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Bid submission deadline for SECI’s 1,200 MW solar-wind hybrid tender (tranche 3) has been extended again to 20 November 2020. The tender was issued in January 2020 and since then, there have been five amendments and a staggering 15 extensions for bid submission date. The latest amendment issued in October 2020 follows new MNRE guidelines for solar-wind hybrid projects. Main change pertains to mix of technologies – each source should account for at least 33% of contracted capacity as against at least 25% of capacity for other source.

The amendments, made in response to demands from different stakeholders, seem arbitrary;

Shorter execution timelines, requirement to stay within 2% of L1 tariff and inadequate protection from ‘change in law’ risk would be major concerns for project developers;

Potential lack of interest from DISCOMs also raises questions for prospects of this tender;

The changes are essentially a patch work of fiddles in response to pushes and pulls from DISCOMs, equipment suppliers and IPPs. For example, DISCOMs want low tariffs. Wind turbine manufacturers, on the other hand, are unhappy with low share of wind power in previous hybrid projects (effectively about 25% of total capacity) and have been pushing for an increase in share of capacity. However, the proposed increase is nominal. Performance BG amount, now less than 2% of capital cost, is reduced as a concession to IPPs but is now too small to be a meaningful deterrent.

For project developers, shorter timelines would be a major risk particularly for the wind component – under construction projects are delayed by more than 12 months due to land acquisition and transmission connectivity constraints. The proposed ‘change in law’ compensation amount, based on cost of debt funding cost, is also troubling as in practice, any extra costs are funded by a mix of equity and debt funds. Levy of BCD on solar modules, which seems imminent, would be a substantive incremental cost and compensation based only on cost of debt would be inadequate.

All three previous solar-wind hybrid tenders issued by SECI (including the ‘blended wind’ tender) have been heavily undersubscribed. We expect interest in this tender to also remain small due to concerns around tight execution timelines, requirement to stay within 2% of L1 tariff and ‘change in law’ risk. Winning tariff could be expected in INR 2.80-2.90/ kWh range raising additional concerns around attractiveness of this power to DISCOMs.

This video presents a summary of major developments for renewable tenders during the month. It includes details of tender issuance, bid submission, completed auctions and related market trends.

This video presents a monthly snapshot of key policy and regulatory developments in India’s renewable power sector.

BRIDGE TO INDIA hosted a webinar on 3 November 2020 to discuss recent developments in India’s residential rooftop solar market. The webinar was sponsored by Tata Power and supported by Indo-German Energy Forum.

There were six participants in the webinar:  

Tata Power: Mr. Ravinder Singh, Chief – Solar Rooftop Business

Oakridge Energy: Mr. Shravan Sampath, CEO

Enphase Energy: Mr. Harsha Venkatesh Director

State Bank of India (SBI): Mr. KP Baiju, Deputy General Manager

Bajaj Finserv: Mr. Suyog Malviya, National Lead – Business Development

Kerala Electricity Board: Mr. Madhulal J, Senior Project Manager

Annual installation of residential rooftop systems has declined from 199 MW in FY 2017 to 93 MW in FY 2020 despite attractive central/ state government subsidy schemes and falling equipment costs. Most panellists agreed that slow progress in residential rooftop solar can be attributed primarily to lack of consumer awareness, limited rooftop space and lack of financing options. Mr. Singh from Tata Power mentioned that consumer enquiries have increased substantially over the last six months due to increased power consumption in residential segment, but conversion rate is still poor. To address health-related concerns of consumers, the companies are looking at options for remote site surveys and standard designs for reduced installation time.

Recent tenders have received bids as low as INR 34,000 (USD 453)/ kW making such systems highly affordable and financially attractive. The downside of such low prices is risk of poor-quality installations by small, local players resulting in consumer dissonance. There was consensus amongst panellists that lack of appropriate quality standards is a major risk for the market. Mr. Madhulal from KSEB clarified that their tenders include sufficient provisions to ensure rigid quality standards and compliance with performance requirements. Another challenge in these tenders relates to mandatory use of domestic modules for availing subsidies – limited supply and high prices of domestic modules have impeded growth and prevented use of more efficient, higher wattage modules.

Mr. Sampath from Oakridge Energy mentioned that their integrated financing and technical solution has been received well in the market. The panellists noted that while PSU banks offer attractive interest rates, their approval process takes a long time and is very complex. NBFCs, on the other hand, offer quick turnaround times but their higher interest rates are unattractive to consumers as rooftop solar is not an impulse purchase. There is huge need for innovative financing products meeting unique requirements of this market. SBI acknowledged that financing rooftop solar is a challenge for the bank due to small ticket size of loans. The bank is keen to consider financing aggregated portfolios. The bank is in discussion with World Bank for a credit line of about USD 200 million dedicated to residential rooftop solar market. Meanwhile, Bajaj Finserv mentioned that they do not have standard products for this market but are keen to partner with large installers for a bundled offering.  

Mr. Madhulal highlighted KSEB have shortlisted 42,000 consumers for installation of 200 MW capacity, of which 46.5 MW has been allocated to installers. The state has another 150 MW tender in pipeline.

Mr. Venkatesh from Enphase Energy emphasised significant safety and reliability benefits of microinverters for household consumers. He stated that while consumers are attracted by low EPC prices quoted by inexperienced ‘fly-by-night’ installers, they are willing to pay a premium for higher quality products as seen in other part of the world.

Overall, there is great optimism about prospects of the residential rooftop solar market. 833 MW of subsidy has already been sanctioned by MNRE. As COVID-related constraints ease and more financing solutions become available, the market should grow rapidly in the coming years.

