. Besides hard incentives and funding provisions, it has significant soft initiatives focused on creating clean hydrogen hubs, promoting recycling research, supporting low carbon materials produced domestically, undertaking inter-disciplinary industrial decarbonisation research and designing a new carbon-based trade policy to keep out ‘dirty’ products. Interestingly, the new law makes no mention of any federal carbon tax or emission trading scheme.

Preliminary estimates suggest that the law would reduce net US emissions by about 40% below 2005 levels, compared to 27% under previous policies. Renewable power capacity addition is expected to get a big boost with almost 4x increase to an average of about 100 GW per annum over next 10 years. Module manufacturing capacity is expected to jump from 7 GW at present to 37 GW by 2025 and 50 GW by 2030. The two criticisms are aimed mainly at support for carbon capture and storage, a long-touted technology but still unproven at commercial scale. It is also feared that the generous loans and loan guarantees could lead to wasteful use of taxpayer money.

The US is not alone in scaling up clean energy ambitions. Increasing weather extremities and concerns about air quality, energy security and affordability particularly since the start of the Ukraine war have jolted everyone. The European Union’s REPower EU plan, announced in May 2022, aims to accelerate green energy transition by setting up 723 GW renewable capacity by 2030 to attain 45% renewable power share. China recently announced plans to add 1,200 GW renewable capacity by 2030.

Between the US, EU and China, the revised targets amount to an average annual renewable capacity addition of about 310 GW per annum, more than double the progress over last five years.

Figure: Renewable power capacity addition in key international markets

Source: IRENA, BRIDGE TO INDIA researchNote: Figures include hydro power capacity.

From an Indian perspective, the US law offers lessons in policy making particularly about the importance of technology research, job creation, recycling and trade policy. US incentives for domestic manufacturers, investors and consumers are in stark contrast to tariff and non-tariff barriers in India, which are constraining the market.

Overall, the international efforts towards technology innovation and scale up should bring down costs for Indian consumers too. But rapid sector growth is bound to intensify competition for minerals and metals, funds, skills and expertise. India will have to work harder to compete in the global marketplace and manufacturing domains. Moreover, other countries’ attempts to boost domestic production are a setback for Indian companies eyeing the lucrative exports market.

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States go after ‘behind the meter’ systems

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After resisting growth of net metering and open access markets, DISCOMs seem to be now turning their focus on ‘behind the meter’ (BTM) installations, a key engine of growth for the rooftop solar market in the last few years. Maharashtra and Gujarat DISCOMs are asking consumers seeking open access project approvals to switch BTM systems to gross metering mode effectively making them financially unviable. Some Rajasthan DISCOMs have even started levying electricity duty, cross subsidy surcharge (CSS) and additional surcharge (AS) on BTM systems with the same end result.

Switching from BTM to gross metering mode reduces effective saving potential of rooftop solar installations drastically from variable grid tariff (INR 8.48-13.08/ kWh and INR 6.80-7.39/ kWh in Maharashtra and Gujarat respectively) to gross metering tariff (INR 3.00/ kWh and INR 1.75/ kWh in Maharashtra and Gujarat respectively). The reduction renders all such systems, almost without exception, as financially unviable. The levy of electricity duty, CSS and AS totalling INR 3.35 – 3.52/ kWh in Rajasthan has the same end result. These measures are particularly harmful for OPEX-based installations, which are being forced to shut down in many cases.

As net metering policy became increasingly restrictive over the last few years (see figure), BTM installations became the default mode for setting up large rooftop solar systems – often over 1 MW in size. We estimate that a total of 2,211 MW rooftop or other onsite solar capacity has been installed in this mode spread mainly across Maharashtra, Rajasthan, Gujarat, Madhya Pradesh, Karnataka and Tamil Nadu. In the absence of any formal policy clarity (eligibility criteria, technical requirements, approval process, applicability of grid charges and surcharges etc), consumers and OPEX solution providers market have conveniently taken the view that there was no restriction on BTM systems for 100% self-consumption and no requirement to bear any grid charges. Historically, the only formal requirement for such systems has been to obtain approval from local safety inspector depending on prevailing policy in addition to installation of a simple relay to prevent injection of power into the grid.

