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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.

CERC, the national power sector regulator, has issued a set of proposed amendments to procedure for grant of inter-state transmission system (ISTS) connectivity approval to renewable projects. Among the major proposals is relaxation in the onerous bank guarantee requirements. Deadline for commissioning of transmission line and obligation for payment of transmission charges are proposed to be linked to scheduled COD of renewable projects rather than fixed dates. Timelines to achieve specific milestones after award of connectivity approval are also proposed to be relaxed along with a proposal to enable sharing of dedicated transmission lines between various developers.

Transmission has been a critical bottleneck to growth of the renewable sector;

Ministry of Power, MNRE and CERC have collectively taken several steps to address associated challenges;

These initiatives are highly encouraging for the renewable sector although some teething issues still remain;

Proposed changes in bank guarantee requirements include linking guarantee amount to type and status of bays allocated to the project instead of project capacity and complete waiver of construction bank guarantee if the developer constructs transmission bays at the ISTS substation. Moreover, CERC has proposed to reduce time of return of guarantees from six months to one month post renewable project COD.

These changes come on back of several other steps taken by Ministry of Power, MNRE and CERC over the last few years:

The Central Transmission Utility (CTU), responsible for ISTS planning and network management, is being demerged from Power Grid Corporation to address conflict of interest between the latter’s role as transmission system developer and network manager.

MNRE and SECI are now part of transmission planning committee resulting in better planning and synchronisation of transmission infrastructure development with renewable project development.

The Green Energy Corridor and Renewable Energy Zone schemes are designed to create evacuation infrastructure for new renewable power capacity of 106.5 GW by 2022. Total estimated cost of these schemes is INR 647 billion (USD 8.6 billion) is being funded by the government together with concessional finance from development FIs.

More transmission work is being tendered out through competitive bidding, as against allocated directly to Power Grid Corporation under cost plus mechanism, reducing cost and time required for new infrastructure by up to 30-50%.

MNRE recently extended commissioning deadline for projects eligible for ISTS charge waiver from December 2022 to June 2023 besides providing blanket waiver to projects implemented under the PSU scheme and manufacturing-linked tender.

Figure: Renewable Energy Zone scheme target, GW

Source: CERC, BRIDGE TO INDIA research

Overall, these initiatives are highly encouraging for the renewable sector. Transmission has been a critical bottleneck to growth of the sector. Poor coordination, planning and execution have led to extensive delays and even cancellation of renewable power projects.

For sure, there are still many teething issues for renewable projects. Critically, there is no guarantee by the CTU that transmission infrastructure would be available by scheduled COD of the renewable project. And there is no provision for compensation in case or transmission infrastructure is not ready. There is also even now uncertainty in getting connectivity approvals particularly in Rajasthan. Heavy regional concentration of capacity – more than 50% of total solar pipeline of 41 GW is proposed to be located in Rajasthan – is still creating bottlenecks.

Last week, Norfund, Norway’s development finance institution, announced a USD 100 million investment together with Siemens into Berkeley Energy Commercial Industrial Solutions (BECIS). The two companies have agreed to invest USD 50 million each into BECIS, which offers rooftop solar and other energy solutions to C&I consumers under PPA model. BECIS, founded by Berkeley Energy, is a new C&I renewable energy platform spanning south and south-east Asian countries. Another C&I renewable platform, Radiance Renewables, has been recently set up by Green Growth Equity Fund with investments from India’s National Investment and Infrastructure Fund (NIIF), Department for International Development (DFID UK) and Lightsource BP.

Strong supply and demand side forces point to attractive growth prospects in the C&I renewable business;

Renewable developers are competing for a small pool of acceptable counterparties;

Hostile policy scenario is further limiting growth of the market;

There is strong investment interest in the C&I renewable business. BECIS and Radiance would be competing in a crowded market alongside other specialist C&I focused developers including Amplus (Petronas), Cleantech Solar (Shell), CleanMax (KKR), Fourth Partner (TPG) and AMP. Some utility scale IPPs (ReNew, Avaada, Mahindra, Aditya Birla, Tata) are also present in the market. The investment premise is to go after large blue-chip clients with A+ credit rating (low offtake risk), high energy consumption and presence across multiple countries (scalable business).

 There is equally strong demand pull from the consumer side. Companies across the board are rushing to procure renewable power for both cost and environmental reasons. The push is getting stronger as renewable power becomes cheaper and corporate boards accelerate timeframe to achieve carbon neutral status. The good news for IPPs is that the C&I consumers have an overwhelming preference for OPEX model. It offers them assured savings, no operational or technology risk and most importantly, requires no upfront financing (crucial in COVID times).