Progress on MNRE’s residential rooftop solar policy phase 2, with a target capacity of 4,000 MW by March 2022, remains slow. The government has so far approved subsidy for 833 MW and disbursed only INR 240 million (USD 2.4 million) across the country. Progress has been held up by COVID-19, cancellation of tenders and aggressive bidding, amongst other factors. But Gujarat and Kerala have made more progress in comparison to other states with announcement of ambitious targets, large tenders and an attempt to tackle financing barrier, the biggest point of resistance for end consumers. As of October 2020, MNRE had sanctioned subsidy for 285 MW and 50 MW capacity for Gujarat and Kerala respectively (40% of total).

Table: Status of MNRE’s rooftop solar policy phase 2 until October 2020

Source : MNRE

Gujarat has announced a target of 800,000 home installations by December 2022. The state government has approved subsidy budget of INR 9.1 billion (USD 122 million) to top up subsidy available from MNRE. It is already the leading state by residential rooftop solar capacity in the country with total installation of 178 MW as on 31 March 2020 as per MNRE data. The state is also known for efficient net metering policy administration unlike most other states. The DISCOM officials are well trained, making timely inspection visits and approving applications within a few weeks of application.

Meanwhile, Kerala has emerged as one of the most attractive markets for installers and financiers due to its ambitious policy (rooftop solar capacity target of 500 MW by March 2022) and innovative scheme design. As the state has little potential for utility scale solar (fertile and expensive land) and relatively good stock of residential properties, it is focusing predominantly on rooftop solar for meeting its solar targets. The state DISCOM, KSEB, is acting as demand aggregator and investing itself in rooftop solar systems. End consumers are required to fund only 12-25% of total system cost and in return, they get to consume 25-50% of total power generated depending on their investment. Complete O&M responsibility over 25 years is retained by KSEB (passed on to bidders).

KSEB is aggregating demand through online registration by consumers. It received 278,000 applications and selected 42,500 rooftops for installation of 50 MW capacity, based on site surveys, under its first tender. The advanced registration and site examination process significantly reduces installation time and hassle for the contractors. The state has subsequently issued another tender for 150 MW capacity.

Both states have, however, struggled with their tender programmes. Gujarat issued a 600 MW tender, the largest such tender in the country, in July 2019. But only 430 MW was awarded at rates between INR 33,399-46,827 (USD 445-624)/ kWh 2020 with final allocation still pending. Timelines for another 600 MW tender, issued in February 2020, have been extended repeatedly because of COVID-19. Kerala’s 150 MW tender was cancelled and then re-issued in March 2020 with a change in business model. Final results are still awaited.

Gujarat and Kerala stand out for their serious intent to harness huge potential of the residential rooftop solar market. They also provide a good case study of how states can demonstrate leadership with innovative policies and efficient administration.

India’s economy and power sector continue to reel under effects of COVID-19. IMF has projected FY 2021 GDP to contract by 10.3% over the previous year. As the vaccine is not likely to be widely available until mid-2021, a long period of uncertainty looms. The economic slowdown poses critical concerns for the renewable power sector:

Power demand has gradually recovered to last year’s (subdued) levels but there are concerns that long-term growth prospects may have been dimmed.

DISCOM financial position has grown even more perilous due to unfavourable shift in demand away from the lucrative C&I consumers and, lower billing and collection efficiency. Payment delays to power producers continue to soar despite injection of INR 310 billion (USD 4.1 billion) liquidity support by PFC and REC.

Banks are even more shy of new lending particularly to smaller consumers, contractors and project developers.

Figure: Power consumption and DISCOM dues

Source: CEA, PRAAPTI portal, BRIDGE TO INDIA research

The troubling part is that renewable power capacity addition has anyway been slowing down considerably recently due to strong headwinds on multiple fronts. We estimate total capacity to reach 121 GW by 2022, significantly behind the 175 GW target. The government has announced a new bold target of 450 GW for 2030 – entailing capacity addition of 36 GW every year – but the pathway for doing so is not clear.

Figure: Renewable power capacity addition

Source: BRIDGE TO INDIA research

In the economic recovery measures announced so far, renewable power has received scant attention. The government has agreed to provide concessional liquidity support of INR 900 billion, now increased to INR 1,200 billion (USD 16 billion), to DISCOMs for clearance of outstanding dues and commitment to future reforms. Battery cell and solar PV manufacturing have been identified as ‘champion sectors’ as part of the atma-nirbhar policy but any concrete measures are yet to be announced.

As uneconomic uncertainty still persists, there is pressure on the government to provide greater stimulus and undertake new measures to boost growth. We believe that there is a unique opportunity to kill two birds with one stone – support the economy and pave way for faster energy transition through a ‘green recovery’ package. Such a package would have considerable benefits in the form of accelerating flight against climate change, improvement in air quality (Indian cities are amongst the most polluted in the world), greater energy security, fostering economic and technological innovation as well as improving long-term competitiveness of domestic businesses.

Strong merits of ‘green recovery’ process have already led many countries to pursue this path. The European Union, Japan and South Korea have committed to achieving carbon neutrality by 2050. Many countries have announced dedicated R&D funds, new technology initiatives and scale-up programmes.

Germany is building R&D capability with a focus on digitalisation and coupling of electricity, transport and heating sectors.

France plans to spend EUR 32 billion in development of the renewable energy and energy-efficiency sectors. The French government has also released a National Hydrogen Strategy, providing for an investment of EUR 7.2 billion by 2030.

South Korea and Italy have ramped up subsidy support for rooftop solar PV projects. The Italian government has increased subsidies for households installing solar and storage systems.

Singapore is developing a solar PV roadmap to potentially meet 43% of the city-state’s power demand by 2050.

Nigeria has earmarked USD 620 million for installation of solar home systems by 5 million households, thereby creating 250,000 jobs.

