Category: Uncategorized

BRIDGE TO INDIA hosted a webinar on 30 March 2020 to discuss impact of COVID-19 on the renewable sector in India. Speakers from a cross-section of players from the industry discussed impact on equipment supply chain and projects under construction (an estimated 10 GW where on-site activity is currently under progress) as well as operations (about 75 GW of wind and solar projects) and implications for the entire industry value chain.

Luke Lu, VP-APAC region, LONGi mentioned that their factories in China have already been running at 80-90% capacity utilisation since around mid-March with 100% utilisation expected to be reached shortly. He reported ongoing dialogue with Indian developers with no reported cases of order postponement, delays or cancellations. LONGi is optimistic that global demand would recover in a few months with minimal impact on module prices.

Ivan Saha, Head-Manufacturing & CTO, Vikram Solar stated that domestic manufacturers have been dealing with the situation for 3 months now. Because of normal stockpiling before the Chinese New Year, operations were relatively unaffected until February. But manufacturing has been affected severely from mid-March onwards. He expressed fears that the lockdown and subsequent disruption in flows of material and labour may result in Q2 being severely affected. He expects smaller EPC players and developers to be hit hardest due to payment delays and cost increases. Export markets in the US and EU have also seen a collapse in demand. He expects a module price contraction if the situation persists. His other main point was about INR depreciation, 5-7% in the last few months, adversely affecting viability of projects under construction.

Mayank Mishra from Huawei mentioned that as renewable projects have been allowed to operate normally, they have been able to perform all service and operational activities due to presence of on-site engineers and improved remote diagnostic abilities. He was unsure about impact on their annual target of 3 GW supply for the Indian market as developers seek timeline extension.

Monika Rathi from Mahindra Susten spoke about suspension in all construction activities since last week of March. She mentioned that majority of on-site labour has migrated back to their villages and re-mobilizing it may be a challenging task even after the lockdown is lifted. She further expressed concerns that construction activity may not pick up until after August due to monsoons. Meanwhile, manufacturers across the supply chain, forced to shut down factories, have issued Force Majeure notices to their clients.

Figure 2: India power demand

Source: POSOCO

Kishore Nair, COO of Avaada stated that low power demand is the biggest threat to the sector currently. There has been a 25% reduction in demand as industrial and commercial complexes are shut down. Their projects have been running as normal and they have not seen any material problems with evacuation yet as renewable energy enjoys must-run status. But he expressed fears that if demand stays depressed for an extended period of time, it could lead to higher renegotiation and payment delay risk. He also agreed with Monika that even if the lockdown is lifted shortly, projects would need 4-6 months extra for completion due to monsoons and non-availability of labour force. Finally, he stated that passing of interest rate cuts and working capital relaxation norms by banks, as per RBI announcement, would help developers tide over the situation.

Pallavi Bedi, Partner at L&L Partners clarified that despite differences in definition of Force Majeure across PPAs, the current situation would still likely be classified as such particularly because of MNRE guidance. PPAs with tariff reduction in case of non-commissioning by July 2020 also need appropriate relief. Proactive notices to the authorities within a reasonable timeline is key to claiming relief. She also stated that it would be difficult for any party to claim relief from payment obligations in the current circumstances.

The Maharashtra regulator, Maharashtra Electricity Regulatory Commission (MERC), has made a series of positive announcements for rooftop solar market in the state. It has accepted demand from MSEDCL, a state government owned company and the largest DISCOM in the state, to levy grid usage charges on all new installations over 10 kW capacity but only once total installed capacity in the state exceeds 2,000 MW (current estimate: 810 MW). The level of approved grid usage charges is also much lower at INR 0.72-1.16/ kWh as against punitive levels of INR 3.60-8.76/ kWh sought by MSEDCL. But the consumers would incur banking charges of 7-12% with immediate effect.

Maharashtra has become the first state in India to levy grid usage and banking charges on rooftop solar installations;

The time-graded levy provides much needed policy clarity and could be a template for other states;

We expect the state rooftop solar market to grow rapidly over next five years with new capacity addition of about 3,000 MW;

Notwithstanding MNRE’s move to appoint DISCOMs as nodal agencies for development of rooftop solar, MSEDCL has been trying hard to restrict this market. Back in July 2018, it had petitioned MERC to severely limit net metering connectivity for all consumers. After that demand was rejected by MERC, MSEDCL had requested levy of grid usage charges on all C&I systems over 10 kW in size. Other DISCOMs in Maharashtra (Tata Power, Adani Electricity and BEST) have not made any formal proposals to restrict net metering or levy grid usage charges.

MERC decision is a pivotal moment in the development of rooftop solar market in India. It marks the first time any grid charges have been levied on such installations anywhere in the country. The other really unique and positive aspect of the decision is the policy clarity and long-term visibility afforded to the market. MERC has sensibly taken the view that rooftop solar is still too small to materially hurt financial interests of the DISCOM. By dealing decisively with policy risk, the biggest challenge in the market, it has paved way for rapid growth of rooftop solar in Maharashtra. The state, already the largest rooftop solar market in the country, had recorded near 100% growth rates in FY 2018 and FY 2019. But growth had stalled over last year because of uncertainty posed by MSEDCL petitions. We expect the state to add as much as 3,000 MW of rooftop solar capacity within five years.

Figure: Rooftop solar capacity addition by state, MW

Source: BRIDGE TO INDIA research

Separately, MERC has also approved tariff reduction of 4.3% for industrial consumers and 18.3% for commercial consumers between FY 2021 and FY 2025. Clearly, the decision comes on behest of the state government in a bid to offer financial relief to consumers post Coronavirus slowdown. Notwithstanding the tariff reduction, economic case for rooftop solar remains strong with potential savings of 30-70% for C&I consumers in the state.

Interestingly, while MERC has lowered grid tariffs, it has allowed a 13% increase in power purchase cost over next five years for MSEDCL. Quite how the DISCOM would be able to absorb the financial impact is not clear.

Coronavirus lockdown and consequent slowdown in power demand are striking at the core of the power sector in India. A cascading series of litigation and payment defaults by end consumers, DISCOMs and power producers seems underway. To make matters worse, there is pressure on the DISCOMs to reduce tariffs and/ or offer payment concessions to consumers. In an unprecedented move, Maharashtra regulator has cut tariffs for all consumer categories by 7-24% for all DISCOMs in the state for a period of five years. The state regulator has also offered a three-month moratorium on fixed charge payments to C&I consumers. Uttar Pradesh has similarly provided a fixed charge deferral and more states are likely to follow suit.

Delayed payments to power producers seem like the only route available to DISCOMs for financing higher losses and working capital requirement;

Prolonged weakness in power demand poses risk of cancellation to ongoing tenders, higher curtailment and slowdown in rooftop solar and open access markets;

The government ought to ensure compliance with core tenets of timely payments and no curtailment for sustained sector momentum;

What makes this crisis really difficult is the weak position of DISCOMs at the outset. With banks already unwilling to lend to them, there are no easy options for them to fund operational losses and higher working capital requirement. Public funding seems improbable due to stretched financial position of the state governments. That leaves the default option of delayed payments to power producers, which must ring alarm bells for lenders and investors in the sector.

Table: Snapshot of aggregate DISCOM financial performance

Source: India’s Power Distribution Sector Needs Further Reform, IEEFA, March 2020

Other likely consequences of the current situation seem equally unsavoury.

