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New solar tariff low not a surprise

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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.

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Customs duty finally on the anvil

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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.

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Border tension with China does not augur well

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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.

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Financial bonanza for Adani and Azure?

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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.

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Real-time power trading a win-win for power producers and consumers

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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.

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COVID-19 to cause serious damage to renewables

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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 placeShort-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.

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Oil & gas players set to carve a bigger role

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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.

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RTC auction a small step towards firm renewable power

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RTC auction a small step towards firm renewable power

SECI completed auction for its 400 MW round-the-clock (RTC) tender last week. Entire capacity has been awarded to ReNew Power at a tariff of INR 2.90/ kWh. Other bidders included Greenko (400 MW, INR 2.91/ kWh) and HES Infra (100, 3.91). Ayana had also submitted a bid for 50 MW but was not qualified for e-auction stage. First year tariff would be escalated by 3% annually for 15 years going up to INR 4.52/ kWh and stay flat thereafter. Levellised tariff is estimated at INR 3.56/ kWh. Unlike most other tenders, offtakers for this tender were identified in advance. New Delhi Municipal Council and Dadra & Nagar Haveli, a Union Territory, are expected to procure 200 MW power each.

The project configuration would most likely be solar-wind hybrid with a relatively small battery storage component;

Minimum CUF and scheduling conditions are stacked in favour of the project developer;

Evolution of tender designs, well under way now, would radically alter competitive dynamics and financing profile of renewable sector;

Contrary to the name, there is no provision for intra-day scheduling of power in the tender. The developer needs to comply only with monthly and annual CUF requirements of 70% and 80% respectively – much higher than the usual 19% and 22% stipulation for vanilla solar and wind tenders. However, the offtakers are obligated to purchase power output equivalent to CUF of up to 100%.

The tender is technology neutral – the developer is free to choose solar, wind or any other renewable technology alongside any storage technology. High CUF requirement means that actual project capacity would be much higher at about 2.4-2.8x tender size. An optimum project design would most likely use a mix of solar and wind technologies with minimal battery storage capacity. And as permitted in the tender, the projects would most likely be located in different regions to achieve highest possible techno-commercial efficiency.

We believe that the tender conditions (CUF, scheduling) are stacked in favour of the project developer. As a key requirement of the two offtakers – firm, predictable power meeting their demand profile – is not met, it remains to be seen if they would actually be willing to go ahead and sign the PPAs. Interestingly, New Delhi Municipal Council’s total power requirement is only 1,400 million kWh, equivalent to 80% CUF for a 200 MW project. So how they could switch their entire procurement to this project and commit to 100% CUF is not clear.

Nonetheless, alongside the recent peak power tender, the RTC tender signals a step change in the market and a move away from vanilla tenders. In response to DISCOM demand, MNRE is pushing for tenders seeking predictable power output. SECI has already issued a 5,000 MW RTC tender seeking a blended mix of renewable and thermal power (bids due on 4 June 2020). We believe that this evolution is going to radically alter the nature of market. For one, the number of participating developers is likely to come down because of complex technology and risk considerations. Second, as storage component becomes larger, tariffs would gradually inch up and renewables would compete more evenly with thermal power.

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Project progress grinding down

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India added total utility scale solar and wind capacity of 715 and 328 MW respectively in the quarter ending March. These are meagre returns; the combined total represents the weakest quarterly progress on capacity addition in the last two years. For the financial year 2019-20, total utility scale capacity addition was 7,408 MW, 34% below the high of two years ago.

Progress over next two quarters is expected to remain dismal due to Coronavirus disruption;

Faced with sharp demand slowdown and deteriorating financial condition, the DISCOMs are reluctant to sign long-term PPAs;

The sector urgently needs a revised roadmap in view of the slumping power demand outlook, offtake concerns and challenges in tying up land and transmission connectivity;

Jan-Mar is usually the busiest quarter for project construction as developers and contractors rush to complete projects to claim depreciation and meet internal targets for the financial year. So the slow progress is doubly disappointing. Reasons for slow down are multiple and varied. A spate of challenges including delays in regulatory approvals of tariffs, transmission connectivity, debt financing and INR depreciation has affected project execution across the board.

Going forward, supply chain disruption due to Coronavirus would continue to severely affect progress in Q2. Project construction activity was allowed to commence from 20 April 2020 onwards but a further 6-8 weeks are expected to be lost in remobilisation effort and resolving shipment blockages. There may be further hold-ups depending on government approvals, or reopening of PPAs in case of open access projects.