But we see two major growth constraints. The pool of large, A+ rated counterparties is relatively small in India. Within the total 80 GW C&I power demand, we estimate that only about 8-10 GW comes from suitable counterparties. All IPPs are competing for this relatively small client pool, leading to an extremely competitive and price driven market. We estimate annual C&I renewable PPA market size at only about 1,200 MW excluding public sector consumers. And as the chart below shows, growth has begun to taper off.

Figure: New deployments in C&I renewable PPA market, MW

Source: BRIDGE TO INDIA researchNotes: Rooftop solar data excludes projects supplying power to public sector consumers. Wind open access market size is estimated at between 100-200 MW per annum; year wise data is not available.

The other major constraint to this market comes from strong resistance from DISCOMs, who are reluctant to see their best and highest tariff paying customers go away. Many states including Uttar Pradesh, Haryana, Rajasthan, Gujarat, Karnataka, Andhra Pradesh, Telangana and Tamil Nadu have announced regressive policy measures withdrawing incentives, denying approvals, limiting banking provision and/ or imposing grid charges on C&I renewable projects. We expect policy scenario to grow even more hostile as COVID-19 causes a serious dent in DISCOM finances. Proposed amendments to the Electricity Act (reduction of CSS, tariff reform), if implemented, may also pose additional short-term challenges to the market. The new players would need to innovate and diversify their business offering to cope with these constraints.

Chinese module major Trina launched a new series of 550 W bifacial modules recently and announced production of a new 600 W version from next year onwards. The company also announced that it expects to triple production to 31 GW in 2022, up from 10 GW last year. The new modules use half-cut cells and are reported to have efficiency of over 21%. The company’s peers including LONGi, Jinko, Canadian Solar, JA Solar and Risen have announced broadly similar breath-taking jumps in technology and production scale.

Leading Chinese manufacturers are upgrading technology and investing aggressively in R&D and capacity expansion;

Uptake of new technologies by Indian IPPs is increasing due to affordable prices;

The government policy comprising mainly trade barriers and capital subsidies is not equipped to improve fundamental competitiveness of manufacturing;

Leading Chinese module manufacturers continue to rapidly upgrade technology and are making huge investments in R&D and capacity expansion. The Chinese government is weighing in with a new set of proposed guidelines, issued in June 2020, for module manufacturers to improve focus on advanced technologies and lower production cost. These developments have critical implications for the entire solar value chain. One, prices have crashed by 15% already this year. Mono-PERC and bifacial technologies are becoming mainstream as price differential over multi-crystalline modules has narrowed to less than USD 1 cent and 2 cents respectively (see figure). Two, the smaller manufacturers, not just in other countries but even in China are getting left behind. Most tier 2 and tier 3 manufacturers in China – lacking in technology, scale and access to international markets – are facing increasing financial stress and risk being squeezed out of the market. Share of top ten module makers worldwide (eight from China) is expected to touch a record high of 70% this year.

Figure: PV cell capacity by technology, MW

Source: PV Infolink

Three, the IPPs face a more complex choice both for module technology and suppliers. Downward pressure on LCOE is forcing them to adopt new technologies but often with limited proven track record.

In India, uptake of new technologies has been relatively slow because of high prices in the past. But with LCOE gains exceeding price differentials, bulk of new projects are now using mono-PERC modules. We expect bifacial modules to become mainstream by 2022.

Meanwhile, the government has been struggling even to implement quality assurance guidelines. Deadlines for BIS and ALMM initiatives are being progressively extended because of lack of technical infrastructure. It is a sobering thought that in such an environment and against fierce competition from Chinese manufacturers, how are Indian manufacturers going to compete? The government policy, directed mainly towards creating trade barriers and providing capital subsidies, is not equipped to improve fundamental competitiveness of manufacturing. Even the extension of safeguard duty by one year is a worthless exercise. So long as Indian manufacturers are unable to compete with their Chinese counterparts on scale and technology, the goals of energy security and self-sufficiency would remain elusive.

Earlier this month, the Ministry of Railways announced a plan to transform Indian Railways to ‘Green Railways’ by 2030. The move is in line with the government’s initiatives to meet the commitments made under the Paris Agreement, with Railways being identified as one of the key sectors for decarbonisation.

The Indian Railways depend primarily on diesel and electricity for meeting its energy requirements. The two sources account for a share of 65% and 35% respectively. A key component of the Railways green mission is to achieve complete electrification of rail tracks by 2023. At present, only around 58% of total track or 39,866 route kilometres is electrified. Greater electrification would help Railways in switching to cleaner energy alternatives such as solar and wind power and also significantly reduce energy cost. Preliminary estimates suggest annual savings potential of more than INR 135 billion (USD 1.8 billion).