In Australia, plans are afoot to develop a hydrogen-based industry.

There are many urgent priorities for the sector in India: develop technology and manufacturing competence, digitalisation, improve system resilience through storage and demand-supply flexibility, and greater provision of land and transmission capacity besides long-overdue reform of the distribution business. If the government can grasp this opportunity by taking effective steps, it can pave way for a wonderful and long-term transformation of the economy.

Haryana electricity regulator, HERC, has recently adjudicated on two petitions by Cleantech Solar and LR Energy respectively, open access solar project developers in the state. Both developers had obtained all necessary approvals from the state nodal agency (HAREDA) and state transmission company (HVPN) to build and connect two separate 20 MW projects to the state transmission network. However, on completing construction of the projects, when the developers applied for final long-term access approval and execution of Connectivity Agreement, the DISCOMs declined to give approvals on various grounds.

Approvals are being denied to fully constructed projects on specious grounds only to serve DISCOM interests;

Haryana has amended its solar policy at every turn creating chaos in the sector – only 69 MW capacity has been commissioned in the last four years;

The blatant abuse of power by HERC and other state authorities is a warning sign for investors and consumers and does not bode well for the open access market;

In the case of LR Energy, HERC has simply noted that because of the company’s “dispute” with the state utilities including HAREDA, DISCOMs and transmission company, it is desirable that the company signs a PPA with the DISCOMs instead at a tariff to be approved separately. In Cleantech Solar’s case, where the company had argued against various objections raised by the DISCOMs and HAREDA relating to ‘captive’ nature of the company’s SPV and its shareholding structure, HERC has ruled against the company. The status of Cleantech Solar’s project is therefore unclear.

Similar issues had recently arisen in the case of Amplus Solar, which was denied final long-term access approval for a 50 MW open access solar project after construction was completed. Amplus Solar had no choice but to “agree” to sign a PPA with the DISCOMs at a tariff believed to be around INR 2.80/ kWh.

Haryana is probably the worst instance of ad hoc and inconsistent renewable policy formulation and implementation by states. The state had issued a very favourable solar policy in 2016 with a target of 3,200 MW solar capacity by March 2022 (50% capacity addition through rooftop solar). The policy, offering a complete waiver from all transmission and wheeling charges as well as CSS and other surcharges, was extremely favourable to open access projects. After a couple of amendments in 2017 and wrangling between different state agencies, HAREDA issued guidelines for approving projects under the state policy and received applications for projects aggregating over 1,000 MW capacity. The guidelines were further amended and the policy was finally notified and approved by HERC with multiple restrictions in 2019. The transmission and wheeling charges were waived only for 500 MW of aggregate ‘captive’ capacity. Unsurprisingly, only 69 MW of solar capacity has been commissioned in the state in the last four years.

Haryana’s case typifies problems faced by open access market. DISCOMs and other state agencies, under ever growing financial pressure because of weak demand, delayed payments from consumers and high T&D losses, are not only reversing favourable policies, but also refusing to give approvals and creating implementation hurdles.

Figure: Open access solar capacity addition, MW

Source: BRIDGE TO INDIA research

Consequently, growth in open access renewable market, which holds huge growth potential, has stalled in the last few years. DISCOMs in many states including Andhra Pradesh, Telangana, Gujarat, Rajasthan and Maharashtra remain opposed to open access, but Haryana has touched a new low and sent a warning to investors and consumers. Given growing financial problems of DISCOMs, prospects of this market may yet grow worse before getting better.

BRIDGE TO INDIA hosted a webinar on 29 September 2020 to discuss India’s open access (OA) renewables market. Participants included Mr. Dinesh Jagdale (Joint Secretary, MNRE), Ms. Bhavna Prasad (Director – Sustainable Business, WWF India) and a spectrum of private sector stakeholders comprising  Mr. Arvind Bansal (CEO, Continuum Wind Energy), Mr. S Manikkan (CEO, Radiance Renewables) and Mr. Tejus Arsikere (Chief – Solar farms, CleanMax) as the three developers; Mr. Arijit Mitra (Head of Distributed Generation, LONGi) and Mr. Vivek Bhardwaj (Head of Sales – India, GoodWe) representing the equipment suppliers and Mr. Amar Narula (Partner, Trilegal) bringing in the legal perspective. We also had two C&I consumer representatives on the panel – Mr. Debasish Ghosh (AVP, Hindalco Industries) and Mr. Ashwin Kak (Associate Director, AB InBev).

C&I consumers currently source only about 5% of their power requirement directly from renewables. The consumers are under growing pressure from their investors and customers to scale up renewable procurement and reduce carbon emission. Renewable power also has the benefit of being cheaper than grid power in most states. Despite strong interest from consumers and developers, OA renewable capacity addition has slowed down in the past two years due to hurdles posed by DISCOMs and state regulators. As a result, the industry is facing a number of distressing policy and regulatory issues.

Figure: Estimated C&I power consumption sources

Source: BRIDGE TO INDIA research

Both Hindalco and AB InBev mentioned that they want to scale up their renewable power programme and have been examining different procurement options. Hindalco currently has an installed capacity of 45 MW open access solar, with another 60 MW in pipeline. They also have plans to foray into pumped hydro and energy storage in the future. AB InBev has made a commitment to achieve net zero carbon emissions globally by 2025. Interestingly, they mentioned that while they have already achieved more than 50% renewable penetration in many countries, they are struggling to go beyond 10% in India. Both consumers also talked about various challenges on regulatory and policy fronts as well as land acquisition and transmission connectivity. A growing challenge in recent times is ad hoc cutback in banking provision whereby many states are either removing banking provision altogether (Andhra Pradesh and Madhya Pradesh) or restricting it to 15 minutes only (Karnataka). Inconsistent interpretation of ‘group captive’ policy with different shareholding and power consumption norms by different states is also a major concern. For example, Maharashtra has been levying additional surcharge even on captive projects.