Slowdown in renewable power procurement

Unless power demand jumps back to normal levels fairly quickly, it is inconceivable that the DISCOMs would be willing to procure even 10-12 GW of new renewable power over the next year. Recently completed auctions where execution of PPAs and/ or regulatory tariff approvals are still pending (4,000 MW manufacturing tender and 1,200 MW peak power tender, amongst others) are also at risk in our view.

Higher curtailment

States have already started resorting to large scale curtailment under the pretext of force majeure protection. MNRE has issued a couple of advisories to state governments and DISCOMs on enforcing ‘must-run’ status for renewables but such advisories hold little sway in these times.

More resistance to rooftop solar and open access

The DISCOMs need their high-paying C&I consumers more than ever and would use every trick possible to hinder growth of these markets.

With far too many conflicting and seemingly more urgent priorities (jobs, healthcare, economy, bank solvency), the government would seem unlikely to have political or financial will to recapitalise DISCOMs or institute much anticipated power sector reforms. It is now nearly a year since formation of the new central government. We believe that the opportunity to take tough measures may have been lost.

But now more than ever, we need to place a premium on environmental and operational value of renewables (low operating risk, simple value chain, high energy security). The government ought to ensure compliance with core tenets of timely payments and no curtailment for sustained sector momentum.

Coronavirus damage impossible to assess

India has been in a near complete lockdown since 22 March 2020. The current three week lockdown is due to last until 14 April 2020. All commercial and social activity including all international and domestic travel has been completely banned. Only essential services including healthcare, food and critical infrastructure – telecom, power, security and banking – are exempted.

On the face of it, India has been relatively untouched so far. Total number of infected patients and fatalities was reported to be 1,024 and 24 respectively as on 28 March, minuscule in comparison to rest of the world but the fear is that these numbers are hugely underreported. Because of severe lack of testing facilities, very few people are being tested. Actual numbers could be far greater, possibly explaining the government’s overly cautionary stance.

A number of relief measures have been announced to mitigate economic fallout of the virus. For the renewable sector, there are three relevant provisions.

Force Majeure relief for delay in construction

MNRE has issued a guidance to the various government authorities that project developers should be given more time for achieving COD under Force Majeure provisions in the contracts. This is mere guidance – actual relief would be granted on a case-by-case basis depending on duty to mitigate, actual project level impact and other specific provisions in individual PPAs. We expect the legal process of obtaining time relief to still be a contentious affair as the project developers would try to maximise time extension for a host of reasons – the Solar Power Developers Association is seeking a six-month blanket relief – but the authorities are likely to take a stricter stance.

Continuity of project operations

MNRE has separately notified that all operational renewable projects should be allowed to operate without any operational or logistical hindrance.

Moratorium on servicing bank debt

India’s central bank, the Reserve Bank of India, has loosened monetary policy and allowed a three month moratorium on debt repayments plus relaxation in working capital lending norms.

We believe that the direct sector fallout in most cases would still be detrimental but contained. There would be no compensation for additional operating, interest and working capital costs. But any commissioning shortfall would simply move to latter part of the year and overall utility scale project activity levels are expected to catch up within about 3-6 months (assuming no extended lockdown or other disruption).

However, we fear that the indirect impact would potentially last much longer and be far more damaging. Average power demand in India has shrunk by a staggering 36 GW, or about 25% of total demand, because of the lockdown. While high tariff demand from commercial and industrial consumers has collapsed, low tariff residential demand has gone up. If this demand shift prevails for a weighted average period of two months, financial hit for the DISCOMs is estimated at about INR 400 billion (USD 5.3 billion), more than double their annual losses.

Figure: Daily power demand in India

Source: POSOCO

In addition, because of reported delays in payments by end consumers, the government has allowed the DISCOMs to defer payments to power producers by up to three months. As a result, working capital position of IPPs, already struggling with payment delays, is expected to deteriorate even further. Reduction in power demand has also depressed power prices on the exchanges to about INR 2.20/ kWh and raised the risk of curtailment.

Rooftop solar and open access projects with C&I offtake are expected to face even more difficult construction and offtake risk related scenarios.

Bad news does not stop here unfortunately. INR has depreciated against USD by about 5% in the last month increasing capital costs. International freight charges have shot up. Shipments, stuck at ports, are incurring demurrage charges. There is mass exodus of labourers to their native places. Fearing disease and employment uncertainty, some workers may choose to not come back to their regular jobs at all. It is too early to estimate net impact on the sector or hazard a guess on when we would see a return to normal. The timing, coming towards the end of the financial year, couldn’t be worse.

We pray for good health and safety of all our readers.

Power demand for cooling applications accounts for about 17% (210 TWh in 2017-18) of India’s total electricity requirement. As per a projection by the Ministry of Environment, Forests and Climate Change (MOEF&CC), this demand could increase to 985 TWh by 2037-38 in the business-as-usual scenario. But the Ministry’s India Cooling Action Plan (ICAP) has projected this demand falling by 300 TWh if appropriate measures including energy conservation building code (ECBC), more efficient cooling appliances, district cooling and thermal energy storage are adopted.

Figure: Projected power demand from cooling applications, TWh

Source: Ministry of Environment, Forests and Climate Change Note: Accelerated adoption scenario assumes implementation of additional cooling load reduction measures.

Inability of renewable power to meet evening peak loads is a major reason why grid operators and DISCOMs are hostile towards it. Reduction in cooling demand would reduce the evening loads and make renewable power more attractive to DISCOMs, who rely on expensive thermal power for evening peak demand.

Some recent initiatives give us a useful peek into efficacy of potential measures to reduce cooling load arising from measures proposed under ICAP. Space cooling, which includes air conditioners and fans, accounts for 64% of cooling load and is a focus area for load reduction. Large scale district cooling has so far been implemented only in the GIFT City, Gujarat reducing the city’s cooling load from 240 MW to 135 MW. More schemes are expected to be implemented in Bhopal, Coimbatore, Pune, Rajkot and Thane on a pilot basis. Thermal storage has been adopted by several commercial and institutional entities, especially in hospitality and IT sectors. Tata Power, the Mumbai DISCOM, has successfully demonstrated reduction of load by 80% using thermal storage. Success on ECBC compliance front has, however, been limited. Only 13 states have notified ECBC and its implementation remains questionable.

With limited adoption of proposed measures so far, medium to long-term viability of shifting cooling demand away from electricity remains uncertain. But India is bound under the Montreal Protocol to phase out ozone-depleting substances (used in refrigeration and air-conditioning) by 2030. Doing so would be hugely beneficial for the renewable sector.

MNRE is understood to be in advanced stages of waiving requirements for bank guarantees by project bidders. As per a news report, MNRE is proposing that instead of bank guarantees, the developers may provide letters of comfort from one of the three government owned financial institutions – Power Finance Corporation (PFC), Rural Electrification Corporation (REC) and Indian Renewable Energy Development Agency (IREDA).

The move is motivated by a desire to free up banking lines of credit for the developers and improve ‘ease of doing business’ in the sector.

Reeling under bad-debts, most banks are reluctant to take fresh exposure to the sector;

Eligibility criteria and bid guarantee requirements in the Indian tenders are already extremely lax in comparison to international practices;

Relaxation in bank guarantee norms would expose DISCOMs and debt providers to undue project risks;

Bidders are currently required to provide a bank guarantee for about 1-2% of capital cost at the time of bid submission as earnest money deposit. This guarantee is released when the bid is not successful, or when the successful bidders furnish a performance bank guarantee for about 2-4% of capital cost at the time of executing the PPA. The performance bank guarantee is released on project commissioning net of any penalties for delay in achieving financial closure and/ or commissioning.

