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Regulators add to the pain

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

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

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

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

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

Table: Winning bidders and tariffs in the three tenders

Source : BRIDGE TO INDIA research

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

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

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

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

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2020 – year of prayer and hope

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

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

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

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

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

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

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

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

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

Figure: Intra-day power prices on exchange

Source: Indian Energy Exchange

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

Separation of content and carriage for power distribution;

Payment of tariff subsidies directly to consumers by state governments;

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

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

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

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

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

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2019, RE’s annus horribilis

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

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

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

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

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

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

Table: Key sector developments in 2019

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

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

Figure: Annual RE capacity addition, MW

Source: BRIDGE TO INDIA research

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

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Andhra Pradesh and Centre on escalation path

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

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

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

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

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

Figure: Timeline for Andhra Pradesh PPA renegotiation

Source: BRIDGE TO INDIA research

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

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

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

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

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Consolidation underway in solar EPC market

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

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

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

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

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

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Fourth time lucky for the manufacturing-linked tender?

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

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

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

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

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

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

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

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

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States moving away from net metering prematurely

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

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

Figure: Rooftop solar installation capacity by state

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

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

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

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

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MNRE issues a new 12,000 MW scheme to promote domestic manufacturing

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

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

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

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

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

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

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

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

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Uttar Pradesh deals a blow to rooftop solar

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

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

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

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

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

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

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

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

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

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

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Five charts summarising RE development in 2018

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2018 was the first year to see a dip in RE capacity addition in India. The highest reduction was in wind (-52%), followed by utility scale solar (-29%) but rooftop solar continued to grow healthily (+73%). 

Figure 1: RE capacity addition, MW

Source: BRIDGE TO INDIA research

2018 saw a huge surge in new tenders. However, actual project allocation was much less due to multiple instances of tender cancellations. 

Figure 2: Tender issuance and auctions, MW

Source: BRIDGE TO INDIA research

Tender issuance was dominated by SECI pan-India tenders (21,300 MW). Maharashtra, Uttar Pradesh, Andhra Pradesh, Gujarat and Karnataka were the top five states to issue new tenders. 

Figure 3: Tender issuance in key states, MW

Source: BRIDGE TO INDIA research

Solar PV module prices saw a steep decline in 2018, falling from USD 0.33/ W at the beginning of the year to USD 0.21/ W at the end. 

Figure 4: Solar PV module prices, USD cents/ W

Source: BRIDGE TO INDIA research

Note: These prices are for imported modules on a CIF basis (before any local tax or duty). Wind tariffs declined substantially in 2018 and stayed below solar tariffs for most part of the year. 

Figure 5: Average solar and wind tariffs, INR/ kWh

Source: BRIDGE TO INDIA research

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Floating solar needs new technical standards

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SECI recently completed auction for India’s first large-scale floating solar plant. The 50 MW project at Rihand dam in Uttar Pradesh was won by Shapoorji Pallonji with a bid of INR 3.29/ kWh. The winning tariff is about 10% higher than observed in respective ground-mounted auctions.

Floating solar is still in nascent stages of development in India with installed capacity of just 2.7 MW at present. However, MNRE has ambitious plans and intends to add 10 GW of floating solar as part of its 227 GW renewable energy target by 2022. Capacity under development has already reached 1,639 MW.

Like any new technology in its early stages of deployment, floating solar faces some unique challenges and risks. Main challenges include higher capital cost, absence of bathymetric and hydrographic data on water bodies and exposure to moisture and Ultraviolet (UV) radiation. Similarly, lack of quality standards for systems installed on water surface poses unusual performance and environmental risks. High ambient moisture content combined with long-term UV exposure makes floating solar plants susceptible to higher degradation. Use of high-quality modules with appropriate water vapour transmission rate and floats which provide necessary protection against harsh aquatic environment can substantially mitigate this risk.

Moreover, as floating solar systems are usually deployed in ecologically sensitive areas, inadequate design and/ or poor quality can pose water contamination risk during plant construction and operation. Potential leaching out of hazardous materials used in making these components could have a negative impact on both human and marine life.