Figure: Net metering connectivity size limit for C&I rooftop solar systems

Source: BRIDGE TO INDIA researchNote: In Karnataka and Madhya Pradesh, net metering is not available for OPEX business model. Tamil Nadu and Uttar Pradesh offer only net billing and gross metering to C&I consumers. West Bengal provides net metering to C&I consumers but with a system size limit of only 5 kW.

The changes in policy stance are blatantly ad hoc and creating confusion in the industry. That these changes are being applied to older installations without any prior warning and forcing them to shut down is outrageous. Elsewhere too, DISCOMs continue to deny or delay project approvals, impose ad hoc certification or reporting requirements and levy charges in defiance of official policy framework. The regressive actions by DISCOMs are another reminder of high policy risk in the corporate renewable market.

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Electricity Act amendment bill back on the table but…

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After having seemingly binned the Electricity Act, 2003 amendment bill last year, the government has sprung a surprise by reviving it. A new draft has been tabled in parliament but immediately sent to a standing committee for wider consultation amid opposition from other political parties, state governments and other stakeholders. The central feature of the bill, as last time, is proposed delicensing of the distribution business. The proposal is to allow new players to enter distribution business and supply power to end consumers by riding distribution networks of incumbent DISCOMs for a fee. The new players shall seek approvals from state regulators but based on criteria specified by the central government rather than state governments.

The Bill has several other provisions relating to streamlining of tariff determination process, ensuring full cost recovery by DISCOMs, constitution of state regulators and more power to regulators pari passu with civil courts. These provisions are broadly similar as last time but there are two main changes. The first one relates to requirement for all power purchasers to maintain adequate security of payment prescribed by the central government. If the power purchasers fail to maintain the prescribed payment security, power would not be scheduled and despatched to them. The other main change is enforcement of a uniform RPO trajectory across the country although financial penalties for non-compliance are proposed to be reduced by more than 50% to INR 0.25-0.35/ kWh in first year and INR 0.35-0.50/ kWh in subsequent years.

Main objective of the Bill clearly (and rightly so) is to restore financial condition of DISCOMs, which has been deteriorating steadily putting all sector initiatives at risk. The innumerable financial support and reform packages announced to date have been to almost no avail. ICRA estimates that total DISCOM debt has increased from INR 4 trillion (USD 50 billion) to INR 6 trillion (USD 76 billion) in the last five years while there has been no improvement in payment status to IPPs.

However, the proposed delicensing solution has a fundamental flaw. The incumbent DISCOMs would continue to own and be responsible for all legacy PPAs, distribution network and associated costs. Running a full service distribution business and providing a parallel service to new competitors introduces a severe conflict of interest. Managing that conflict – sharing of power supply, granting network access and maintaining a cross subsidy balancing fund on an equitable basis – is going to be a herculean challenge. It remains to be seen if integrity of this process can be maintained particularly as the state governments see a natural incentive in DISCOM mis-governance and using cheap power to lure voters.

The government has mistakenly abandoned the other two potential routes of making DISCOMs financially viable – privatisation and separation of content and carriage. Each route is fraught with unique challenges but the delicensing solution is almost too complex to be workable. Failure to implement with due rigour would be a recipe for endless regulatory disputes and confusion. Given the magnitude of the problem and its widescale implications for economy, we believe that the government needs to build a consensus on sector reform and possibly change course.

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Carbon market would change entire business paradigm

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Since announcing the goal of achieving net zero emission status by 2070 in November 2021, the government has taken first tangible step in that direction. A bill has been introduced in the Lok Sabha to amend the Energy Conservation Act, 2001 to mandate use of non-fossil fuel based energy sources and establish carbon credit market in the country. It defines applicability threshold as all industrial, commercial and residential consumers with a minimum connected load of 100 kW or contract demand of 120 kVA. The bill is mainly a directional policy document; detailed rules would be issued separately.

Key highlights of the bill:

i. Energy consumption targets would be set for different types of consumers;ii. Financial penalties would be imposed on entities failing to meet targets;iii. Manufacturing or import of specific equipment failing to meet energy consumption standards would be banned; andiv. Regulatory jurisdiction will lie with state electricity regulators.