The move to relax bank guarantee norms is driven by pressure from developers hurting from tightening credit conditions and aversion of banks to lend to the sector. Share of bad-debts in total banking exposure to power sector has touched an unprecedented 18%. In most cases, the banks are insisting on 100% cash collateral for providing bank guarantees. Based on about 7,000 MW of tenders where bids have been submitted (auctions pending) and almost 38,000 MW of renewable projects under construction, total money locked up in bank guarantees is estimated at INR 50 billion (USD 675 million). For the leading developers, individual bank guarantee requirement is estimated at about INR 3-5 billion (USD 40-65 million). Including change-in-law claims for safeguard duty and GST, working capital requirement of developers has soared.

Figure: Bidding volume and pipeline for leading developers in 2019, MW

Source: BRIDGE TO INDIA research
Note: This data includes utility scale solar and wind projects. Pipeline data is applicable as of 15 March 2020.

As the 2022 deadline for 175 GW approaches, the government seems to be getting jittery about waning bidder response and undersubscription in tenders. Weak progress on commissioning – only 753 MW of renewable power capacity was commissioned in the first two months of this year – and worsening outlook due to Coronavirus disruption may be other reasons why the government is keen to appease developers.

However, at a time when project execution risks are rising and completion delays are getting worse, the move to relax bank guarantee norms seems ill advised. Eligibility criteria in the tenders are already very lax. We believe that dropping bank guarantee requirements would lead to speculative bids and expose DISCOMs and lenders to undue completion and quality risks.

If banks are wary of power sector exposure, the government ought to address their concerns rather than pass risk to public financial institutions and offtakers. Similarly, calling an end to unnecessarily destructive practices such as delays in tariff adoption by regulators, tender cancellations and payment delays would be hugely helpful to the sector.

The Directorate General of Trade Remedies, under the Ministry of Commerce & Industry, has opened a fresh investigation into solar cell and module imports. The investigation follows an application for extension of safeguard duty by Adani and Jupiter Solar, a local cell manufacturer. Their application seeks continuation of duty for four more years after the current duty expires in July 2020.

The case hinges on impact of imports on the business of Jupiter Solar with a capacity equivalent to only about 4-5% of India’s total annual requirement;

Uncertainty around time-table of final decision is mitigated by experience in dealing with change in law claims;

If the government can take a decisive stand and provide long-term clarity, many Indian and international companies would be willing to make large-scale investments in manufacturing;

The review application has sought to cover SEZ (Special Economic Zone)-based units, where Adani’s 1.2 GW per annum cell and module manufacturing plant is based, in the definition of domestic industry. SEZ-based units were not given benefit of duty protection in the original duty decision and the Director General has again decided to exclude them from the investigation. In effect, therefore, the decision on extending safeguard duty would be based solely on impact of imports on the business of Jupiter Solar, which seems bizarre given that their operational capacity is less than 500 MW, or only about 4-5% of India’s total annual requirement. 

Unfortunately, the timetable and process for final decision for such investigations in India is muddled as we saw last time around. The launch of investigation throws the industry into another open-ended period of uncertainty. Hopefully, however, more experience and clarity in dealing with change in law claims should prove useful. Assuming final duty in the range of 20-25%, incremental tariff requirement is estimated at about INR 0.30-0.35/ kWh. The increase seems nominal but may be enough to deter some DISCOMs from procuring solar power.

It is clear that improving manufacturing competitiveness of the economy (land and labour reforms, reducing cost of capital, improving infrastructure, developing skills) remains too arduous a task for the policy makers. Even the various measures announced so far (manufacturing-linked tenders, PSU scheme, solar pump and rooftop solar schemes) to support domestic manufacturing have proven to be ineffective. The government seems, therefore, pushed in a corner with the prospect of duty protection looking highly likely. The Coronavirus disruption has only added to urgency of ‘Make in India’ quest. Creating trade barriers for the benefit of just one company is hard to understand but seeking self-sufficiency in an industry of vital economic importance must be a sound policy objective.

Under the right framework, many Indian and international companies would be willing to make necessary large-scale investments in the sector. We hope that the government can take a decisive stand, make a quick decision and provide long-term clarity to the sector. Simultaneously, it should abandon other ineffective and costly measures to support domestic manufacturing.

Karnataka and Delhi DISCOMs have recently issued empanelment tenders for installation of residential rooftop solar systems under MNRE’s phase II rooftop solar scheme, also known as SRISTI. Including these two states, twelve states and union territories have so far issued such tenders. Six states and union territories have already completed empanelment process for a total capacity of 180 MW and obtained MNRE approval for subsidy funds.

DISCOMs are expected to aggregate demand, empanel installers and  monitor on-the-ground progress in residential rooftop solar market;

With empanelment process gaining speed, residential market should see rapid growth over next three years;

Procurement process needs to be re-tooled to achieve desired performance outcomes;

Under the new scheme, where MNRE provides 20-40% capital subsidies, DISCOMs are expected to assume responsibility for demand aggregation, empanelling installers, subsidy disbursement, installation monitoring, inspection and metering. The scheme guidelines mandate: i) use of domestically manufactured solar PV cells and modules, ii) minimum warranty of five years for all mechanical structures and equipment including inverters, net-meters and batteries, iii) commissioning period of 15 months, and iv) matching of L1 bids. The installers are also required to establish a service centre in each operational district. 

There has been a lull in government initiatives in rooftop solar since March 2019 when phase I scheme expired. With the new empanelment process, momentum is now building up and residential installations are expected to pick up rapidly over the next three years. 

Table: Salient details of state empanelment tenders for residential rooftop solar

Source: BRIDGE TO INDIA research

Note: Costs mentioned are total system costs pre-subsidy and include equipment procurement, transportation, insurance, installation, five year operations plus applicable fees and taxes.

Some states have specified very basic eligibility criteria. For instance, Andhra Pradesh requires minimum installation experience of only 50-100 kW. Other states have either specified no criteria or reserved part capacity for inexperienced installers. As a result, most of the empanelled vendors are little known local installers. And as often seen in India, high competition has resulted in price bids coming in at unrealistic levels and far below MNRE benchmark price (INR 48,000-59,000 for systems ranging in size from 1-10kW plus).

We fear that unless corrective action is taken expediently, lack of robust eligibility criteria and aggressive bidding would lead to poor quality installations and consumer dissatisfaction.

The Ministry of Finance has clarified that projects affected by the Coronavirus breakout would be given relief by way of extensions in project completion timelines under Force Majeure provisions. The announcement is not a surprise as the resultant business disruption, clearly outside the control of the project developers or the equipment suppliers, has severely impacted equipment shipments and installation activity. Module, inverter and other material shipments are delayed across the board and there is no clear visibility over how long the disruption would last.

China’s stranglehold over sector supply chain means that project developers and equipment manufacturers across the world have been hit hard by this disruption;

Despite the Force Majeure relief, projects under execution would be adversely affected due to increase in equipment and other operating costs;

This incidence is a stark reminder of risks arising due to heavy reliance on just one country but it is important that the right policy lessons are learnt;

China’s manufacturing dominance extends across the value chain including wafers, cells, backsheets, chemicals, adhesives and electrical components. Its stranglehold over the supply chain means that even manufacturers in other countries are having to curtail operations.