The project developers, on their part, believe that the OA market has very attractive growth prospects and could grow by 30-40% per year. Among states, Karnataka is deemed attractive due to stable policy landscape and banking provision. Gujarat, Maharashtra and Odisha are also deemed favourable with increasing demand. Continuum mentioned that they are hybridising their 800 MW of wind projects with addition of solar and storage capacity over the next 2 years. The move allows them to use existing connectivity infrastructure and provide greater quantum as well as more reliable power to customers with a much higher savings potential in comparison to standalone solar or wind projects. However, hybridisation is only possible where the developer has 100% ownership of assets and dedicated evacuation infrastructure.

On countering DISCOM resistance to OA power, most panellists agreed that unless DISCOMs earn similar margin from OA power as grid power supply business, their resistance would continue to grow. Some states (Gujarat, Tamil Nadu and Odisha) have already achieved this equilibrium through increase in OA charges. Other interesting discussion points in the webinar were related to need for bilateral RECs and innovative business models like Contract for Differences (CFD) or virtual PPAs for the market to grow. One of the panellists mentioned that some large-scale consumers are seriously exploring the virtual PPA option.

To address the policy and regulatory concerns of the panel, Mr. Dinesh Jagdale added that MNRE along with the Ministry of Power (MOP) has been making constant efforts to make policy and regulatory framework more stable. He mentioned that MOP is expected to shortly release directives to ease regulatory procedure for OA connectivity and reducing minimum capacity threshold from the current 1 MW.

Last month, Greenko announced acquisition of 873 MW of operational wind assets from ORIX, Japan, who also agreed to invest USD 980 million into the company for a minimum 20% stake. It is one of the largest in-bound investments into the renewable sector so far and provides a double shot in the arm for Greenko: simultaneously boosting its operational portfolio size, now up to 5.1 GW, and also providing it with substantive growth capital.

Greenko is the only major renewable developer to have consciously stayed away from all project auctions (other than recent hybrid tenders);

It is diversified across renewable technologies and has been proactively developing a portfolio of pumped hydro projects to meet growing need for 24×7 despatchable renewable power;

By maintain a steady financial and operational strategy, and staying patient, Greenko has successfully differentiated itself in a highly commoditised sector;

Greenko has taken on a very different path to growth in comparison to its peers, first eschewing project auctions, and then focusing on developing despatchable power projects rather than standalone renewable projects. Remarkably, Greenko is the only company in the sector that has consciously stayed away from all project auctions – other than the two recent hybrid tenders – believing that the market is overly competitive with risk-adjusted returns being consistently below cost of capital. Instead, the company has made substantial acquisitions after the assets have been built and derisked. Over the years, the company has acquired a total of 2,000 MW of assets making some substantial acquisitions including Orange (1,000 MW), Skeiron (385 MW) and SunEdison India (587 MW).

There are other fundamental ways in which Greenko has differentiated itself. Its portfolio is more diversified across technologies with a growing share of hydro power. Most of the debt funding comes from offshore green bonds and the company has more financial headroom in comparison to other developers (see table below).

Figure: Portfolio size and make up of Greenko and its peers.

Source: BRIDGE TO INDIA researchNotes: Pipeline includes all projects successfully awarded to developers in completed auctions including instances where PPA execution and/ or regulatory approval are pending. For hybrid projects, we have estimated solar and wind capacities based on industry norms. Adani’s operational capacity includes 2.1 GW of solar projects carved out in a separate JV with Total.

Table: High level comparison of Greenko with its peers

Source: BRIDGE TO INDIA research

Greenko says that it is developing a further 8 GW/ 40 GWh capacity in five states. Main focus is combination of hydro, solar and wind power to provide 24×7 schedulable, on-demand renewable power during peak hours to meet DISCOM demand. There are also news reports of the company trying to acquire US-based NEC, a battery storage systems integrator.

The ORIX deal validates Greenko’s unique strategy in the Indian renewable sector. It is an isolated example of a company successfully differentiating itself in a highly commoditised and competitive sector. The company has built a strong competitive barrier by patiently developing a portfolio of pumped hydro projects in anticipation of changing market needs.

This video presents a summary of major developments for renewable tenders during the month. It includes details of tender issuance, bid submission, completed auctions and related market trends.

This video presents a monthly snapshot of key policy and regulatory developments in India’s renewable power sector.

Bid submission date for SECI’s 5,000 MW renewable-thermal-storage hybrid tender has been extended to 3 November 2020. This is the eighth bid submission extension for the tender as developers have raised various concerns on tender design, contract structure and penalty regime. Bidding date for SECI’s 2,500 MW Karnataka tender and Railways 2×1,000 MW tenders has also been extended multiple times. While there are problems related to land acquisition by Karnataka government in the SECI tender, the issue with Railways tenders is unsuitable clauses related to project siting and land use.

Slowdown in tender programme, confusion regarding new tender designs and repeated deadline extensions are creating a sense of unease in the sector;

The developers, already reeling from greater execution challenges, delayed construction and higher working capital costs are suffering loss of confidence;

MNRE needs to streamline the programme and offer greater transparency to investors;

Main issues in the renewable-thermal-storage hybrid tender pertain to change in law provisions, coal linkage, connectivity regions and share of power from different sources.

A look at the monthly data for tender issuance and project award shows activity declining steadily over the last few months.

Figure: Tender issuance and auction capacity

Source: BRIDGE TO INDIA research Note: Auctions data refers to actual capacity awarded.