In India, there are already two different schemes indirectly targeting decarbonisation by industrial and commercial entities. All thermal power consumers are required to procure a minimum specified share of power from renewable sources or buy Renewable Energy Certificates (RECs). The Perform, Achieve and Trade (PAT) scheme requires specific businesses in energy intensive industries to comply with energy efficiency standards or buy Energy Saving Certificates (ESCERTs). As the following table shows, the REC and ESCERT markets are tiny in scope, coverage and market value.

Table: Comparison between REC, ESCERT and carbon trading certificate

Source: IEX, BRIDGE TO INDIA research

The new carbon trading scheme is expected to be significantly larger in comparison. It would also inevitably have significant overlaps with both REC and ESC schemes. For example, if a company increases renewable power consumption and reduces its emissions as a result, will it be entitled to both RECs and carbon credits? It is vital for policy clarity and market efficiency that the three schemes are merged into a single scheme. A unified approach with a consistent emission based denominator would also act as useful guidance to energy consumers evaluating investment decisions in alternate decarbonisation technologies.

There are currently 32 carbon markets – covering 17% of global GHG emissions – operational around the world. In 2021, traded volume and value jumped sharply to 15,811 million MT (plus 24% YOY) and EUR 759 billion (164%) respectively. Europe accounts for 90% of total activity because of stricter enforcement and more mature market. Prices in different markets range between EUR 16-65 per tonne or about INR 1.30-5.20/ kg.

Figure: Total value of global carbon markets, EUR billion

Source: Carbon Market Year in Review 2021, Refinitiv

A detailed study of different global carbon markets should offer useful lessons for Indian policy makers. Designing the scheme, setting targets, defining standards, trading protocols, and developing inspection and monitoring capability will require careful consideration. The government would also need to play a critical enabling role in developing technology, skilling and financing expertise for decarbonisation efforts.

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India Renewable Sector Update – June 2022

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This video presents a summary of major sector developments including tender issuance, auctions, policy and regulatory developments, financial deals and related market trends in June 2022.

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Revised RPO trajectory needs strong execution support

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The Ministry of Power has issued an order specifying national RPO trajectory until FY 2030. The target, originally set at 21.00% for FY 2022, has been modified and extended to 43.33% for FY 2030. Separate sub-targets have been introduced for new large hydro, wind and storage projects. Solar has been clubbed with other technologies like biomass and waste-to-energy and, older large hydro and wind projects in a separate sub-category.

Table: RPO trajectory until FY 2030

In a neat sleight, the government has included older large hydro projects in the Other RPO category immediately raising March 2022 compliance level from 12% to above the target level of 21%.

Separate targets for large hydro and wind, both struggling in recent years, emphasise importance of boosting these sectors. Any shortfall in Other RPO category may be met from excess power consumed from large hydro projects commissioned after Mar-19 or wind projects commissioned after Mar-22, but any shortfall in WPO may be met only from excess power from large hydro projects commissioned after Mar-19. CERC has been asked to issue regulations for a new hydro REC instrument with suggested price cap of INR 5.50/ kWh escalating at 5% annually. But other REC instruments would also need to be redesigned in accordance with the newly constituted targets.

Taking note of the 2030 target of 500 GW renewable capacity, it seems that the RPO trajectory has been framed with the assumption of national power demand growing at 6% annually and implied CUF for new large hydro, wind and other projects of 30%, 25% and 20% respectively. A more realistic scenario of at 4.5% annual demand growth and CUF of 40%, 35% and 24% for large hydro, wind and other projects results in total renewable capacity of 387 GW by March 2030 (see figure).

Figure: Required capacity addition based on new RPO trajectory

Source: BRIDGE TO INDIA research

A separate storage target is desirable. But the 4% target – equivalent to total storage capacity of 88 GWh by March 2030 – is significantly lower than previous government estimates. And there is surprisingly no mention of enforcement or penalty mechanism.

While it is good to see the government finally providing some clarity on sector roadmap since announcing the 500 GW target back in November 2021, some fundamental issues remain unaddressed. One, how to get the states to accept these targets. Historically, RPO trajectories of 25 states have remained below the national target. Second, how to improve enforcement. We believe that 27 of the thirty states have failed to meet their own (lower) RPO targets and in most cases, the failure goes unpunished. Proposed amendments to the Electricity Act include a provision for penalties of up to INR 0.50/ kWh for non-compliance but there is no clarity on timeline. Finally and most importantly, how to speed up capacity addition. Progress is painfully slow because of poor demand, severe execution bottlenecks and soaring costs. Total capacity addition in 2022 and 2023 is expected to come in at about 21 GW, about 65% below required levels.