Figure: Railway electrification progress, route km

Source: Trend of railway electrification commissioning in India (1925-2020), Indian Railways, April 2020

At present, the Railways have only 203 MW of installed renewable capacity (rooftop solar 100 MW, wind 103 MW). Railway Energy Management Company (REMCL), the nodal procurement agency for the Railways, has issued two tenders of 50 MW solar and 140 MW solar-wind hybrid capacity, where bids have been received. REMCL has been further mandated to develop 3,000 MW of solar capacity by 2022-23 on vacant land owned by the Railways. Two different tenders of 1,000 MW solar capacity each have already been issued, whereby the Railways will procure power on a fixed cost basis under 25-year PPAs. There are multiple project sites located across 14 states including Chhattisgarh, Gujarat, Rajasthan and Maharashtra. The remaining 1,000 MW is likely to be developed and owned by REMCL. An EPC tender has already been issued for 400 MW solar capacity. All tenders stipulate use of domestically manufactured cells and modules in line with the government requirement.

The Railways have become the first public sector entity to significantly ramp up renewable energy adoption for captive consumption. Their tender pipeline provides attractive opportunities for project developers and contractors as Railways are amongst the most credible and bankable public sector counterparties.

The Railways move is in line with the government drive to increase renewable power consumption by public sector. Last year, MNRE had launched a 12,000 MW scheme specifically for meeting power requirement of public sector entities with a VGF outlay of INR 85.10 billion (USD 1.1 billion). Until now, 2 auctions have been conducted under the scheme and a total of 2,027 MW has been awarded. However, we believe that there would be few other opportunities matching the scale and financial strength of the Railways.

Last week, power minister R.K. Singh announced that the INR 900 billion (USD 12 billion) liquidity package for DISCOMs may be expanded to INR 1,250 billion (USD 17 billion) to cover their increasing outstanding dues. The dues have increased sharply from INR 1,062 billion (USD 14 billion) in December 2019 INR 1,280 billion (USD 17 billion) in May 2020 due to lower power demand and poor payment collections in the recent months. But states seem reluctant to accept central government conditions attached to the package. DISCOMs have submitted preliminary letters of interest aggregating over INR 910 billion. However, applications have been received for only INR 205 billion by six states including Andhra Pradesh (INR 66 billion), Rajasthan (INR 41 billion), Punjab (INR 40 billion), Maharashtra (INR 50 billion), Uttarakhand (INR 8 billion) and Manipur (INR 1 billion).

DISCOMs need urgent liquidity support to tide over their deteriorating financing condition;

The central government requirement of seeking acceptance of proposed sector reforms seems like the main sticking point for states;

The sector cannot afford another free lunch for the DISCOMs and state governments;

The package involves concessional loans with a tenor of up to 10 year from Power Finance Corporation (PFC) and Rural Electrification Corporation (REC), government-owned financial institutions. DISCOMs may use these funds only for clearing their outstanding dues to power producers. The loans are conditional upon state governments providing a guarantee for repayment of loans. DISCOMs and state governments are also required to fulfil other conditions including installation of smart meters, enabling digital payments by consumers, clearance of power dues by state government agencies and, improvement in AT&C losses and unrecovered tariff. Strangely, the conditions are loosely defined with no firm targets.

We understand, however, that behind the scenes, the central government is also seeking acceptance of proposed sector reforms by the states as a pre-condition to the loans. Fiscal deficit limit of 3% of state GDP, under the Fiscal Responsibility and Budget Management Act, was recently relaxed to 5% post announcement of COVID economic stimulus package. However, additional allowance is contingent upon implementation of reforms in multiple sectors including power distribution. If true, acceptance of reforms together with requirement of state government guarantees would be the big sticking points for states. As we had anticipated, many states are still unwilling to give up their control over the power sector.

Figure: Key financial parameters for DISCOMs, INR billion

Source: Power Finance Corporation report on Performance of State Power Utilities, CRISIL and BRIDGE TO INDIA estimatesNote: FY 2020 numbers are not available at present.

The stalemate is troubling news for all stakeholders in the sector. DISCOM financial position, already perilous at the start of this year, is deteriorating sharply. Losses and debt levels are expected to touch all-time highs by the end of this year. The central government is justified in using this crisis to enforce tough conditions for the loan package as it is no longer viable to kick the can further down the road. The states need to realise that they cannot have a free lunch for ever.

BRIDGE TO INDIA hosted a webinar on 3 June 2020 to discuss impact of COVID-19 on domestic module manufacturing industry in India. We had an eminent group of speakers including Mr. Amitesh Sinha, Joint Secretary, MNRE, Mr. Ashish Khanna, CEO, Tata Power Solar, Mr. Ramesh Nair, CEO, Adani Solar, Mr. Saibaba Vutukuri, CEO, Vikram Solar and Mr. Ranjit Gupta, CEO, Azure Power.