Figure: Module and inverter suppliers for utility scale solar projects commissioned in 2019

Source: BRIDGE TO INDIA research

Based partly on a quick round of checks with various market players, our assessment is that different players would be affected very differently. For utility scale projects, commissioning is likely to be delayed across the board due to heavy reliance on imports from China (see chart). Module prices have also firmed up rather than falling as expected earlier. Associated increase in other costs including working capital, interest charges etc. would mean that notwithstanding the Force Majeure relief, the final impact would still be damaging. Even in an optimistic scenario, there are fears that normal service may not resume for another 2-3 months as the Indian developers may lie at the back of the queue because of low price expectations.

Rooftop solar, which typically enjoys a very busy Q1 (end of the financial year), is affected badly with installation volumes down as much as 40-50% over normal levels. Indian module manufacturers are also badly affected despite stocking up on supplies in advance of the Chinese new year. But they should be able to revert to full operations faster than other players.

The loud and clear message from this episode is that supply chain control is fundamentally important for real energy security. But all those calling for more trade barriers should note that the disruption is affecting not only solar projects (across the world) but also most parts of the economy including electrical and electronics, automobiles, engineering goods, tourism, amongst others. We need a wider economic reform and a vigorous industrial policy to improve long-term competitiveness of domestic manufacturing.

Eight of the proposed 11 Renewable Energy Management Centres (REMCs) have commenced operations. REMCs were proposed to be set up by the Ministry of Power back in 2017 to aggregate renewable energy forecasts and dispatch schedules. They are expected to help optimise scheduling of conventional power plants and maintain grid balance.

In late-2018, 11 REMC contracts were awarded by Power Grid Corporation. Contracts for a national and six northern and southern REMCs were awarded to a joint venture of OSI Systems and Chemtrols while Siemens was awarded the western region REMC contract. Subsequently, eight state and regional-level REMCs in western and southern regions were partially operationalised in mid-2019. REMCs in northern region are still believed to be facing real-time data acquisition problems.

In December 2019, the Ministry of Power also approved establishment of REMCs for Telangana and South Andaman. More REMCs may be set up in other states as renewable power penetration increases.

Figure: Current REMC structure

Source: BRIDGE TO INDIA research

REMCs complement existing scheduling and dispatch system available to grid operators. To achieve high forecasting accuracy, the REMCs seek weather and generation forecasts from multiple service providers. Generation forecasts are made on intra-day, day-ahead and week-ahead basis.

Through REMCs, India expects to catch-up with developed markets like Germany, Australia and the United States in balancing and deviation settlement mechanism for renewable energy projects. Grid operators in these countries are responsible for regional forecasts while individual developers settle project-level generation deviation through open market instruments with or without penalties depending on regulations.

A major beneficiary of REMC initiative would be thermal power projects. These projects will be able to schedule their generation and source fuel more efficiently.

Establishment of REMCs is yet another step to integrate large-scale renewable energy in the grid. A logical next step in this direction would be to link renewable power project generation deviation charges to grid frequency and day-ahead market prices, as is the case for conventional power plants and DISCOMs.

India added 2,770 MW of renewable capacity in Q4 2019. For the year 2019, total capacity addition is estimated at 11,403 MW comprising 7,140 MW utility scale solar, 1,896 MW rooftop solar and 2,367 MW wind. The total figure is up marginally over 10,683 MW capacity addition in 2018 but substantially lower than 14,031 MW in 2017.  

Capacity addition numbers are stuck at levels far below government targets;

Weak demand growth poses a major risk to growth outlook;

We estimate new capacity addition at 58 GW in the next five years;

Outlook for 2020 is expected to be only marginally better. 14,300 MW of utility scale solar and wind capacity is scheduled to come online in the year but we expect actual addition at around 12,000 MW based on past track record. The slippage could be worse if disruption from Corona virus extends into the second quarter.

There are various reasons cited for slow growth of the sector. Most analysts and industry experts blame delays in land acquisition, lack of transmission connectivity and reluctance of banks to provide debt financing. But the risk which often gets ignored is weak power demand – a tepid 3.8% CAGR over last four years and just over 1% in YTD FY 2020.

Slow demand growth is worsening supply surplus situation as more thermal capacity continues to be commissioned. Excess capacity has already caused severe stress in the power sector with average thermal PLFs falling to record low of 56% during Apr-Dec 2019. More than 40 GW of thermal power capacity is believed to be stranded because of lack of PPAs while DISCOMs remain reluctant to sign long-term PPAs. Meanwhile, banks fearing a hit on their power sector loans are wary of lending to renewable projects.

Figure: Total installed capacity and peak demand, GW

Source: CEA, India Renewables Outlook report by BRIDGE TO INDIA

Note: Peak demand and PLF figures are given for the financial years ending on respective dates.

We have modelled various scenarios for power demand growth (between 3.5-5.0% per annum) and thermal PLFs (53-60%). Accordingly, we estimate total solar and wind capacity addition of only 43 GW and 15 GW respectively by 2024, far below the government aspirations.

Figure: Projected solar and wind capacity, GW

Source: India Renewables Outlook report by BRIDGE TO INDIA

Unfortunately, there is not much insight into reasons for power demand slowdown. Even the link with GDP is tenuous as per the Economic Survey. The outlook could yet get worse if industrial activity doesn’t pick up or T&D system losses are reduced as per recent Ministry of Power initiatives.

DISCOMs want firm and cheap power, both areas in which coal still decisively trumps renewables despite advancements in storage technologies. Unless demand picks up substantially, the DISCOMs would continue to go slow on renewable power procurement and we would see continued instances of tender cancellations and tariff negotiation.

Note: Please read our new report INDIA RENEWABLES OUTLOOK for more insight into 5-year trajectory for the sector including prospects for key sub-markets (storage, rooftop solar, open access, and module manufacturing).

Thermal power IPPs have put in bids of INR 3.26/ kWh in a 2,500 MW tender issued as part of a Ministry of Power scheme. They would supply power to DISCOMs across the country under 3-year PPAs at prices indexed to 50% of wholesale price inflation index (currently less than 3% per annum). Participating IPPs include Adani, Jindal, Essar, GMR, Jaypee, Sembcorp amongst others. 

The winning tariffs, considerably lower than in the previous two rounds, are far more attractive than tariffs in the first renewables plus storage tender;

Surplus thermal power capacity poses grave threat to growth prospects of renewables;

Our power demand-supply modelling suggests flatlining outlook for renewables with base case capacity addition estimate of 58 GW in the next five years;

The Ministry of Power scheme was issued in April 2018 to support struggling thermal IPPs. It aims to aggregate short-term demand from DISCOMs as they remain reluctant to enter into long-term PPAs. Previous two auctions under the scheme were not very encouraging. In the first round, PPAs were signed for only 1,900 MW at a tariff of INR 4.24/ kWh. The second round, completed in December 2019, was cancelled after DISCOMs refused to sign PPAs at the discovered tariff of INR 4.41/ kWh.

Thermal IPPs seem to have been forced into aggressive bidding in response to competition from renewables plus storage. SECI’s recently completed auction for the 1,200 MW tender for supply of peak power from renewable sources received winning bids of INR 6.12/ kWh and INR 6.85/ kWh from Greenko (900 MW) and ReNew (300 MW) respectively. Price for off-peak power is fixed at INR 2.88/ kWh. 