Figure: Solar and wind capacity addition, MW

Source: BRIDGE TO INDIA researchNotes: Figures include open access projects but exclude rooftop solar and other distributed solar systems.

There are 37 GW of solar and wind projects currently in pipeline. Excluding 3 GW capacity in the manufacturing-linked tender, the remaining 34 GW is due for completion in the next two years. But we are skeptical if more than 24 GW can be added in this period in view of the various ongoing challenges. Faced with sharp demand slowdown and deteriorating financial condition, the DISCOMs are reluctant to sign PPAs and commit to long-term purchases. SECI is believed to be struggling to find buyers for the recently completed 1,200 MW peak power tender auction (weighted average tariff of INR 4.30/ kWh) and 4,000 MW manufacturing-linked projects (INR 2.92/ kWh).

Our most plausible renewable capacity estimate for March 2022 is 116 GW including rooftop solar and open access projects. These numbers are consistent with our recent study on 5-year outlook for the renewable sector. MNRE has been keen to rush out new tenders and auctions but should instead focus on finding decisive solutions to supply side constraints. Unless these factors are addressed, the sector would stay stuck in the third gear at 9-10 GW average annual capacity addition.

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Draft Electricity Act amendments a lame affair

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The Ministry of Power has issued another set of draft amendments to The Electricity Act, 2003. It is the third attempt to amend the Act in as many years. The latest set of amendments focuses mainly on improving DISCOM financial position and reducing offtake risk for power generators. However, it is more limited in scope in comparison to previous drafts. Major exclusions include separation of content and carriage in the power distribution business, obligation to provide 24×7 power to consumers, reduction of cross-subsidy surcharge and penalties for non-compliance with RPO targets. The Ministry has sought comments from all stakeholders by 5 June 2020.  

The proposed changes are a disjointed approach to address recent problems rather than institution of fundamental long-term reforms;

The states are likely to resist many of the key proposed changes;

 As seen with previous such attempts, we expect little concrete progress on the new draft amendments;

Key elements in the draft amendments are discussed below.

Replacement of subsidies with direct transfers Due to long delays in payment of subsidies to DISCOMs by state governments and concerns about authenticity of related data, the government has proposed that the state governments should instead provide direct cash transfers to consumers.

Our view: This is arguably the most ambitious measure reform in these amendments. Delay in tariff subsidy payments, estimated at over INR 850 billion (USD 11.2 billion) per year, by state governments is a major cause of financial distress for the DISCOMs. But the change is likely to be resisted heavily by the state governments.

Specified time limits for bid tariff approval by regulators As much as 2.4 GW of projects have had to be cancelled in the last year because of delays in regulatory approvals of bid tariffs. The government is seeking to streamline this process and ensure that regulatory decisions are made within 60 days of filing of petition.

Our view: The fundamental problem here is reluctance among DISCOMs to sign long-term PPAs, which, in turn, is due to excess power supply (and weak demand growth). This issue remains unresolved.

New hydro power procurement obligation (HPO) targets A new target for hydro power procurement is proposed to be set for DISCOMs and select C&I consumers. It is an attempt to revive the hydro power sector, which has been languishing with new capacity addition of only 406 MW in the last two years.

Our view: Hydro power is an attractive generation source because of its flexible output profile but new projects are stuck because of high capital cost, long gestation periods, high construction and environmental risks, and lack of interest from private sector players. No improvement is expected because of HPO targets alone.

Establishment of the Electricity Contract Enforcement Authority (ECEA) as a new adjudication body for all non-tariff disputes in PPAs ECEA, proposed to have the same power as civil courts, would have rights to detain and attach property. Aggrieved parties may approach APTEL if they are dissatisfied with ECEA ruling.

Our view: This is an attempt to speed up resolution of PPA disputes, a growing problem. But it is unclear why creation of a new agency is necessary. It complicates dispute resolution process due to multiplicity of agencies including electricity regulators, APTEL and the Supreme Court.

Increased operational role for National Load Despatch Centre (NLDC) It is proposed that NLDC would have the power to direct DISCOMs, power producers, SLDCs and other stakeholders to schedule and despatch power in accordance with PPAs.