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Auction process needs tightening, not relaxing

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The MNRE Secretary announced at a recent conference that the government has decided to do away with e-reverse auction stage for wind power projects. Projects are proposed to be allocated on the basis of a single-stage written bid submission by developers. The move comes in response to persistent lobbying by the industry to relax the competitive bidding process. A formal announcement from MNRE is awaited shortly. Project developers hate competitive bidding process for obvious reasons. But all pleas to the government to move to feed-in-tariffs have been rejected again and again. The other suggestion, of the government issuing a clear annual time-table plan for auctions to mitigate FOMO concerns – sensible but operationally impracticable unfortunately – has also been rejected several times. The government has reluctantly offered a small concession because it is getting worried about slow pace of progress. Around 4 GW of wind projects have already been abandoned by developers on back of rising costs and execution challenges. Wind capacity addition has ground to a near halt – falling to 1.1 GW in 2021 and an average of 1.6 GW over last four years against about 3-4 GW per annum prior to 2018. For context, the 2030 target of 140 GW wind capacity warrants capacity addition of over 11 GW per annum. The decision to do awa with auctions is ad hoc and unlikely to change anything. First, the problem of unviable bids is not unique to wind projects. All sectors including thermal power, solar, roads and ports with competitive bidding process have faced similar issue of overly aggressive bidding. Solar projects have historically seen a relatively better success rate only because of sharper than expected fall in equipment costs. Now that module and other execution costs are going up, solar faces the same issue. We believe that as much as 18 GW of solar projects face abandonment risk over next year. Second, the industry view that the auction stage puts undue pressure on them to bid aggressively is hardly credible. Third, auctions actually allow bidders to go in with conservative bid levels in the first stage and then finesse their bids in the second stage. If the auction stage is removed, the bidders will have only one shot at success making more desperate bids likely. The real problem is twofold – weak demand against too much capital, and an overly loose bidding process. The first problem is of a systemic nature and not the focus of this note. The latter has got progressively worse over time. Bid security and performance security amounts have fallen to grossly inadequate levels of less than 1% and 3% respectively. Indeed, even that requirement has been relaxed in the aftermath of COVID. Eligibility criteria have been deliberately diluted progressively to drive bidding interest and low tariffs. There is no sanctity to execution timetable. The process from auction date–letter of award–PSA and PPA execution–regulatory approval can often take more than a year. And when things go wrong, say delay in land procurement or increase in costs, the government is sympathetic on giving time extensions. Many projects have got repeated time extensions totalling to 1.5 years on account of COVID, land unavailability (at the right price), module supply disruption, transmission delays etc. There is little penalty for errant developers. If a project ends up being unviable, the successful bidder can simply surrender it and bid for a new one (heads I win, tails you lose!). The competitive bidding process has become a farce as a result. It is encouraging deviant behaviour instead of enforcing bid discipline. The rules need to be tightened on both sides – government and offtakers, on one hand, and project developers, on the other – to lend sanctity to the process.

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Another botched DISCOM relief scheme

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The Ministry of Power has issued new Electricity Rules offering yet another debt package to DISCOMs to help clear delayed payments to power producers and transmission companies. The proposal is for DISCOMs to reschedule and clear all outstanding amounts in equal monthly instalments spread over 1-4 years depending on total quantum of liability. If the DISCOMs abide by the scheme and make all rescheduled payments on time, their entire accumulated late payment surcharge (LPS) liability, currently estimated at INR 198 billion (USD 2.5 billion), shall be waived. The “rules” are voluntary for DISCOMs, who are required to provide their acceptance to the scheme within 30 days.

In case the DISCOMs fail to make any monthly payment as per the revised schedule, they would be required to pay the full LPS amount and may be barred from accessing short-term open access and exchange markets. PFC and REC, government owned financial institutions, are expected to provide state governments with additional debt financing to support repayments under this scheme. The most striking component of the new scheme is that the cost of LPS waiver is expected to be borne by the power producers and other obligors. It is not clear how the government has pre-supposed their willingness to forego these payments.