The DISCOMs would most certainly favour 100% dispatchable and almost 40% cheaper thermal power over (at least partly infirm) renewable power. The result starkly highlights the grave threat posed by surplus thermal power capacity, estimated at between 40-50 GW, to renewable power prospects. To compound the problem, India continues to add more thermal capacity. Despite a slowdown in new plant construction, at least 16 GW of net new capacity is expected to come on line in the next five years. NTPC alone is planning to commission 9 GW thermal capacity in the next two years.

BRIDGE TO INDIA has recently concluded a modelling exercise for power demand-supply as part of a new report titled India Renewables Outlook 2024. Having modelled various scenarios for power demand growth and thermal PLFs (ranging between 52% and 61%), we believe that renewable power would flatline over the next five years. Our base case capacity addition estimate of 58 GW (11.6 GW per annum) comes with a considerable downside risk. 

Singapore’s sovereign wealth fund, Temasek, and Swedish PE fund, EQT, have announced entry in the Indian renewable power sector with a corpus of USD 500 million. They have set up a new renewable IPP platform, O2 Power, as a 50:50 joint-venture. The venture has got off to a brisk start by hiring a team of senior managers from ReNew and bidding for a 300 MW project in the NHPC 2,000 MW solar power tender.

Bulk of equity investment is coming from offshore sources, mainly financial investors;

Easy availability of equity is a relief for the sector particularly at a time when debt financing is constrained and there are mounting concerns about offtake risk, policy uncertainty and execution;

We expect risk aversion to abate and bidding process to become competitive shortly;

Temasek and EQT are two of the latest international investors to jump into the fray. Just three months ago, Masdar, UAE’s sovereign wealth fund, announced an investment of USD 150 million in Hero Future Energies. Meanwhile, Abu Dhabi Investment Authority (ADIA), Abu Dhabi’s sovereign wealth fund, has been making further substantial investments in Greenko (alongside GIC of Singapore) and ReNew (alongside CPPIB, the Canadian pension fund). CDPQ, another Canadian pension fund, has also made substantial investments in Azure Power and CLP’s Indian business.

Table: Private equity investments in renewable power in 2019

Source: BRIDGE TO INDIA research

In total, there was an estimated investment of USD 2 billion by global financial investors, mainly sovereign wealth funds and pension funds, last year alone. These investors are attracted to the sector as much by yield play, quasi-sovereign offtake, ‘green’ investment tag and ability to deploy large sums of money quickly. There is also a strong herd mentality factor. Investment opportunities in most western countries are limited and returns are relatively low. The Indian government has also played its part by talking up the sector, adopting large targets and founding International Solar Alliance.

The financial investor class has now almost entirely crowded out domestic as well as international strategic investors. Interestingly, the spate of recent investments has come at a time when the sentiment has been ridden with serious concerns about offtake risk, policy uncertainty, execution and debt financing hurdles.

We believe that the sheer amount of cheap global capital is encouraging short cuts to investment decisions and higher risk taking. It is possible that after a lull of over a year, resumption of normal service (falling tariffs) would resume soon. Subject to module prices remaining soft and no customs duty on modules, the all-time solar tariff low of INR 2.44/ kWh may be under threat later in the year.

The question is what is the likely exit for financial investors? Strategic investors are not willing to meet exit valuation expectations and the IPO route seems unlikely in view of overall risk-return profile and past market experience with power stocks.

Last week, we wrote about the proposed MNRE scheme to procure round-the-clock renewable power with blending with thermal power. As we noted, the need for firm, predictable power is all too clear. But it is odd that the government is asking the project developers to provide a solution for this. Not only is the scheme beyond scope of most renewable developers, it is also unlikely to receive reasonable bids from thermal IPPs because of their stressed financials and limited competition. The responsibility of blending power from different sources should instead lie with the grid operator, load despatch centres and DISCOMs.

The government is expecting project developers to bear additional risk and responsibility that they are not suited for;

In the integrated project development-cum-manufacturing tender, the winning bidders have demanded cross-subsidy equivalent to more than 4x the capital cost of investing in manufacturing business;

The developers and DISCOMs seem unwilling parties in this wasteful approach;

If the government persists with the scheme, it would be forced to pay over the odds for blended power. We have seen this recently with module manufacturing. After failing to incentivise domestic manufacturing over many years, the government launched integrated project development-cum-manufacturing tender in May 2018. The tender was repeatedly undersubscribed, cancelled and modified. In the end, the government is believed to have awarded 4,000 MW capacity to Azure and Adani (exact capacity still not confirmed) at a tariff of INR 2.92/ kWh, 14% higher than average tariff for SECI solar tenders in the last year.

This is a stupendous waste. In present value terms, the extra tariff is equivalent to a cross-subsidy of INR 20.2 billion (USD 285 million) per GW of cell and module manufacturing capacity, almost 4x the total capital cost of investing in such facility. The subsidy is potentially even higher because power generation projects are expected to come up over an extended period of 5 years when power tariffs could be much lower than seen in the last year. In effect, the government is asking DISCOMs (in turn, the end consumer) to bear the burden for poor competitiveness of domestic manufacturing business and its own failure to support the same.

There are several other instances where we believe that the government is mistakenly expecting to pass additional risk and responsibility to project developers:

SECI’s 7,500 MW tender for projects in Leh-Ladakh region with over 2,000 km of high voltage transmission lines in developer scope,

Forecasting and scheduling responsibility imposed on individual power projects rather than on grid management agencies,

Focusing on provision of storage capacity at individual power project level rather than at transmission and/ or distribution level.

These proposals suggest an implicit admission of failure by the government agencies in fulfilling their obligations. But growing risk aversion means that the developers may shun these proposals altogether or extract too high a price. On their part, the DISCOMs may refuse to buy costly power thereby scuppering the government proposals.

MNRE has issued a draft scheme for procuring renewable power, blended with thermal power, on a round-the-clock basis with 80% overall availability. The scheme is technology agnostic. Minimum 51% of power outcome is required to come from renewable sources – with or without storage solutions. Thermal power may be supplied from existing power plants. Bidders are expected to quote a composite tariff with two separate components for variable costs and fixed costs.

Vanilla renewable power is not able to address evening peak power demand in summer months, the biggest headache for DISCOMs in meeting power demand;

The proposed scheme may not attract very competitive bids because of limited number of potential bidders with thermal power capacity;

The potential change in business model from commoditized must-run structure to predictable power is both a challenge and an opportunity for renewable project developers;

As thermal power cannot be ramped up or down in sync with renewable power output variations, storage is expected to play the bridging role. With proposed mandatory blending of thermal power, the scheme remains beyond scope of most renewable power developers. They don’t have access to any in-house thermal capacity and it is implausible that they would take the risk on a third party thermal IPP for a period of 25 years. That leaves only a handful of IPPs straddling both renewable and thermal power sectors – mainly NTPC, Adani, Tata Power, CLP and Sembcorp – potentially interested in the scheme. However, some pure thermal IPPs like Jindals may be induced to make a foray into renewable power. We suspect that because of limited number of potential bidders, the scheme would not attract very competitive bids and may therefore not be cost attractive for the DISCOMs.

The scheme is designed to mitigate the intermittency and variability challenges of renewable power. For DISCOMs, the biggest headache today in meeting customer demand is providing evening peak power in summer months. This evening spike is not catered to by solar or wind power. Prices on power exchanges typically shoot up to INR 6.00-8.00/ kWh in the evenings when power is available at other times of the day at about INR 2.80-3.50/ kWh. As a result, the DISCOMs remain dependent on thermal power (predominantly coal) and are reluctant to increase procurement of renewable power. To make matters worse, peak power demand has been increasing faster than average power demand in the last few years.