Mr. Amitesh Sinha, Joint Secretary, MNRE spoke about the importance placed by government on domestic manufacturing. He outlined various initiatives to support manufacturing – import duties, scaling up DCR programmes including the PSU and KUSUM schemes and creation of manufacturing hubs. Additionally, he stated that the BCD will be imposed with an indefinite timeline. He also reiterated the Ministry’s support for grandfathering of existing projects from new duties as well as ironing out differences between SEZ and DTA zones to support manufacturers in both areas. He also mentioned that a 7-8% export incentive to domestic manufacturers was being explored by the Ministry to boost exports. He also allayed any concerns on WTO disputes arising from imposition BCD and mentioned that procedures for rolling out BCD have been decided in consultation with the Ministry of Commerce.

Mr. Ashish Khanna, CEO, Tata Power Solar spoke about the need for a stable policy environment. He also stated that demand visibility is extremely important for domestic manufacturers. According to him, lack of backward integration is also a major hurdle in manufacturing. Therefore, the entire value chain needs to be promoted to ensure a robust supply chain.

Figure: Production volume of top Indian and Chinese companies in 2019, GW

Source: BRIDGE TO INDIA research

Mr. Ramesh Nair, CEO, Adani Solar also stressed the need for a supportive policy framework. In his view, manufacturing tender, DCR requirements, PSU and rooftop schemes have helped in boosting demand for domestic module, but this demand needs to be sustained for a long time to attract more investment into the sector. He also highlighted the support provided to manufacturing units in China by way of land, infrastructure facilities, lower input costs and low-cost loans.

Mr. Saibaba Vutukuri, CEO, Vikram Solar mentioned the need for sustained R&D support for building  domestic expertise. He stated that solar manufacturing needs to be prioritised as a strategic sector and given a strong push by the government. He also stated that a 5-year duty implementation with adequate clarity on policy would help setting up of new manufacturing capacity.

Mr. Ranjit Gupta, CEO, Azure Power – the only pure-play developer present in the webinar – expressed his strong support for domestic manufacturing. He stated that unsustainably low tariffs demanded by DISCOMs contribute to reliance on cheap imports. He believes that increase in tariffs and impact on power demand would not be detrimental if import duties are levied across the board.

All speakers stressed on the need for a stable, clear policy regime to boost domestic manufacturing. Other priorities include demand visibility, R&D, export incentives and backward integration.

SECI’s latest solar auction has discovered a new record low tariff of INR 2.36/ kWh (USD 3.1 cent). The company’s pan India 2,000 MW ISTS tender was oversubscribed 2.3 times. Spain’s Solarpack (300 MW, tariff INR 2.36/ kWh) was the lowest bidder. Other winners included ReNew (400, 2.38), Enel, EDEN (an EDF-Total JV) and IB Vogt (300, 2.37 each), Ayana (300, 2.38) and AMP (100, 2.37). Tata Power, O2 Power, NTPC, Azure and NLC were the unsuccessful bidders.

Shift to more complex hybrid and manufacturing based schemes has led to strong pent up demand for vanilla solar;

The new tariff is financially more attractive than in the past but returns remain below cost of capital;

Tariff outlook is turning soft because of strong investment appetite and low entry barriers;

This was the first vanilla solar auction completed by SECI in the last four months (and second in eight months). Most of the recent auctions have been for complex schemes to support manufacturing (PSU scheme, manufacturing-linked tender) or to procure hybrid, round-the-clock and peak power with restricted participation. Strong pent up demand obviously resulted in oversubscription. Many developers are keen on vanilla projects due to their ease of execution and low tariffs which find higher acceptance with DISCOMs.

The new tariff low has come more than 3 years after tariffs reached INR 2.44/ kWh first time in SECI’s Bhadla solar park auction in May 2017. Market dynamics and bidding parameters have changed enormously in this time. Most input costs have been falling notwithstanding Rupee depreciation and higher GST rates. Module prices have crashed to about USD 0.17/ Wp (down 50% in three years) due to COVID related demand depression worldwide. Improvements in technology (efficiency, form factor) have also led to improvement in power yields as well as savings of about 25% and 20% in land and BOS costs respectively. Total EPC cost has fallen 32% in last three years. Savings have also come through reduction in interest and tax rates. Recent monetary easing has led non-recourse financing rates down to 9.0-9.5% as against 10.5-11.0% a year ago. Meanwhile, corporate tax rate has fallen from 25% to 15% for new businesses. Of course, there have also been some offsetting increases in costs on account of forecasting & scheduling regulations, annual development levy of INR 250,000/ MW by Rajasthan and payment security fund requirement of INR 500,000/ MW by SECI.