The new scheme is the tenth such policy package by the central government to rehabilitate the perennially distressed DISCOMs in last eight years (see figure below). Despite over USD 50 billion of aggregate relief over this period, financial position of the DISCOMs has been deteriorating steadily. As per an ICRA estimate, their total debt and overdue payments are expected to have increased to INR 6 trillion (USD 76 billion) and INR 1.3 trillion (USD 16 billion) by March 2022. All proposed reforms have failed because of refusal of the state governments to come on board. Even where the DISCOMs and state governments have agreed to a series of conditional operational efficiency and prescribed reforms (example, UDAY scheme), they have simply failed to make permanent headway.

Figure: Proposed DISCOM reform packages since 2015

Source: BRIDGE TO INDIA research

Failure of the central government to permanently fix the distribution business permanently is a mystery. By moving from one half-baked scheme to other, it is showing a lack of political commitment and/ or a worrying underappreciation of the malaise. We believe that poor operational and financial preparedness of the DISCOMs is critically impacting overall health of the power sector and growth of renewable power. Moreover, by proposing to give DISCOMs more time to make delayed payments and asking power producers to bear the cost of LPS waiver, the government is setting a very bad precedent.

Note: Next edition of the India Renewable Weekly shall be issued, after a two-week summer break, in the week commencing 17 July 2022.  

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India Renewable Sector Update – May 2022

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This video presents a summary of major sector developments including tender issuance, auctions, policy and regulatory developments, financial deals and related market trends in May 2022.

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SC transmission order highlights need for tighter social and environmental norms

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A committee constituted by the Supreme Court (SC) has released technical specifications and certification requirements for installation of bird diverters on overhead transmission cables. The move came after CEA noted that bird diverter installation had been extremely slow and of poor quality. According to NLDC, first bird diverter on ISTS lines was installed in April 2022.  An interim order issued by the Supreme Court in April 2022 had mandated installation of bird diverters on all transmission lines by 20 July 2022 and allowed exemption from laying underground lines only on a case-by-case basis.

In April 2021, the Supreme Court had ordered renewable project developers to move all existing and new transmission lines underground within a year in inhabited areas of the near-extinction Great Indian Bustard and Lesser Florican birds. The affected areas stretch across parts of Rajasthan and Gujarat, prime locations for renewable projects. Where conversion from overhead to underground is not “feasible”, the court ordered mandatory installation of bird diverters. In response, MNRE and the Ministry of Environment, Forests and Climate Change (MOEFCC) applied to the court in November 2021 seeking relief from the court’s decision due to concerns about its impact on project execution and viability. CEA submitted a detailed techno-commercial study to the Supreme Court concluding that laying underground cables would be 4-20x costlier than overhead lines depending on voltage level. It also raised concerns about unavailability of underground cable lines in India, higher transmission loss and adverse impact on environment.

The Supreme Court order is ambiguous as it does not define feasibility threshold for moving transmission lines underground. Cost of installing bird diverters is relatively miniscule at around INR 1.5 million (USD 20,000)/ km of transmission line. But there are various operational challenges in installation of bird diverters including procurement lead time, need for statutory approvals (in some cases, the lines need to be switched off) and maintaining installation quality. Drone-based installations, usually faster than other approaches, are not allowed in many of the affected areas because of security concerns.

Next court hearing for taking stock of progress is scheduled on 20 July 2022. An urgent resolution of this issue is essential as nearly 2 GW of projects are held up in advanced stages of construction. The developers, already reeling from soaring execution costs, are not keen to incur any additional cost. If ordered to lay underground lines, they are likely to challenge the committee’s decision in the Supreme Court. MNRE has extended scheduled COD of all projects awarded by central government agencies including SECI, NTPC and NHPC to 30 days after the final judgement date. But more extensions may be needed.

Growth of renewable sector has led to increasingly frequent conflicts about its social and environmental impact. So far, these issues have been generally swept away in the rush to execute projects and accelerate progress. In most states, requirements for environmental permits or carrying out social and environmental studies have been completely waived. Unless the government takes a more sensitive approach to needs of local people and habitats for sustainable growth of the sector, such disruptions are likely to recur with greater intensity.