Our view: It is a sensible move to curb growing curtailment risk for renewable power. It is an extension of recent decision to let POSOCO, the national grid manager, investigate curtailment incidents in Andhra Pradesh.

Increased government control over selection of state regulatorsA national level committee is proposed to appoint members of state regulators on a timely basis.

Our view: It is a sensible measure to reduce state government intervention in regulatory process but again, we expect the state governments to resist the change.

Distribution sub-licensees Following opposition by states to both separation of content from carriage and DISCOM privatisation, the government is mooting a compromise formula to sub-license limited responsibilities of DISCOMs to private sector players.

Our view: Sub-licensee structure could, if implemented earnestly, result in marginal operational and financial efficiency enhancements in power distribution business.

To sum up, the proposed changes seem largely reactive and designed to address recent problems faced by power producers. We are disappointed that the amendments are a far cry from much needed fundamental long-term reform of the sector. Moreover, the central government’s ability to secure progress and compliance of these steps by states remains in doubt. As seen in the past, state governments and DISCOMs have been openly flouting key provisions of the Electricity Act on a regular basis. 

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Government financial institutions becoming lenders of last resort

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The Ministry of Power is supposedly working on a plan to use central government-owned financial institutions (FIs) including Power Finance Corporation (PFC), Rural Electrification Corporation (REC) and Indian Renewable Energy Development Agency (IREDA) to fund DISCOMs in wake of the Coronavirus disruption. As per news reports, funds would be provided to DISCOMs at concessional cost specifically for clearing dues to the power producers. It is not yet clear what conditions may be attached to such a funding package.

Banks and other lenders are steadily withdrawing from the power sector leaving government-owned FIs as lenders of last resort;

Another bailout is a missed opportunity for driving tough reforms in the distribution market;

It portends a continuing cycle of financial insolvency and risks such as PPA renegotiation, delayed payments, cancelled auctions, curtailment and policy instability;

DISCOM dues had crossed INR 900 billion (USD 12 billion) before the Coronavirus-related lockdown. Subsequent economic slowdown and reduction in power demand are expected to increase their funding shortfall by about INR 200 billion (USD 2.7 billion) for every month of the slowdown. The situation is reaching a crisis point and it is disappointing that after several years of policy deliberation, the government believes that there is no option other than another financial bailout of the DISCOMs. It is a missed opportunity for driving a hard reform package and sending a tough message to the DISCOMs and state governments.

It is not a surprise that the government-owned FIs are becoming lenders of last resort to the sector as banks, other institutions and NBFCs slowly withdraw. Recently, MNRE allowed developers to provide letters of comfort from the same government FIs instead of bank-issued performance guarantees and earnest money deposits. Our research into sector lending data shows some stark trends. While banks have been steadily cutting back their exposure to the sector, the government FI loan book has grown by more than 50% in the last five years to INR 6 trillion (USD 81 billion). Share of these FIs in new lending to renewables is estimated to have reached an unprecedented 84% in FY 2019.

188807

Figure: Total lending exposure of government FIs and banks to the power sector, INR billion

Source: Reserve Bank of India, annual reports of PFC, REC, IREDA, and BRIDGE TO INDIA research

Figure: Total new lending to renewable energy sector, INR billion

Source: Annual reports of PFC, REC, IREDA, and BRIDGE TO INDIA research

Failure to attract private commercial capital is an indictment of prevailing risk framework in the sector. While most analysts and developers have rejoiced at the prospect of the bailout, we believe that it sends a terrible message. It is a signal to private investors and lenders to not expect a sector structured around commercially sound principles. It portends a continuing cycle of financial insolvency, bailouts and ensuing risks related to PPA renegotiation, delayed payments, cancelled auctions, curtailment and policy instability.

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Webinar: impact of COVID-19 on the Indian renewable sector

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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.

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Maharashtra offers relief to rooftop solar

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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.

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Bankrupt DISCOMs plus Covid-19 a disastrous mix

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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.

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Coronavirus damage impossible to assess

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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.

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Management of cooling load favourable to renewables

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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.

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Waiving bank guarantees not desirable

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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.

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Safeguard duty redux

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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 tendersPSU 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.

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Poor design of procurement schemes would hurt residential consumers

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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.

 

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Coronavirus disruption highlights risk of external dependence

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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.

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India takes one more step in integration of RE

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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.

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Weak power demand an under appreciated risk

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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).

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King coal here to stay

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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. 

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No dearth of equity

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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.

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