Figure: EPC costs and tariffs

Source: BRIDGE TO INDIA research

Adjusted for all these factors, we believe that the new tariff is far more attractive than INR 2.44 back in May 2017. We estimate equity IRR at about 14.0%, still not sufficient in our view, but much better than 8-9% at the time of bidding three years ago. Setbacks in the last few years have instilled more discipline in the industry but with so many new players in the fray, it will not be a surprise to see tariffs sliding down further in the next few months. A wall of capital is flooding the renewable sector with pension funds, sovereign wealth funds and PE funds seeking a transition to clean energy as well as higher yields.

The record low tariff is in line with our prediction earlier this year that tariffs would touch a new low soon. Low entry barriers combined with excess liquidity are likely to maintain downward pressure on tariffs.

After a year of deliberation, MNRE has announced that basic customs duty (BCD) shall be levied on all cell and module imports from 1 August 2020 onwards. The proposal, pending approval from The Ministry of Commerce and Ministry of Finance, mentions 15% and 20% duty rates on cell and modules in the first year, going up to 30% and 40% respectively from second year onwards. MNRE has indicated that the duties are expected to stay for a long time with no set date for expiry.

Adani, Tata Power, Vikram and Waaree would be the main beneficiaries but most of them would be keen to enter into JVs with Chinese companies for financing, technology and procurement assistance;

A comprehensive and well-planned manufacturing policy is needed alongside BCD for shoring up domestic manufacturing competitiveness;

BCD effect would take about two years to trigger as developers would continue to import from China because of cheaper prices and ‘change in law’ protection;

The government has been deliberating on customs duty for over a year now. COVID-19 and border dispute with China have hardened the government stance on both timing and level of duties. Most likely, the duty shall also be applicable on various components including glass, frames and chemicals but polysilicon and wafers would be exempted. There is no clarity as yet if the duties would be applicable on inverters also.

Figure: Solar duty structure

Figure: BRIDGE TO INDIA research

Will BCD actually lead to manufacturing investment in India?Yes, but only to a limited extent. The proposed duty levels are sufficient to tide over the cost disadvantage of domestic manufacturing. We expect Adani, Tata Power, Vikram and Waaree to be the main beneficiaries and most obvious candidates for expansion. Most of them are likely to look for JV opportunities with Chinese companies for financing, technology and procurement assistance. US-based First Solar is a potential candidate. There may also be 1-2 dark sheep, possibly leading industrial houses in India. Reliance, Jindal and Mahindra have shown intent in the past to enter solar manufacturing business. But we do not see any material interest from the Chinese, for obvious reasons.

Will India become a solar manufacturing superpower?Sadly, no. BCD alone is not going to cut it. The Chinese players dominate solar manufacturing through substantial investments in scale, R&D and value chain control. Indian companies have mammoth capability gaps and would continue to rely heavily on Chinese suppliers. Imports meet 40-60% of domestic requirement across the capital goods sector because of shallow technology capability, fragmented scale and high cost structure. Moreover, with the economy weakening and banks not keen to lend, financing would be a major hurdle.

India’s notoriously fickle policy regime also does not help. A comprehensive and well-planned manufacturing policy is essential for shoring up domestic manufacturing competitiveness.

Will we gain complete energy security?For the reasons discussed above, not in the next 5-7 years at the very least.

What will be the impact on tariffs? Will DISCOMs still buy solar power?A 40% duty would increase tariffs by INR 0.50-0.55/ kWh. Solar would still remain far cheaper than conventional power but demand over 1-2 years would be subdued partly because of excess supply situation.

What will be the impact on current project pipeline?Setting aside 12 GW capacity allocated in the manufacturing-linked tender, India has a solar project pipeline of 27.2 GW. Fundamentally, there should be no adverse impact on the pipeline projects as most tenders offer an all-encompassing ‘change in law’ protection. The developers would continue to import from China because of cheaper prices. But the problem would be funding incremental capital cost as lenders would not be keen to do so. We estimate equity requirement of projects to almost double posing a major (but temporary) headache for the developers.

About 2.1 GW of the pipeline is earmarked for domestic modules. Netting that off and assuming a typical DC:AC ratio of 1.4x leaves us with 35 GW market for imported modules over the next 2-3 years. Assurance of this business makes the Chinese companies reluctant to invest in India in the short-term.

What about rooftop solar and OA markets?These markets are already bearing 15% safeguard duty burden. The impact of 5% additional duty would be negligible. Implementation of the duty structure along planned lines should lead to a temporary burst in activity in 2020-21 as demand comes forward in anticipation of higher duty from August 2021 onwards. Longer-term impact may not be material either because of the falling cost trajectory.