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Make in India to suppress capacity addition over next two years

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The US government has decided to defer import duties on ASEAN solar cells and module imports for two years notwithstanding its make local policy and an ongoing Department of Commerce investigation into circumvention of duty by ASEAN manufacturers. The decision was influenced mainly by fears of a sector slowdown amid intense pressure from the solar industry, already reeling from sharp price rises and supply side disruption. The two year window is intended to ensure sufficient supply of modules while domestic manufacturing capacity ramps up. In stark contrast, in very similar circumstances, the Indian government is maintaining a firm stance on no imports.

We estimate India’s current cell and module manufacturing capacity at about 4 GW and 15 GW respectively. But more than 50% of this capacity is technologically obsolete and cost inefficient. Total production last year was only about 2,460 MW and 4,935 MW respectively. Many companies have announced ambitious manufacturing plans but bulk of new capacity is expected to come online only by late 2023 onwards. Appetite for module imports, following BCD imposition, is limited as evident from sharp decline from a monthly average of 1,200 MW over last two years to 68 MW over last two months. Even project developers entitled to ‘change in law’ compensation for BCD are not keen on imports because of high upfront cost and inherent uncertainty in pursuing claims against offtakers. That leaves a big gap in module availability vis-à-vis demand.

Figure: Module manufacturing capacity and demand, MW

Source: BRIDGE TO INDIA research

Developers are trying to cope with the supply shortage in multiple ways. Reliance, Adani, Tata Power, ReNew and Avaada – five of the biggest consumers – are entering or expanding their module manufacturing capacity. Azure has tied up with Premier Energies to secure 600 MW of module supply annually. Some are finding ingenious ways to avoid BCD on imports. A Free Trade Agreement (FTA) with ASEAN countries allows duty-free import of cells subject to 35% local value addition. However, this is not expected to provide any material relief because of limited capacity in ASEAN. Moreover, with the US waiving all duties on ASEAN imports, these manufacturers would prefer to supply modules in the profitable US market (40 cents/ W) rather than in the price-sensitive Indian market. Meanwhile, a couple of project developers are believed to have tried importing modules under a bonded warehouse scheme to defer duty payment.

Consequently, we believe that solar capacity addition would be suppressed by about 6-8 GW over 2022 and 2023. All parts of the sector are expected to be affected but rooftop solar and other distributed markets may see a relatively bigger hit.

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A revolution of open access renewable market?

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The Ministry of Power (MOP) has released final open access renewable rules clearing the path of corporate consumers to buy renewable power using open access and other routes. The rules are broadly consistent with the draft version issued in August 2021 except for two changes. Limit on amount of banked power has been revised from 10% of annual consumption to 30% of monthly consumption from DISCOMs subject to payment of banking charges as determined by the regulator. Second, reference to behind-the-meter (BTM) generating systems as an option to meet RPO targets has been removed.

The rules, coming in response to extensive policy advocacy efforts by the industry and consumers alike, seek to end DISCOM resistance to the open access market. There are three critical provisions. The first one relates to widening consumer eligibility for open access to all consumers with connected load of 100 kW, down from 1 MW at present in most states. The second provision is removal of all arbitrary caps on project size and total quantum of renewable power procurement. Currently, states impose multiple formal and informal renewable power caps linked to absolute system size, connected load, contract demand and distribution transformer capacity. The third provision is harmonisation and transparency in open access connectivity application process across states with a national registry and assured approval to all projects within 15 days of application date.

The rules are being hailed as a revolution. On paper, that’s correct. They improve growth potential of the open access market, long suppressed by DISCOMs, by a factor of more than 10x (average annual capacity addition in last 3 years: 1.3 GW). It is worth noting that SME consumers account for 51% of total industrial power demand.

Figure: Open access renewable capacity addition, MW

Source: BRIDGE TO INDIA research

But we need to wait to see how states react to the changes. Our concern is that the MOP has completely disregarded core concern of DISCOMs, who need corporate consumers to maintain profit margins and business solvency. A unilateral policy announcement without any consultation with states faces a high risk, as we have seen all too often, that the states may simply disregard the rules. There is also some ambiguity over authority of the central government to issue such rules. It is unclear if they are binding on states since all open access implementation decisions fall under the purview of local policy and regulatory jurisdiction. Our initial discussions with MNRE and couple of state government officials suggests that actual on-the-ground progress is likely to be gradual.