Uncertainty is not confined to new tenders alone. Even the status of many auctions completed in the last nine months is unclear. By various estimates, there are as much as 16-19 GW of projects where SECI has successfully completion auctions but is unable to get DISCOMs to contract power purchase. The list includes capacity awarded under 12,000 MW manufacturing-linked tender (tariff INR 2.92/ kWh), 1,200 MW peak power tender (average tariff INR 4.11), 400 MW round-the-clock power tender (INR 3.55) and 2,500 MW blended wind tender (2.99). Reasons for unsigned PPAs include a mix of low power demand and relatively high tariffs in some of the more complex tenders.

The scale of unsigned PPAs is staggering. Together with slowdown in tender programme, confusion regarding new tender designs and multiple deadline extensions, it has led to apprehension in the developer community about state of affairs. Some of these problems clearly owe their origins to COVID. But the somewhat disorderly nature of tendering process has not helped. It causes unnecessary anxiety and imposes additional cost burden on developers, who are already reeling from greater execution challenges, delayed construction and higher working capital costs.

MNRE is trying hard to tie-up PPAs and has even proposed a bundled scheme combining a mix of high tariff and low tariff projects to bring down average tariff for DISCOMs in the acceptable range. There is also belated acceptance that issuing tenders and completing auctions without firm back-to-back demand from DISCOMs is not desirable. If SECI changes its tendering approach whereby DISCOM demand is tied up in advance of tender issuance, it will be a lesson well learnt.

India has the largest tendering programme worldwide in the renewable sector. The need of the hour is to back it up with greater transparency, improved scheme design and better coordination between different government agencies.

Pumped hydro has once again emerged in the power sector discourse with Greenko developing a 1,200 MW site in Andhra Pradesh and another 1,260 MW site in Karnataka. The Andhra Pradesh project would be coupled with solar and wind power plants as part of the company’s 900 MW project win in SECI’s 1,200 MW peak power tender. Separately, Andhra Pradesh has recently invited EOIs for preparation of pre-feasibility studies and detailed project reports for 6.3 GW pumped hydro capacity across seven locations in the state.

Greenko would be the first developer in India to build a pumped hydro project co-located with wind and solar plants;

Due to high development risk and rapidly falling cost of battery technologies, viability window for pumped hydro is short and no other developers seem keen on it;

Greenko’s willingness and ability to develop pumped hydro projects in anticipation of market demand could pay handsome rewards;

Use of pumped hydro for balancing the grid has been under consideration for a few years as share of renewable power in the grid has been rising steadily. But so far, it has mainly remained a talk with little on-the-ground action. Greenko would be the first developer in India to build a pumped hydro project co-located with wind and solar plants. The main problem is that gestation period for pumped hydro projects is typically 5-7 years, often even longer. This timeframe is not consistent with tendering process for renewable projects, where completion is expected within 18-24 months of PPA date.

Pumped hydro has significant advantages as well as disadvantages when compared with batteries and other forms of storage. It has lower capital cost, can provide longer duration storage, is much safer, has no import dependence and has a very long project life of over 50 years. As an example, Greenko’s 1,200 MW pumped hydro component has estimated capital cost of INR 55 billion (USD 725 million), effectively about USD 75/ kWh, much lower than cost of battery storage systems estimated of approximately USD 300/ kWh. Pumped hydro is also a very versatile technology – it can provide a wide range of grid services including balancing and ancillary services as well as optimisation of transmission system. These advantages are offset by two formidable disadvantages. First, the long gestation period comes with high development, environmental and construction risk. Project bankability is low and even public sector developers shy away from these projects. Second, while India is touted to have a total pumped hydro potential of close to 100 GW, there is no assessment of how many sites are suitable for co-located solar and wind projects.

Government agencies can mitigate some of the development risk by identifying potential sites and completing social and environmental risk assessment studies in advance. Other states should take a cue from Andhra Pradesh in this regard. We believe that given the rapid advancements in battery technologies, pumped hydro has a limited time window of 5-7 years. It is difficult to conceive construction of new pumped hydro projects beyond this timeframe.

Greenko has followed an exceptional approach in anticipating need for storage and developing pumped hydro projects. The company, aided by ample and patient equity support, has been identifying and developing suitable sites while waiting for the right bidding opportunities. This approach could pay handsome rewards as procurement agencies issue more hybrid schemes for firm, dispatchable power.

BRIDGE TO INDIA hosted a webinar on 28 August 2020 to discuss rooftop solar adoption by MSME consumers. Participants included a cross section of industry stakeholders: Mr. Ravinder Singh (Chief – Solar Rooftop Business, TATA Power), Mr. Ashutosh Puntambekar (Sr. Vice President & Head, Electronica Finance), Mr. Kushagra Nandan (Co-founder, SunSource Energy) and Mr. Vivek Bhardwaj (Head of Sales – India, GoodWe); and two MSME representatives (Mr. Sandeep Kishore Jain, Managing Director, The Solo Group and Mr. Rajesh Nangia, CEO, Encoders India) that have recently installed rooftop solar systems on their premises.

We estimate total rooftop solar installed capacity in the MSME segment at only about 800 MW, less than 15% of total rooftop solar capacity. This is exceptionally small given that MSMEs constitute more than a third of total exports and GDP and almost half of total manufacturing output and industrial power demand. Although the segment has a huge potential of 25-27 GW capacity, constraints like lack of awareness and financing options continue to hinder progress.