Figure: Peak power and low power demand times during the day

Source: Electricity Demand Pattern Analysis by POSOCO, 2016

Faced with resistance from DISCOMs in buying vanilla renewable power, MNRE and SECI have been looking at alternate procurement approaches. SECI has already issued – i) a 1,200 MW solar-wind-storage hybrid tender with provision for up to six hours of morning and evening peak output; and a ii) 400 MW renewable-storage hybrid tender to provide round-the-clock power to Delhi and Dadra & Nagar Haveli. It remains to be seen if the DISCOMs would be willing to pay for the expensive storage-based power, a key reason for failure of grid-scale storage to take off so far. 

We see the move away from commoditized must-run-take-or-pay structure to predictable power as inevitable. Renewable power can only grow by adapting to meet market requirement. It is both a challenge and an opportunity for renewable project developers. Having focused solely on reducing LCOE so far, the developers now need to develop new technology skill sets and adjust their business model. Technically savvy developers would see this transition as an opportunity to differentiate themselves and hopefully, earn better risk-adjusted returns.

Maharashtra state regulator, MERC, has recently rejected most of the winning bids in two renewable energy tenders as it viewed the winning tariffs as too high or unreasonable. The two tenders include a 350 MW solar-wind hybrid tender by Adani Electricity, Mumbai DISCOM, and a 1,400 MW agricultural solar tender floated by Maharashtra State Electricity Development Corporation (MSEDCL, the state-government owned DISCOM). Winning tariffs in the two tenders were INR 3.35/ kWh and INR 3.16-3.30/ kWh but MERC has approved only INR 3.24/ kWh and INR 3.15/ kWh respectively. Similarly, Bihar regulator has approved only INR 3.30/ kWh against winning bids of INR 3.58-3.60/ kWh in the Bihar Renewable Energy Development Agency’s (BREDA) 250 MW solar tender.

Seeking regulatory approval after completing auction vitiates the core principle of competitive auctions;

The authorities should instead seek regulatory tariff approval upfront and prescribe a clear ceiling tariff in the tender documents;

The government needs to act urgently to restore investor confidence and transparency in the sector;

In the MSEDCL tender, only one bidder (Kosol, 10 MW, INR 3.16/ kWh) accepted the lower tariff. MSEDCL issued a revised 1,350 MW tender with a ceiling tariff of INR 3.15/ kWh but received only one bid for 5 MW (Kiran Energy, INR 3.14/ kWh).

Table: Winning bidders and tariffs in the three tenders

Source : BRIDGE TO INDIA research

Notes: In the BREDA tender, auction tariffs of INR 3.58-3.60/ kWh were subsequently revised down after a couple of rounds of negotiation between BREDA and the bidders.

It should be noted that previous bid cancellations (SECI 2,400 MW, Gujarat 700 MW, Uttar Pradesh 1,000 MW) were prompted by tendering authorities – mainly DISCOMs and government agencies – who felt the winning tariffs were too high to be acceptable.

Rejection of bids by regulators is a recent and disturbing phenomenon. The regulators are interpreting their mandate in the widest sense of ensuring that the bid tariffs are: i) consistent with market environment; and ii) in consumer interest. But seeking regulatory approval after an auction is inconsistent with the core principle of competitive auctions. Expecting developers to jump through multiple hurdles – auctions, followed by DISCOM approval and a subsequent regulatory approval – is unreasonable. Instead, the authorities should seek regulatory tariff approval upfront and prescribe a clear ceiling tariff in the tender documents.

Fluidity in the Indian renewable auctions is needlessly jeopardising investor sentiment. In an already challenging environment, the government cannot afford investors losing interest.

As we commence the new year, there is much anticipation that 2020 would offer respite from the multitude of problems faced last year. A jump in new installations – from a total of an estimated 11.4 GW last year to 15.0 GW – would certainly provide relief to equipment suppliers and contractors. Most of the increase would come from utility scale solar, which is expected to jump from an estimated 7.4 GW in 2019 to 9.8 GW this year.

We summarise below other key expected trends for the new year:

In absence of industrial demand pick up, outlook for power demand is bleak with estimated growth of about 3.0-3.5% at best.

Tender issuance should still stay strong at about 35-40 GW as MNRE presses ahead to meet the 2022 target. We expect a significant move away from vanilla tenders to complex schemes including manufacturing-linked tenders, solar-wind-storage hybrid tenders and even completely technology agnostic tenders seeking firm 24×7 power.

Safeguard duty on cell and module imports is set to expire in July 2020. Prospects of extending it and/ or replacing it with customs duty are dim in our view. The developers would be keen to take advantage of duty expiry by deferring project construction, where possible, to second half of the year.

High efficiency modules technologies are finally expected to make major inroads as price differential over multi-crystalline modules falls to about USD 1-1.5 cents/W. We expect almost 50% share for mono and mono-PERC modules in 2020.

Maharashtra regulator’s decision to support net metering against the DISCOM’s recommendation has provided major relief to rooftop solar market. But overall, rooftop solar and open access are expected to have a mixed year due to continuing policy uncertainty and lack of financing. Rooftop solar growth rate has already fallen to about 20% annually as against 83% in the previous year.

Increasing RE capacity would manifest through major deviation in RE penetration across states (reaching or even exceeding 30% in some southern states) and intra-day prices (see chart below).

Financing woes are expected to persist as lenders stay extremely selective on project offtaker and developer credentials.

Figure: Intra-day power prices on exchange

Source: Indian Energy Exchange

The key development to look out for, of course, is movement on long-term reforms particularly measures to shore up DISCOM financial position. The government has been talking up reform over the last two years but there has been little progress to date:

Separation of content and carriage for power distribution;

Payment of tariff subsidies directly to consumers by state governments;

Operational efficiencies and use of smart meters to reduce T&D losses to below 15% (currently 21%);

Tariff reform and simplification including reduction of cross subsidy surcharge, gradual elimination of tariff subsidies, time-of-day pricing;

Better utilisation of 25 GW gas-fired capacity to provide peaking power for complementing RE sources;

Move away from fixed-price PPAs to market-based trading;

The most pressing issue remains the crisis created by dire DISCOM finances, which continue to get worse. 2020 may well be the year that most people remember for how government seeks to address this issue. We remain sceptical if the central government has the political will or ability to carry various stakeholders along for effective comprehensive solution. We anticipate a complex financial restructuring package along with bit use of privatisation and franchisee models for a temporary solution.

The Government of India is reportedly considering an ordinance to usher in reforms for the power sector in India. As per a news report, the government is seeking to bring about various legislative changes including timely payments by DISCOMs, reduction in cross subsidy surcharge and penalties for inadequate tariff revision through the ordinance route. These and other changes in the Electricity Act 2003 have been mooted for a long time, but the government has failed to get parliamentary approval as states are not on board with the proposed measures.

2019 was a brutal year for the industry with negative developments all around including from some unexpected quarters;

The perilous state of the power sector is straining market confidence;

An ordinance is a temporary solution at best, whereas the need is for more robust solutions;

The prospect of an ordinance for sector reform aptly sums up the hopeless situation right now. This route is used mainly to introduce legislation in urgent circumstances when the Parliament is not in session or there is no hope of passing the relevant bill. However, ordinances are essentially temporary in nature and need to be passed by the Parliament within 6-12 months or else, they are overturned.