Progress would also be affected by transmission capacity constraints. The 15 day project approval timeline seems impractical as state transmission companies and DISCOMs need more time to complete load flow analysis and consider additional infrastructure requirements for new generation capacity. Moreover, small consumers will generally struggle to deal with intricate financial and operational requirements of open access procurement.

Notwithstanding these concerns, liberalisation of the open access market, coming after last year’s announcement of ISTS charge waiver, is highly encouraging. Focus now should be on implementation and getting states on board.

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Green power exchange an emerging option for corporate consumers

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Open access and rooftop solar can potentially meet only about 40-50% of a corporate consumer’s power requirement due to a temporal mismatch between supply and demand. Consumers keen to increase share of renewables in their consumption mix to achieve decarbonisation goals must therefore find alternative sources. Unfortunately, some of the key options to address intermittency risk of renewable power are not deemed viable. Banking power with the grid is increasingly not possible as DISCOMs and state regulators make such provisions more restrictive. Deployment of battery storage at scale is still not cost effective particularly with growing shortage of key raw materials and increase in prices. In light of these developments, role of the green power exchange to meet consumer demand becomes potentially very significant. It can also be a useful option for consumers not keen on or unable to sign long-term PPAs.

Green power trading has grown significantly in the last two years. Coal shortage and increase in price of thermal power are providing further impetus to this market. The Ministry of Power move to exempt ISTS charges for all power traded on exchanges until June 2025, yet to be approved by CERC, is also helpful in this regard. This market has attracted strong buying interest from both DISCOMs and consumers (Vedanta, Jindal Steel, SAIL among the top participants).

Different market segments Amongst the different instruments – ranging from intra-day to weekly delivery – for trading power on the exchanges, the Green-Day Ahead Market (G-DAM) for next day delivery is the most active (see chart below). Demand and traded volume have been higher (24%) than the Green-Term Ahead Market (G-TAM) which enjoys priority in transmission capacity allocation and longer trading duration. Within G-TAM too, bulk of trading volume is seen in day-ahead and intra-day markets due to shorter forecast horizon and low risk of deviation penalties.

Figure: Trading volume and prices on green power exchange in April 2022

Source: Indian Energy ExchangeNote: Indian Energy Exchange accounts for about 95% share of total renewable power traded on the exchanges.

Lack of liquidityDespite steady pick up in trading volumes, total green power trading volume is still relatively small. Only 3% of total renewable power output (5.5 TWh) renewable power was traded on the exchanges in FY 2022. This is mainly due to lack of untied capacity. Selling interest is confined mainly to a few DISCOMs that have contracted renewable power in excess of their RPO requirements and projects with generation surplus to their PPA requirement.

Volatile power pricesTrading power on exchange exposes consumers to price volatility. Traded prices increased sharply from INR 5/ kWh in Feb 2022 to more than INR 9/ kWh in March 2022 due to jump in demand and limited thermal supply. It is worth noting that prices are lower around mid-day than at other times. Consequently, consumers looking to sell any surplus solar power during the day and buy power at other times to match their demand profile face a negative price differential. This difference is bound to get worse as more solar capacity gets added in the country.

Green power trading market is expected to grow and mature over time. Perhaps the most encouraging aspect is that many project developers are looking to build projects on a pure ‘merchant’ basis or with short-term PPAs. To benefit from this option, consumers must develop better in-house capability to predict their forward demand and trade power on the exchanges.

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Local project developers cementing their leadership position

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ReNew announced acquisition of a 528 MW wind and solar portfolio spread over eight states earlier this week. This transaction, eighth such acquisition by ReNew, takes its total portfolio to over 12.8 GW including projects under construction. In another significant transaction, JSW has entered exclusive discussions to acquire Mytrah’s 1,898 MW wind-weighted portfolio. The two transactions are indicative of how local project developers are consolidating their position in an otherwise heavily crowded market.

The project development business is structurally wide open with low entry barriers and easy access to capital. New players continue to enter the fray and enjoy reasonable success as seen by track record of O2, UPC, Rising Sun, Solar Pack, Powerica, Hinduja, AMP, IB Vogt, NHPC, SJVN and Evergreen amongst others. Astonishingly, there have been 42 unique winners in tariff auctions greater than 100 MW since 2019. Notwithstanding the intense competition, we see nine local developers breaking out and establishing a dominant position.