Border tension with China does not augur well

This week saw violent clashes between Indian and Chinese armed forces. 20 Indian soldiers have died in reportedly the worst clashes in the last 58 years. These events have revived longstanding distrust of China and lent an edge to the precarious relationship between the two countries. There is growing political chorus for boycott of Chinese goods and reducing trade reliance on China. The Indian government has issued instructions to seek alternate sourcing arrangements where possible. It has also accelerated efforts to promote domestic manufacturing by providing ready land and infrastructure with necessary permits to interested businesses. MNRE has constituted its own special cell to further this initiative for the renewable sector.

The government is keen to reduce the soaring trade deficit and growing dependence on China in critical sectors;

But short-term policy options to reduce Chinese module imports are limited;

The huge technology, scale and cost gulf between leading Chinese manufacturers and their Indian counterparts cannot be bridged through hasty decisions;

India has a massive trade deficit of about USD 50 billion per annum, up from USD 22 billion just ten years ago, with China. The government has been keen for some time to reduce this surplus through a mix of trade and non-trade barriers. Two months ago, the government even imposed restrictions on equity investments from “neighbouring countries.” There has been little real progress so far but the government stance is hardening.

For the renewable sector, the issue is straightforward but not easy: how to reduce module imports from China? India, like most other nations, remains hooked on cheap Chinese imports for 80-90% of its module requirements. The panoply of initiatives to promote domestic manufacturing over the years have failed to produce a dent on imports. Meanwhile, the Chinese manufacturers have continued to tighten their stranglehold over the global market through aggressive investments in R&D, upstream diversification and capacity addition.

Figure: 2019 module production volume of top five Indian and Chinese manufacturers, GW

Source: BRIDGE TO INDIA research

Given the lack of alternate supply sources, the policy option is straightforward – either import from China or pay 25-30% premium for domestic capacity as well as traverse the hard yards on critical infrastructure, education, labour reforms etc. To develop the whole value chain from polysilicon to modules would require a minimum 5-6 years gestation period and investment to the tune of USD 6-8 billion. In sum, it is not going to be easy to become self-reliant anytime soon. Plus, there is the risk of negative impact on project development pipeline.

The border tension has escalated the risk of abrupt policy decisions by a notch. The Indian government would do well to ignore rhetoric and realise practical limitations of domestic manufacturing aspirations. The issue at hand needs a serious deliberation with a balanced, long-term perspective.

Stuck in old timesWe find it remarkable that the Indian government has launched a new scheme for commercial mining of coal. The scheme, launched as part of COVID stimulus package, purportedly aims to boost self-reliance in the energy sector. The target is to expand coal production by 225 million MT annually by 2025 with total anticipated capex of INR 700 billion (USD 9.2 billion). It is disappointing that rather than paving way for future with support for new green technologies, the government is stuck in dirty technologies.

SECI has approved award of an astounding 12,000 MW project capacity in its 7,000 MW manufacturing-linked project tender. The auction was held back in January 2020 with Adani Green and Azure announced as winners with tariff bids of INR 2.92/ kWh. The two developers had bid for 4,000 MW and 2,000 MW project capacity but are being awarded 8,000 MW and 4,000 MW respectively after exercising the 100% green-shoe option. In addition to developing projects of this capacity, the two bidders would be required to build PV cell and module manufacturing capacity of 2,000 MW and 1,000 MW respectively.

Extended timelines and attractive tariffs should help in tiding over various project development and financing challenges;

The project award would offer a financial bonanza to the two bidders because of the implicit tariff subsidy and proposed basic customs duty on modules;

It remains to be seen if the DISCOMs sign up to buy such large quantum of power at the relatively high tariff;

The win represents huge success for both Adani (current RE operational capacity 2,208 MW) and Azure (1,652 MW). The tariff is extremely attractive – last two solar auctions by SECI and NHPC saw winning bids between INR 2.50-2.56/ kWh – particularly in view of falling equipment costs and development period of five years (25% completion every year from second year onwards). Land, transmission and debt financing should not be a problem due to long timelines, attractive tariffs and the government’s 50 GW renewable park push.

Salient terms of the tender are as follows:

Manufacturing capacity should come onstream by the end of year two.

Cells and modules produced should have minimum efficiency of 21% and 19% respectively.

There is no restriction on module sourcing for the projects.

There are no cross-linkages between project development and manufacturing components unless manufacturing capacity is delayed by more than 12 months – in this instance, power tariff would stand reduced to INR 2.53/ kWh, equivalent to the lowest discovered tariff in solar ISTS auctions in the year prior to bid submission for this tender.

Adani already has significant interests in both project development and module manufacturing. It is also cash rich after selling 50% stake in its operational solar portfolio to Total for INR 37 billion (USD 0.5 billion). But we understand that it may bring in a JV partner for the manufacturing business. Azure, on the other hand, is planning to rely on Waaree and other partners for meeting its manufacturing obligations.