Indeed, ICRA, a local credit rating agency, has downgraded power sector outlook to negative this week. Perilous financial position of the DISCOMs coupled with severe financing and execution impediments are straining market confidence. These issues have been simmering for a few years now but disappointingly, the situation has continued to deteriorate. To make matters worse, the year 2019 brought negative news from some unexpected quarters.

Table: Key sector developments in 2019

Fortunately, India RE remains a magnet for global investors as evidenced by multiple transactions in just the last few months (ReNew/ CPPIB and ADIA, Azure/ CDPQ, Greenko/ ADIA and GIC, Hero/ Masdar, CLP/ CDPQ, Temasek). But investor patience is wearing thin and if solutions are not found expeditiously, there is a risk of lasting damage to RE prospects.

Quick update on capacity addition in 2019 – we estimate a total of 13.5 GW capacity to be added during the year, up 29% over 2018 but below 2017 numbers as well as massively short of government target.

Figure: Annual RE capacity addition, MW

Source: BRIDGE TO INDIA research

We ended the last Weekly piece in 2018 with the statement, “The sector needs new thinking, policy visibility, and systematic government action to address specific challenges.” The statement has even more relevance now. Let’s hope that 2020 would bring more positive news and cheer.

As per news reports, SECI is seeking to invoke its legal rights in the tripartite agreement with Andhra Pradesh and the Reserve Bank of India to claim INR 276 million (USD 4 million) of outstanding amount from the state DISCOMs. If true, it is a dramatic and unimaginable escalation of conflict between the Centre and state. It is also an indicator of acute financial stress facing the state governments and DISCOMs.

Like many other states, Andhra Pradesh is in a dire financial condition;

Unable to receive government subsidy payments on time and raise tariffs, the DISCOMs are facing unprecedented financial stress;

The situation risks getting out of control if the Centre and states can’t find a constructive long-term solution to keep DISCOMs bankable;

The developers have again approached the High Court appealing its decision to refer the matter to the state regulator. Meanwhile, all MNRE efforts to persuade Andhra Pradesh to honour the renewable PPAs have gone unheeded. We believe that the state government has boxed itself into a corner. Having originally adopted the politically naïve tactic of blaming previous state government, it is stuck into a legal stalemate. In truth, the state is in a dire financial condition and is simply unable to pay for power. 

Figure: Timeline for Andhra Pradesh PPA renegotiation

Source: BRIDGE TO INDIA research

Many other states are facing increasing financial stress burdened by weak tax revenues and desire to offer giveaways to the public. Unable to receive subsidy payments on time and raise tariffs, the DISCOMs are facing unprecedented financial stress. Punjab is a glaring example where the government’s unpaid subsidy bills to the state DISCOM ballooned to INR 150 billion (over USD 2 billion) in 2019. The resultant deficit has meant that the DISCOM is unable to even pay its employees on time. 

A recent report by Prayas, an energy sector NGO, on reliance of DISCOMs on state government subsidies (using a sample of six states including Gujarat, Haryana, Punjab, Tamil Nadu, Uttar Pradesh and Bihar) notes: “Subsidies to DISCOMs form 10-30% of the aggregate revenue requirement in various states. These subsidies are not limited to agriculture consumers alone as many domestic, non-domestic, and even industrial consumers receive free or subsidised power…. the quantum of subsidy is increasingly rapidly…. delays in subsidy payment are frequent and the time period of such delays is increasing. Delays in subsidy payments result in increased working capital borrowings for DISCOMs to meet operational expenses. This puts additional stress on cash-strapped DISCOMs.” The report concludes ominously that there is little transparency in subsidy data and that there are “significant discrepancies” in how this information is reported in regulatory documents. 

The Indian government and MNRE have made all the right noises in recent months including tightening of bidding guidelines, mandating issuance of letters of credit by the DISCOMs and restricting unwarranted curtailment. But there is no material progress on the ground and no talk of long-term sustainable solutions including tariff rises and/ or efficiency improvements in T&D system. 

The real risk here is that as the Andhra Pradesh saga rolls on, investors and lenders would lose patience posing grave threat to future prospects of RE. 

India’s utility scale solar capacity reached 29.7 GW by September 2019, growing 25% y-o-y. A review of the EPC data shows two interesting trends. Contrary to popular perception, share of third-party EPC contractors is increasing and touched 77%, highest in the last five years. Second, there is increasing consolidation in the EPC market as many regional and smaller players have been edged out of the utility scale projects business.

Figure: Share of third-party EPC in commissioned projects (utility-scale solar)

Source: BRIDGE TO INDIA researchNote: Data above pertains to commissioned projects only.

Over the years, most leading developers, particularly Indian corporate houses (Adani, Hero, Acme, Tata Power, Shapoorji Pallonji, amongst others) and private equity backed platforms (ReNew, Azure and Mytrah) have shown a strong preference for bringing EPC work in-house. Faced with falling tariffs, they have tended to use internal resources for project execution to cut costs and improve project returns. However, two factors have led to a reversal in this trend. The EPC market itself has been intensely competitive with sharp fall in costs and wafer-thin margins. There is little cost advantage, therefore, in self-EPC. Indeed, some of the developers keen on self-EPC previously are beginning to consider third party services. Meanwhile, most of the international developers including SB Energy, Engie, Enel, Fortum continue to prefer outsourcing EPC work. Increase in their share of the project pipeline has led to an increase in use of third-party EPC services.

As project sizes have become larger and margins have been eroded, smaller EPC service providers have found it tough to sustain operations. These changes have benefitted larger players such as Sterling & Wilson, Tata Power, L&T and Mahindra Susten who find it relatively easy to raise capital, diversify internationally, benefit from economies of scale and maintain a healthy order book. Many of these players have also diversified into long-term operation and maintenance (O&M) and/ or asset management services to become fully integrated turnkey solution providers.

After several cancellations, extensions and modifications, SECI’s solar project development-cum-manufacturing tender finally received a somewhat encouraging response. In its final avatar, the tender was issued for 7,000 MW inter-state transmission system (ISTS) connected project development capacity. Bidders were given an option to bid for 2,000 MW project development capacity along with 500 MW cell and module manufacturing capacity, or 1,500 MW project development capacity along with 500 MW ingot and wafer manufacturing capacity or combinations thereof. Three bids have been received – Adani (4,000 MW with 1,000 MW of manufacturing capacity), Azure (2,000, 500) and Navayuga Engineering (2,000, 500), a local infrastructure player.

All bidders have opted for cell and module manufacturing capacity as ingot and wafer manufacturing is not competitive at this scale;

Higher ceiling tariff, higher ratio of project development capacity and longer project completion timelines have made the tender commercially attractive;

Lack of willingness of DISCOMs to pay higher tariffs could still jeopardise prospects of this tender;

The tender requires manufacturing capacity to be based on “advanced technologies” such that cell and module efficiency is a minimum 21% and 19% respectively. As expected, all bidders have opted for cell and module manufacturing over ingot and wafer manufacturing.

In the previous three iterations, SECI had received only one bid from Azure for 2,000 MW power generation capacity. Following several rounds of representations by the industry, many changes were made in the last round relating to manufacturing requirements (split in two different packages this time), manufacturing capacity ratio (reduced progressively from 50% of project development capacity to 25-33%), ceiling tariff (revised upwards to INR 2.93/ kWh), project completion timelines (increased from 2.5 years to 5 years) and ISTS usage (waived for all projects). Successful bidders are required to achieve COD for power generation and manufacturing capacity in a phased manner over five years and two years respectively. The level of cross-linkages between two activities has also been reduced – apart from usual delay penalties, power tariff would be reduced to minimum auction tariff discovered by SECI in one year preceding auction date in the event that manufacturing capacity is not commissioned within three years.