Six developers including Adani, ReNew, NTPC, Azure, Greenko and Tata – with total portfolio of over 6 GW each – are the runaway leaders. Their aggregate share of total operational capacity is only 31% but the share jumps to 54% for pipeline capacity. Three other developers – Avaada, Ayana and JSW – are somewhat behind with portfolios of around 2-3 GW each but they also enjoy strong momentum.

Figure 1: Portfolio capacity and share of six leading project developers

Source: BRIDGE TO INDIA research

International developers, other investors lie lowAll top nine developers are India-based IPPs with a mix of ownership including Indian conglomerates (Adani, Tata, JSW), platforms backed predominantly by financial investors (ReNew, Greenko, Azure, Avaada, Ayana) and public sector (NTPC). International developers have struggled to sustain the business in view of low returns, aggressive bidding, high offtake risk, policy uncertainty and execution challenges. Most other developers are forced to go slow too for same reasons, while some others are intent mainly on a short-term portfolio rotation strategy.

Portfolio mix The portfolio strategy of top developers is quite varied. NTPC and Tata have been the most aggressive in new auctions since 2019, while Adani (5.8 GW acquired capacity), Greenko (3.7 GW) and ReNew (3.0 GW) have been relatively more active on the acquisition front. For Adani and Azure, bulk of their auction wins have come from the 12 GW manufacturing-linked tender.

Most notably, the leader group is happy to accept DISCOM offtake risk despite increasing concerns about their financial status. Portfolios of ReNew, NTPC, Greenko and Tata are heavily weighted towards direct DISCOM offtake. Adani and Azure stand out in this regard with 80% and 82% of their portfolio contracted with central government entities. ReNew, Greenko, Tata and Azure have significant plans to ramp up corporate renewable business.

Figure 2: Portfolio breakup of leading developers

Source: BRIDGE TO INDIA researchNote: Portfolio size excludes open access projects under construction. NTPC’s 3.7 GW project wins under CPSU scheme are shown under state DISCOM offtake.

Looking ahead, we expect the dominance of the nine leading developers to gain even further momentum as scale provides crucial ability to withstand short-term market shocks. Their combined share is expected to settle at around 60%.

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IPP valuations driven by technical factors

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In the last three years, there have been a total of 33 M&A or private equity transactions exceeding USD 100 million in size in the renewable IPP business. Total investment value of these deals is estimated at USD 12 billion indicating strong lure of the sector. Investors include companies of all hues including oil & gas major (Total, Shell and GPSC), PE funds (Blackrock, Actis, Brookfield, KKR, Mubadala), pension funds (CPPIB, CDPQ, OMERS) and IPPs themselves.

Table: Key M&A and private equity transactions since May 2019

Source: News reports, investor presentations, BRIDGE TO INDIA research

With some notable exceptions (Adani Green, Tata Power), valuations have typically hovered around 9x EBITDA. We estimate that these valuations are equivalent to SPV level post-tax equity IRRs of sub-9% for the incoming investors. At a fundamental level, this return is inadequate even for a ‘de-risked’ portfolio with central government offtake and 1-2 years of operational track record. We are in uncharted territory particularly with long-term resource availability and operational performance risks. But easy liquidity has depressed returns across the market and pushed up valuations on purely technical grounds. Whether this is a satisfactory level of return depends on many other factors.

A case could be built for paying entry premium in a fiercely competitive and rapidly growing sector with multi-decadal growth prospects. In particular, the financial investors – the most dominant investor class – are happy to just get a seat on the table. Investors also seem willing to pay a premium for organisational learning and expertise in building and operating projects besides accounting for accretive option value arising from emerging businesses like storage and green hydrogen.

On the flip side, utility scale project development is a highly commoditised business with open source, easily accessible technology and operational expertise. Moreover, with new business won mainly through fiercely competitive auctions, the possibility of earning premium returns is likely to remain remote. On the contrary, returns are being progressively squeezed. Ability of relatively new players like Ayana (total portfolio including under construction assets 2,367 MW), O2 (1,330 MW), AMP (969 MW), Axis (854 MW), UPC (620 MW), Aljomaih (450 MW), Evergreen and Solarpack (300 MW each) to ramp up the business neatly buttresses these arguments.

We believe that the valuation cycle has peaked. As central banks tighten liquidity and supply side restrictions eat into returns, investment sentiment is set to moderate over the next few years.

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