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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.

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

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

Weak demand growth poses a major risk to growth outlook;

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

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

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

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

Figure: Total installed capacity and peak demand, GW

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

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

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

Figure: Projected solar and wind capacity, GW

Source: India Renewables Outlook report by BRIDGE TO INDIA

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Table: Private equity investments in renewable power in 2019

Source: BRIDGE TO INDIA research

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source: Electricity Demand Pattern Analysis by POSOCO, 2016

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

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

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

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

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

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

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

Table: Winning bidders and tariffs in the three tenders

Source : BRIDGE TO INDIA research

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

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

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

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

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

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

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

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

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

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

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

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

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

Figure: Intra-day power prices on exchange

Source: Indian Energy Exchange

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

Separation of content and carriage for power distribution;

Payment of tariff subsidies directly to consumers by state governments;

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

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

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

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

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

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

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

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

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

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

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

Table: Key sector developments in 2019

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

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

Figure: Annual RE capacity addition, MW

Source: BRIDGE TO INDIA research

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

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

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

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

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

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

Figure: Timeline for Andhra Pradesh PPA renegotiation

Source: BRIDGE TO INDIA research

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Figure: Rooftop solar installation capacity by state

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

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.