As deployment of floating solar is gathering pace, it is pertinent that formulation of adequate specifications, quality and safeguard standards is taken up urgently by policy makers and procurement agencies to support healthy market development. This would go a long way in providing quality assurance to the various stakeholders and pave way for accelerated growth in a sustainable way.

To access our recent floating solar report, click here

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DGTR announces final safeguard duty recommendation

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The Directorate General of Trade Remedies (DGTR), Ministry of Commerce and Industry, has issued its final decision on the safeguard duty petition by domestic cell and module manufacturers. It has recommended a safeguard duty on imports of all cells and modules, irrespective of technology, for a period of two years – 25% in the first year falling to 20% and 15% in the subsequent six month periods respectively. The duty shall be applicable to imports from China, Malaysia and all developed countries. Imports from other developing countries have been exempted as they individually account for less than 3% of total imports into the country.

 If the recommendation is accepted, it will have no meaningful sustainable impact on domestic manufacturing because of the short duty period and no relief for SEZ (special economic zone) units;

The duty would pose financial and execution challenges for all ongoing projects and adversely impact government plans for the sector;

The industry should brace for an extended period of uncertainty as the duty saga is likely to linger on for the foreseeable future;

The decision is largely in line with expectations although the two-year application period is surprisingly short. It is not sufficient to encourage any new investments and nor does it allow existing manufacturers to upgrade their facilities and make any meaningful recovery. The other key aspect of the decision is that there is no relief provided to SEZ-based units including Mundra, Vikram and Waaree. These ‘domestic manufacturers’ would be subject to duty when they sell modules in the domestic market unless they are given a special dispensation by the government. But the domestic manufacturing industry excluding SEZ-based players can barely meet 5% of total domestic demand. That raises the question: why impose duties for benefit of some small manufacturers and risk growth in such a crucial sector?

We continue to maintain that the safeguard duty would be very damaging to the industry as well as to the government’s ambitious plans. Notwithstanding recent falls in module prices, most projects under execution would face viability challenges (capex increase of up to 15%, extra tariff requirement of INR 0.40/ kWh) and execution delays. MNRE has been promising protection from duty for projects where auctions have already been completed but there is no clarity available on that. Even where PPAs allow legal recourse through ‘change in law’ mechanism, there are bound to be drawn out disputes between the procurement agencies, DISCOMs and project developers.

We also believe that the arguments used to justify duty imposition are highly flawed. If the government accepts the recommendation to impose duty, there is a high chance of a successful appeal by other countries against the decision.

Some industry players have expressed relief that the DGTR decision, even if detrimental to developers and other downstream players, at least provides some clarity on way forward. Unfortunately, we disagree. For one, the final decision is still subject to ratification by the Board of Safeguard and Ministry of Finance. It is also possible that some developer(s) will find a spurious reason to hold up the process through legal appeal as happened last time. Moreover, we understand that domestic manufacturers are considering another petition for anti-dumping duty. The industry should brace for an extended period of uncertainty on this front.

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Open access market in Telangana slows down

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Telangana is the third largest open access (OA) state in the country with an installed capacity 322 MW. The state has an attractive OA policy and added 145 MW capacity in 2015. But since then, activity has slowed down significantly. Last two years saw new capacity addition of only 22 MW and 64 MW respectively. 

Figure: OA solar capacity addition in Telangana, MW

Source: BRIDGE TO INDIA research

There are two key reasons for this slow down.

DISCOM reluctance to lose high paying consumers: NOCs for OA approvals have become increasingly difficult to obtain. We understand that NOCs are being declined on tenuous grounds including upstream/operational constraints, non-feasibility of OA on mixed feeders etc. Delays in installation of ABT (availability-based tariff) compliant meters and inadequacy of transmission/ distribution networks are also seen as major problems.

Regulatory uncertainty: While the state’s solar power policy exempts cross subsidy surcharge (CSS), Telangana State Electricity Regulatory Commission has dictated that exemption shall be permitted only if the state government reimburses DISCOMs for lost revenue. This has led to DISCOMs arbitrarily charging CSS even in instances of delay in disbursement by the state government (example – Sep-Nov 2017). Even though this amount has since been refunded back to the customers, the move creates a huge risk for both project developers and customers.

We believe that resistance from DISCOMs and regulatory uncertainty is likely to keep the state OA market subdued for the foreseeable future.

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