Figure: Rooftop solar installed capacity as on 30 June 2020

Source: BRIDGE TO INDIA research

The two MSME representatives shared their experience of installing rooftop solar systems and challenges faced. They were overall satisfied with their decision and system performance. Encouragingly, they highlighted that they were mainly focused on quality rather than prices while choosing suppliers. Both companies funded the installations internally but faced a major hurdle in securing grid connectivity approvals. Many states continue to take as long as 6-12 months to provide net-metering approvals.

All panellists agreed that the that the MSME market is very tough to penetrate because of lack of financing and insufficient understanding of rooftop solar. The two installers added that there is a lack of awareness particularly in tier 2-3 cities. Mr. Singh stated that financing systems above the size of 100 kW is a challenge for MSMEs because they do not have access to financing unlike larger players. Mr. Nandan mentioned that they see huge growth potential in MSMEs but are targeting select clusters at a time. There was a consensus on the need for hybrid and innovative business models for this market to pick up as traditional CAPEX and OPEX models are not suitable for MSMEs.

Mr. Puntambekar added that Electronica Finance is currently financing up to 75% of total cost of rooftop solar systems up to 300 kW for MSME customers. Typical interest rates are 11-14%. He mentioned that because of limited ability to repossess rooftop solar assets unlike other manufacturing machinery, a collateral is required for larger loans. Mr. Singh agreed but argued that alternate financing models with non-collateralized, lower cost solutions are critical to unlocking the MSME market.

Overall, the speakers were unanimous about the huge potential of MSME market. There are plenty of reasons to be optimistic due to rapidly improving technology landscape, falling capital costs and improving technical awareness.

BRIDGE TO INDIA has just completed the latest round of data compilation exercise for rooftop solar. 1,140 MW of new capacity is estimated to have been installed in the 12-month period to June 2020, down 40% over previous year. Installation activity was tracking fairly well up to January 2020, after which the COVID effect hit the market. Activity levels fell sharply from February onwards initially because of delays in equipment shipments, but later because of extended lockdown, shortage of labour and related reasons.

C&I consumers are hesitant to make buying decisions amid ongoing business uncertainty;

Residential and MSME market segments are constrained by lack of financing solutions;

Rooftop solar faces limited growth prospects in the short-to-medium run due to risk of economic downturn, potential import duties on solar equipment and withdrawal of net metering;

The slowdown came at the worst possible time as Q1 is by far the busiest quarter for new installations. Progress across states and consumer segments was consistently down across the board. The only exceptions were Madhya Pradesh and Telangana, both benefitting from some large C&I installations.

Our quick checks with top contractors and developers across the industry show that business activity has picked up significantly in the last few months. Installation interest seems even stronger amongst C&I consumers because of attractive savings potential of rooftop solar but closures are slow. Companies are hesitant to make buying decisions amid ongoing concern around business operations, power demand and financial status. Discussions are also getting protracted because of risk of import duties on modules (and, possibly inverters). There is a discernible shift in preference towards OPEX model as businesses are reluctant to incur capital expenditure for non-core operations. 

Figure: Capacity addition by consumer segment, MW

Source: BRIDGE TO INDIA research

Meanwhile, we understand that the residential market, expected to be on an upswing due to government subsidies and policy thrust, remains weak particularly in larger cities. Rooftop solar is not a priority for households at a time of rising health concerns and financial uncertainty. The MSME market is also highly constrained due to lack of affordable financing solutions. Weak growth in these segments is disappointing as the market’s over-dependence on private C&I consumers makes it prone to growth shocks.

Going forward, rooftop solar faces three main risks in the short-to-medium run. Adverse impact of COVID on consumer finances and liquidity in the banking system could last for 2-3 years. Imposition of import duties would be a major dampener as contractors renegotiate prices or consumers delay installation decision. An escalating duty structure, as conceived by MNRE, could keep costs high for the foreseeable period. And finally, DISCOM resistance to free net metering is bound to get stronger. Even the Ministry of Power has proposed withdrawal of net metering connectivity for all systems bigger than 5kW. 

Latest MNRE data shows that less than 9,000 solar pumps were installed in FY 2020, the lowest in last five years. Progress on distributed solar projects for agricultural consumption is equally disappointing. Maharashtra, Haryana and Rajasthan are the only three states to have issued tenders for agricultural feeder based solar projects. Maharashtra’s 1,400 MW tender has been undersubscribed repeatedly despite four auctions till date. Haryana has not even announced bid submission date for its 279 MW tender issued back in January 2020. Rajasthan has allocated 725 MW on a preferential basis to more than 600 farmers at a tariff of INR 3.14/ kWh.

Actual progress against the scheme targets is abysmal;

Growth prospects of solar pumps seem bleak in view of the insurmountable financial barriers;

Distributed solar is a sound policy objective but needs focused policy support to overcome on-the-ground challenges;

MNRE had announced the ambitious KUSUM scheme in 2017 (cabinet approval was received in 2019). The target was to add 25,750 MW of solar capacity – 10,000 MW distributed solar projects up to 2 MW each in size plus 2.75 million solar powered pumps – by 2022 with total capital subsidy support of INR 344 billion (USD 4.6 billion).

Figure: Solar pump installed base

Source: MNRE

The problems with pumps are several and obvious. Most importantly, the central and state governments simply do not have funding capacity for required subsidies. Farmers are even less keen – why pay 10-40% of pump cost upfront when they can instead get free (albeit unreliable) power from the grid. Second, the government mandates use of domestically manufactured cells and modules but limited availability and high cost of such modules are major challenges. Moreover, overall techno-commercial efficiency of a pump is almost half of a larger ground-mounted solar installation.

Some analysts have therefore claimed that agriculture feeder based small solar projects of up to 2 MW each are the ideal solution to providing solar power to farmers. Such projects face less acute land and transmission challenges. They also create more widespread economic benefits of solar deployment with jobs, investment and land rental income opportunities accruing to farmers across the country rather than to larger developers in concentrated pockets in a few states.