The project award, touted as the largest solar project award ever in the world, would offer a financial bonanza to the two bidders if implementation goes ahead as planned. We estimate NPV of implicit tariff subsidy in the tender at INR 127 billion (USD 1.6 billion). Separately, the manufacturing business would benefit from proposed basic customs duty (BCD), under active consideration by MNRE. Interestingly, Adani Green’s stock has already shot up by 164% in the last three months, adding USD 3.2 billion in market capitalisation, as against the broader market’s increase of just 30% in the same period. But it remains to be seen if the DISCOMs actually sign up to buy so much power at the relatively high tariff. After all, power demand grew by a measly 1% in FY 2020 and is likely to fall this year by 6-8%. Many tenders have been cancelled in recent times because of DISCOM reluctance to buy power at even lower tariffs.

Power exchanges in India started offering a new ‘Real Time Market’ (RTM) trading window at the beginning of this week. The market features 48 trading slots, half an hour each, during the day for delivery of power within one hour of trading.

The new window allows DISCOMs, power producers and open access consumers to tide over short-term variations in their power schedules through an efficient market process;

Majority of trading activity is expected to be concentrated among a few DISCOMs with high share of renewable power consumption;

RTM would serve as a valuable learning experience for all stakeholders for launch of more sophisticated market instruments and ancillary services;

Until now, the exchanges offered only two power trading windows: i) Day Ahead Market (DAM) where trading takes place for two hours daily for delivery of power next day; and ii) Term Ahead Market which consists of intra-day, day ahead contingency and weekly contracts. Most of the trading has been accounted for by the DAM window – in 2018-19, 94% of all transactions on exchanges were under this route. The DAM window does not allow any intra-day revisions to schedules and hence, there was need for an additional short-term window to provide flexibility to power producers and purchasers.

The need for RTM window has arisen mainly on account of rapid increase in renewable power capacity to 90 GW, now well over half of power requirement. Increasing renewable capacity and pressure to provide 24×7 power to consumers has introduced high levels of uncertainty on both supply and demand sides. RTM allows flexibility to DISCOMs, power producers and open access consumers to meet deviation in their power schedules. In absence of such a window, the DISCOMs dealt with deviations through power plant ramp-up/ down (not always practicable or efficient), load-shedding or Deviation Settlement Mechanism (DSM) involving high risk of financial penalties.

Similarly, renewable IPPs, rather than being curtailed and/or made to pay DSM penalties, can now trade surplus power for additional income. RTM transaction horizon of 60-90 minutes is ideal for them as short-term generation can be predicted with considerably higher accuracy. The day-ahead window has larger scope for errors in power generation and hence, higher risk of DSM penalties. There may also be attractive arbitrage opportunities for smart operators using advanced load and weather forecasting capabilities. NTPC, with its substantial volume of uncontracted power, could also be a major beneficiary. Combined with Security Constrained Economic Dispatch (SCED) scheme – still under pilot phase – RTM offers an attractive opportunity to NTPC.  

First week of RTM trading points to reluctance among stakeholders, especially buyers. Sellers outbid buyers five to one in terms of volume during first five days of RTM trading. Looking ahead, trading volumes are expected to increase as industry gets more experience and power demand catches up with pre-COVID levels. Majority of trading activity is obviously expected to be concentrated among a few DISCOMs with high share of renewable power consumption.

As an additional and more efficient relief valve for short-term mismatches in power schedules, RTM should improve financial performance of DISCOMs and IPPs as well as lead to higher grid stability. It would also serve as a valuable learning experience for all stakeholders for launch of more sophisticated market instruments and ancillary services.

COVID-19 infections in India, relatively low so far, have started rising rapidly. New cases were reported at 8,380 on 30 May 2020, up 4.6x in the last month. Ironically, the lockdown is still being relaxed to avoid economic hardship and under pressure from the business community. Almost all social and business activities would be permitted from 1 June 2020 onwards except in “containment zones”, which will continue to see restrictions until 30 June. In response, most analysts have been marking down economic growth prospects – Goldman Sachs, a US-based investment bank, has projected GDP to fall by 5% in this fiscal year.

The renewable sector, already grappling with a series of vexatious issues on both demand and supply sides, is ill prepared for the pandemic;

We expect negative outlook over the next 1-5 years due to weak power demand, higher offtake risk and shortfall in debt financing;

Fundamental reforms are ever more essential to rebuild growth momentum;

We believe that actual number of infections is much higher as cases are routinely unreported and testing levels are still far below other countries. Over half of infections are reported to come from major cities (mainly Mumbai, Delhi, Chennai and Ahmedabad) but with millions of people on the move again, the pandemic is bound to spread across the country.