Sweetening ceiling tariff and increasing project completion timelines seem to have been sufficient carrots for the three bidders. On paper, the commercial provisions are certainly attractive in comparison to vanilla ISTS project tenders, where we have seen tariffs between INR 2.55-2.72/ kWh this year for projects to be executed in 18 months. However, it remains far from clear if DISCOMs would be prepared to pay higher tariffs to cross-subsidise manufacturing business. Lack of interest from the ultimate offtakers could still affect outcome of this tender.

We continue to maintain that combining project development and module manufacturing, two very disparate businesses in terms of risk profile and competitive characteristics, makes no sense. Unfortunately, all other manufacturing initiatives seem to be failing. If this tender is even partially successful, SECI may persist and launch more iterations.

Indian states are turning their back on rooftop solar. Maharashtra recently signalled its intent to join Uttar Pradesh, Rajasthan and Tamil Nadu in proposing to withdraw net metering benefit from most consumers. These four states together constitute 45% of installed rooftop solar capacity in India.

Maharashtra has proposed to limit net metering benefits to only 300 kWh per month for residential consumers. All other consumers would be eligible only for gross metering, whereby entire rooftop solar power output would be bought by the DISCOM at the Maharashtra Electricity Regulatory Commission (MERC)-approved generic tariff (currently, INR 3.79/ kWh). MERC has gone one step further and proposed that all consumers installing behind-the-meter renewable power plants may be levied an additional fixed/ demand charge or any other charge at a ‘justified’ request of DISCOMs.

Figure: Rooftop solar installation capacity by state

Source: BRIDGE TO INDIA research Note: This chart shows share of states in total installed rooftop solar capacity across all consumer categories except residential consumers (3,685 MW as on 31 March 2019).

As net metering benefits have been withdrawn in other states, C&I consumers have preferred to switch to standalone behind-the-meter systems, although with considerably reduced system sizes. MERC’s proposal to levy additional charges on such consumers, however, puts a critical question mark on prospects for the entire market. Residential consumers would also find the changes completely unagreeable.

Globally, many countries have tended to shift away from net metering after their rooftop solar markets attained a certain level of maturity. However, the timing of such moves in India is hard to understand as rooftop solar accounts for less than 1% of total power output in the country. The DISCOMs and state agencies are blinded by their financial troubles and acting in their short-term interest. Unfortunately, the central government seems to have limited ability to influence state policies.

Abrupt policy changes with no grandfathering protection for existing installations are creating previously unforeseen levels of policy uncertainty. The market, otherwise enjoying rapid growth due to falling system costs, higher consumer awareness and environmental benefits, is likely to be hit hard. The fear is that herd behaviour by other states could threaten rooftop solar prospects across the country.

In early March 2019, MNRE finally launched the much-awaited 12,000 MW PSU scheme to promote domestic manufacturing. The scheme envisages majority government-owned entities to set up projects using domestically procured cells and modules for consumption of power in-house or sale to other government entities excluding DISCOMs. MNRE is offering an incentive in the form of viability gap funding (VGF) of up to INR 7 million (USD 100,000)/ MW. However, the projects would be awarded through competitive auctions to bidders quoting lowest VGF. Operational period for the scheme is four years until the end of FY 2022-23.

The scheme has been designed specifically to stay clear of WTO restrictions;

The tough open access policy environment is expected to be a major deterrent;

Persistent failure on the ‘Make in India’ front is creating uncertainty for the entire industry and detracting from other objectives;

The curious design of the scheme is specifically to stay clear of WTO restrictions. It is not open to private developers even if they want to sell power to public sector consumers. Projects can be located anywhere in the country and connected to national or state transmission grid. Expected commissioning timeline is 18 months from the date of project award.

The VGF support is designed to counter resistance from public sector consumers as domestically produced cells and modules are about 10-15% more expensive than imported modules (no safeguard duty applicable after July 2020). That means capital cost for these projects could be higher by up to INR 3 million/ MW over cost of projects using imported modules. The proposed VGF amount is therefore more than adequate. VGF would be disbursed in 2 tranches – 50% on appointment of EPC contractor (within 6 months of the project award) and 50% on project completion.

So far, so good. There are two major challenges, however. First, the projects would need to rely on (most likely, inter-state) open access mechanism for sale/ consumption of power, which is increasingly fraught with policy challenges. Other than Delhi Metro buying solar power from projects in Rewa in Madhya Pradesh, we have not seen much evidence of public sector consumers buying open access solar power. This problem can be solved partially by developing the projects on a captive basis rather than for third party sale. But not many public sector entities have necessary operational and financial experience to do so. Second, with total operational cell manufacturing capacity in India at only about 1,200 MW per annum, the bidders would struggle to procure qualifying module supplies.

SECI has already launched a 2,000 MW tender under the scheme with proposed bid submission date of 3 May, 2019. We expect multiple extensions and amendments. While the government should be lauded for persisting with support for domestic manufacturing, the policy ideas have not been thought through. The resulting uncertainty is unfortunately hanging like a dark cloud over the industry.

In January 2019, Uttar Pradesh Electricity Regulatory Commission (UPERC) issued new Rooftop Solar PV Grid Interactive Systems Gross / Net Metering (RSVP) Regulations, 2019. These regulations supersede RSVP Regulations, 2015. Key features of the policy are as follows:

Cancellation of net metering for commercial, industrial, institutional and government consumers;

System capacity to not exceed 100% of contract demand and be within 1 kWp – 2 MWp;

Surplus power generation under net metering compensated at INR 2.00/ kWh, far below APPC (average power purchase cost);

Power injected under gross metering arrangement to be compensated at weighted average tariff of large-scale solar projects as discovered in competitive bidding in the latest financial year plus an incentive of 25%;

Maximum aggregate capacity at local distribution transformer is increased by 3 times and set as 75%;

DISCOMs to publicly provide information regarding available capacity of distribution transformers;

Cancellation of net metering for C&I consumers is a major policy setback and it would seriously affect growth of rooftop solar in Uttar Pradesh. It is not clear if already installed systems (223 MW capacity) will be grandfathered under the old regulations. If not, all these systems as well as systems under installation would become unviable overnight. C&I and public sector consumers account for an estimated 98% share of total installed rooftop solar capacity in the state.

C&I consumers save INR 8-12/ kWh payable for grid power by adopting rooftop solar. But under gross metering, net realisation would come down by more than half to about INR 4.00/ kWh – equivalent to weighted average tariff for large-scale solar project auctions in FY 2018 (INR 3.20/ kWh) plus 25% incentive. Not only is this tariff too low, timely payment from DISCOM is far from assured as state DISCOMs remain amongst the weakest in the country.

We understand that various market participants are lobbying for policy reversal but that appears unlikely. Tamil Nadu has already implemented such a change in somewhat ad hoc manner, while Maharashtra has also tried unsuccessfully to back track on net metering. The message is loud and clear – the DISCOMs are going to fight against free net metering (or indeed any form of net metering). In our opinion, policy volatility is one of the biggest risks facing this market. The industry needs long-term policy visibility and grandfathering of existing investments. Any changes should be introduced after due consultation and phased in to avoid drastic shocks.