Figure: Comparative assessment of different solar power sources for agricultural supply

Source: BRIDGE TO INDIA research

Andhra Pradesh has jumped on the bandwagon with its own ambitious scheme to develop 10 GW of distributed solar capacity to meet the entire agricultural demand in the state. But given the recent renegotiation, curtailment and payment problems faced by developers in the state, it will be a miracle if this scheme takes off.

Agricultural solar has been touted as a panacea for the power sector and even the wider economy – reliable supply to farmers boosting farm output and rural incomes, reduced transmission losses, improved DISCOM finances, lower diesel consumption and so on. However, the scheme suffers from poor conceptualisation and implementation. It is a sound policy objective but needs focused policy support to overcome on-the-ground challenges.

Central Electricity Regulatory Commission (CERC) recently issued a draft regulation for power markets. The regulation is aimed at improving transparency in market trading and lay groundwork for derivative trading in near future. 

Figure: Power traded through short-term markets

Source: CERC annual market monitoring reports

One of the most important proposals is to set up a market coupling operator for discovery of a common clearing price across all power exchanges for day-ahead (DAM) and real-time (RTM) instruments. However, the justification provided for introduction of this operator is not entirely convincing. CERC claims that harmonisation of prices across power exchanges would lead to optimal utilisation of the cheapest sources of power and transmission corridors. The commission also claims that a common market price is necessary to benchmark financial derivatives and contracts expected to be launched soon.

Surprisingly, the commission has made no mention of market-based economic dispatch (MBED, mooted in 2018) in the draft regulations. MBED aims to maximise utilisation of power plants with low variable charge, potentially requiring all power plants, even those with existing long-term PPAs, and DISCOMs to trade electricity through power exchanges. If achievement of optimal utilisation of cheapest power plants is indeed the objective, MBED should have been central to these regulations. CERC has claimed annual savings of INR 62 billion (USD 831 million) in a simulation conducted for Andhra Pradesh, Karnataka, Telangana, Maharashtra and Chhattisgarh.

With respect to benchmarking to a common price, there is no such precedent in other markets. The two national stock exchanges trade independently with separate derivative contracts. Further, any difference in prices at two or more platforms is bound to diminish overtime.

Another proposal in the draft regulation envisages setting up an OTC trading platform with information of all buyers and sellers. We believe that this measure would increase transparency in the bilateral market and potentially increase trading volume and competition.

The draft regulation also includes a brief mention of ancillary services and capacity contracts but falls short of providing any details, operational guidance or implementation timeline for either of the two contracts. Lack of operational guidance for these contracts or clarity on introduction of MBED makes this draft regulation a missed opportunity in our view.

This video presents a monthly snapshot of key policy and regulatory developments in India’s renewable power sector.

This video presents a summary of major developments for renewable tenders during the month. It includes details of tender issuance, bid submission, completed auctions and related market trends.

In an encouraging development for renewable power, Indian states and private investors are turning their back en masse on new thermal power capacity. Energy minister of Maharashtra, the largest power consuming state, announced last week that the state will not add any new thermal power capacity. Reasons cited include increasing cost of thermal power production and pollution. The state wants to meet 25% of its power requirement from renewable resources, up from current 9%. Maharashtra’s announcement comes after two other states including Gujarat, another major power consumer, and Chhattisgarh, one of the largest coal producing states, announced retreat from new thermal power last year.

State governments, DISCOMs, private investors and consumers are collectively turning back on thermal power;

Share of private investment in thermal power capacity addition has fallen from 65% to almost nil in just five years;

The Indian government needs to define a clear roadmap for phasing out new thermal power by 2024 to provide clear direction to policy makers and markets;

With most states now grappling with power surplus as well as environment and climate change related issues, more similar announcements can be expected soon. DISCOMs across the country have anyway been reluctant to sign new long-term thermal PPAs for a few years now. Private investors and power consumers are following in the same direction. Even the Indian Railways have announced a goal of attaining zero carbon emissions by 2030. The Railways are aiming to achieve 100% renewable energy adoption by building 20 GW of new renewable capacity by 2030. Meanwhile, Tata Power and JSW Energy, two of the largest private thermal IPPs, have recently declared that they do not anticipate setting up any new thermal power plants. Both companies now want to focus only on renewables for their future expansion plans. The investors are concerned about safety of their investments and do not consider long-term prospects of thermal power – increasing taxes, higher litigation risk and cost disadvantage vs renewables – as attractive.

Shifting investor preferences can be most clearly seen in the profile of new thermal power generating capacity developed each year. In just five years, share of private sector in new capacity addition has fallen from 65% to almost nil. Of the 46.6 GW of thermal power plants in various stages of construction, only 7% (3.3 GW) is being developed by private IPPs.

Figure: Share of thermal power capacity addition

Source: CEA, BRIDGE TO INDIA research

We maintain that given limited viability of other generating sources (hydro, nuclear, biomass) and non-firm nature of renewable power, thermal power will have an important role to play in India for years to come. We expect coal to account for over 50% share of total power production in the country for at least another 20 years.

Nonetheless, government-owned companies still investing so heavily in new thermal power plants is indefensible. Thermal plant PLFs are down to historic lows of around 50% and it is almost inevitable that all new plants will end up making losses in the long run. The central government is showing lack of vision in trying to expand thermal power and coal production rather than laying out a clear roadmap for phasing out new thermal power by say, 2024. Absent the government doing so, the market forces will drive the same changes but in a somewhat chaotic and expensive manner.