Unfortunately for the renewable sector, already grappling with a series of vexatious issues on both demand and supply sides over the last two years, the pandemic comes at a really bad time. The sector has seen a significant loss in growth momentum over last two years. In EY’s latest global ‘Renewable Energy Country Attractiveness Index’ rankings, India has slipped from 3rd place last year to 7th place. Short-term impact may be relatively mild, the mid-longer term impacts caused by weaker power demand growth, worsening financial condition of DISCOMs and shortfall in debt financing would be seriously damaging.

Weaker power demand growthDespite demand slowdown, public sector IPPs continue to add 4-5 GW of net thermal capacity every year mainly because of long gestation periods. The natural commercial response of the DISCOMs would be to go slow in procuring renewable power. We have accordingly revised our base case solar and wind power capacity addition estimate over 2020-2024 to 35 and 12 GW, down from our previous estimate of 43 GW and 15 GW respectively.

Deteriorating financial condition of DISCOMsDISCOM losses in FY 2021 are expected to rise sharply due to fall in demand, unfavourable demand mix, higher Aggregate Technical and Commercial (AT&C) losses and fixed charge waivers. We estimate total losses to the tune of about INR 895 billion (USD 11.8 billion) in FY 2021 almost fully wiping out benefit of INR 900 billion liquidity support from the central government. Unless tariffs are raised quickly and commensurately, which seems unlikely, payment delay and curtailment risks would be exacerbated. DISCOMs in Haryana, Rajasthan, Tamil Nadu, Uttar Pradesh and Maharashtra are amongst the worst affected in our view.

Figure: Estimate of DISCOM losses in FY 2021, INR billion

Source: BRIDGE TO INDIA research

Shortfall in debt financing With the pandemic causing widespread losses in bank loan books, we expect lenders to remain extremely cautious notwithstanding monetary easing by The Reserve Bank of India. Debt financing would continue to be one of the biggest challenges for the sector.

We also expect rooftop and open access installations to suffer from increasing policy uncertainty as DISCOMs try ever harder to retain lucrative C&I customers. There is now need for a robust roadmap for future growth of clean energy giving due regard to long-term structural benefits of the sector – improved air quality, energy access and job creation. Fundamental reforms are ever more essential to rebuild growth momentum.

Note: BRIDGE TO INDIA has prepared two reports assessing COVID-19’s impact on the global and Indian renewable markets respectively. The reports shall be released on 2 June 2020 and would be available as free downloads from our website.

Shell, a global oil & gas major, recently announced accelerated goals in a mission to become zero energy business. The company is seeking to completely eliminate all emissions from its manufacturing business by 2050 and also wants to reduce emissions for all energy products sold by it by 65% by 2050. Forced to take some drastic decisions in wake of the COVID-19 demand shock, the company also announced significant reduction in total capex (down USD 5 billion) and dividend (66%). But tellingly, it has kept capex plans for clean energy intact.  

So far, the oil & gas companies have been testing waters by acquiring minority stakes in disparate clean energy businesses;

But they would want to play a more central role as their primary businesses shrink and clean energy grows in scale and prominence;

For India, entry of oil & gas companies with their deep pockets and strong technology expertise in the renewable sector is highly welcome;

Shell is aggressively expanding presence in the clean energy business internationally across technologies (solar, wind, biofuels, storage, electric mobility and hydrogen) and value chain. In India, the company has already acquired stakes in two distributed energy ventures: 49% in Cleantech Solar, a market leader in C&I renewables, and 20% in Orb Energy, a rooftop solar company focused on SME and residential consumers. It is also believed to be looking actively at round-the-clock and hybrid schemes announced by MNRE.

Shell is not alone amongst the oil & gas majors to try to pivot to clean energy. France’s Total recently acquired 50% stake in Adani’s 2,148 MW operational solar portfolio. BP has set itself a target of building 10 GW renewable capacity by 2023 and has acquired interests in Ayana and Radiance Renewables through its 50:50 JV with Everstone. Petronas bought out complete control in Amplus, another leading C&I renewable company, in April last year.

We expect involvement of oil & gas companies in Indian renewables to grow significantly in the mid to long term. Most of them have sat out the exuberant bidding phase as risk-return was not deemed favourable; and there was little synergistic benefit in vanilla renewable projects. But as the sector grows in scale, procurement schemes become more complex and interlinkages with conventional energy businesses grow, these companies would want to play a central role. Growing complexity of procurement schemes – MNRE stated this week that it may hold auctions for only round-the-clock and hybrid projects in future – would also play to their advantage.

For India, entry of oil & gas companies in the renewable sector is highly welcome. The global majors bring deep pockets, strong technology expertise and international best practices besides more discipline and patience. Other developers, particularly financial investor backed platforms, should take note.