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Indian Energy Exchange opened a new window for trading of renewable power this week. Solar and non-solar renewable power can be traded separately under four different contract types: intra-day, for delivery within 3.5 hours; day-ahead, for delivery next day; daily, for delivery between two to ten days ahead; and weekly, for delivery from Monday to Sunday. Buyers will be able to fulfil their RPO targets by purchasing renewable power on the exchange provided sellers have not been issued RECs for the same power. No revision in schedule will be allowed for intra-day and day-ahead contracts. Revisions are allowed for daily and weekly contracts but with at least two-days advance notice. Deviation penalties would be applicable as per CERC regulations (at national APPC for inter-state trading, currently INR 3.60/ kWh) or state regulations (for intra-state trading).

Trading interest is likely to be confined to DISCOMs keen to fulfil their RPO targets;

Price expectations may be hard to bridge as buyers look to reduce costs but sellers mainly focus on selling surplus renewable power contracted historically at much higher prices;

Together with launch of spot trading and announcement of other new trading initiatives, the move heralds an exciting and potentially transformational opportunity for the sector;

As almost all generation capacity is tied up in firm PPAs, volumes are bound to be thin. Sellers would mostly comprise DISCOMs that have entered into renewable PPAs in excess of their RPO targets (Karnataka, Andhra Pradesh, Tamil Nadu). The buyers are also likely to be mostly DISCOMs, primarily in north and east regions, keen to buy renewable power to meet their RPO shortfall. This route would be financially more attractive than buying Renewable Energy Certificates (RECs), a market suffering from regulatory uncertainty and shrinking volumes. Interest from C&I consumers is expected to be low at least initially due to low volumes, very short-term nature of the market and open access policy constraints.

We see a few other potential issues. Price expectations of buyers and sellers may be hard to bridge. Given the surplus power situation in the country and prevailing solar auction tariffs, buyer appetite would be mainly around INR 2.50/ kWh whereas sellers would be keen to sell power contracted at much higher prices. Scheduling conditions are quite onerous with limited provision for revisions. And finally, the need to pay immediately for power may keep some buyers away. As expected, trading volume has been patchy in the early days hovering below 10 MW for most part.

Launch of green power trading follows commencement of spot trading of power from 1 June 2020 onwards. This window is ideal for buyers and sellers in meeting their unforeseen last-minute requirements. Trading volume has already soared to 15% of total volume. Monthly average price of INR 2.31/ kWh is nearly in line with day-ahead market price of INR 2.40/ kWh.

Figure: Volume traded at Indian Energy Exchange and share of total power consumption

Source: Indian Energy Exchange, NLDCNotes: DAM – day ahead market; TAM – term ahead market; RTM – real time market

Longer-term trading windows and new instruments including derivatives are expected to follow in near future. Another new concept proposed to be launched shortly pertains to market-based economic dispatch, whereby all power sale transactions including those under long-term PPAs would be routed through exchanges.

These are all very exciting and transformational developments for power sector in India. Although some people have voiced doubts about prospects of power trading, we believe that launch of market-based mechanisms is highly desirable and the logical next step in evolution of the market. Exchange-based trading provides more information to all market participants including financiers and consumers, and leads to greater transparency, efficiency and better decisions. However, we doubt that these moves would lead to creation of new merchant power generation capacity anytime soon as we see no financing appetite for such projects currently.

ReNew recently made a surprise announcement to set up a 2 GW PV cell and module manufacturing line. Adani and Azure, the latter in partnership with Waaree, are already due to set up cell and module manufacturing capacity of 2 GW and 1 GW respectively as part of their win in the manufacturing-linked tender. Several other companies, including both manufacturers and project developers, are believed to be in advanced stages of considering setting up new manufacturing capacity. The list includes Vikram Solar, Premier Energies and US-based First Solar amongst other names. As per a news report, MNRE has received proposals aggregating total manufacturing capacity of about 10 GW.

The government is planning to throw everything from duties to cheap capital and land to demand certainty for growth of domestic manufacturing;

Most companies seem to be making opportunistic short-term bets based on government incentives;

Government incentives alone cannot be a sufficient basis for investment decisions of private investors or developing manufacturing into an engine of long-term economic growth;

The tide of company announcements comes in the wake of fervent plans of the Indian government, which seems to be throwing everything at manufacturing. In addition to extending safeguard duty by a year, it is looking to levy customs duty on all imports. There are plans to offer 5% interest rate subsidy and subsidised land with automatic project clearances. The government has also directed public financial institutions to offer debt financing of up to 75% of total capital cost to manufacturing ventures. Historically, lack of any debt financing has been a major business barrier as companies have found it difficult to fund the capital-intensive business.

How much all of this actually plays out is anybody’s guess. There is a huge gulf between Indian manufacturing businesses and their Chinese competitors on technology, scale, in-house business capability and external eco-system. Government support can be fickle at the best of times and does not provide a sound foundation for long-term investment decisions. Uncertainty of policy design and poor implementation have been amongst the biggest challenges in the sector. The government has already failed to implement customs duty from 1 August 2020 onwards as promised. Our best guess is that about 5-7 GW of new downstream manufacturing capacity would be actually set up over the next three years.

But the new businesses do not unfortunately herald India’s manufacturing resurgence. The rush to set up manufacturing capacity is not based on strong business fundamentals. Almost all companies seem to be making opportunistic short-term bets based on government incentives and trade barriers rather than plotting a long-term roadmap to develop business competitiveness. If the Indian government is serious about developing manufacturing as an engine of long-term economic growth and wants to move beyond rhetoric, it will have to work much harder than offering incentives.

This video presents a monthly snapshot of key policy and regulatory developments in India’s renewable power sector.

This video presents a summary of major developments for renewable tenders during the month. It includes details of tender issuance, bid submission, completed auctions and related market trends.