India First Quarter Solar Market Update - Focus on India's solar policy framework

After the formal launch of the Jawaharlal Nehru National Solar Mission (JNNSM) in 2010, the markets have been closely watching the progress of India’s solar program as the JNNSM moves out of policy stage into execution.

POLICY UPDATE

Since the announcement of the JNNSM guidelines, there have been some significant changes to the policy.  Most notably the feed-in-tariff (FIT) was scrapped (due to overwhelming response, according to the government) and replaced with an auction where the projects go to the lowest bidder. The original FIT was announced at Rs. 17.91 ($0.40) for PV and Rs. 15.31 for CSP ($0.34). The auction of Phase I projects resulted in 37 winners (620MW) out of which 30 projects (150MW) were PV and seven projects (470MW) were CSP. The lowest winning bid for PV projects came in at Rs 10.95 ($0.23) (40% discount on the original FIT), the highest winning bid came in at Rs. 12.76 ($0.28) (30% discount on the original FIT), averaging out to Rs. 12.16 ($0.27) (33% discount on FIT).

India-UtilityScaleProjects-April2011

The question is - are these projects financially feasible at such discounts? It is certainly going to be a challenge to finance these projects with unattractive returns, especially when you consider the high borrowing costs in India combined with the fact that foreign banks may consider the market too immature and risky for such low returns.

Solar project experience was not a criterion to win as long as the bids were lower than everyone else’s.  This has resulted in companies with questionable qualifications selected as winners, including such companies as an animation company, a wool yarn maker, a pipes supplier, and an auto dealer. Can the Indian solar industry take off under the policy framework of JNNSM, with this no-experience-required, lowest-bid wins approach?  This remains to be seen. 

We stand by our previous analysis, as published in PV Magazine September 2010 issue, that the mandated  50:50 split between PV and CSP is not a good idea. JNNSM is trying to encourage the development of both PV and CSP technologies by giving each equal weight. However, by allotting specific quotas for each technology, the JNNSM is dictating the ratio of technology that can be built rather than allowing the market to select the most efficient and cost effective technology for India.

Water shortage is an important issue in India.  A recent Rajasthan State report concluded that the water status in the state is “critical”, yet 86% of Phase 1 JNNSM CSP projects are in Rajasthan state.

JNNSM - Phase I

Migration - Power Purchase Agreements (PPAs) for Migration projects were signed on October 15, 2010 for 84MW (54MW-PV, 30MW-CSP).

Batch 1 – PPAs for Batch 1 projects were signed on January 10, 2011 for 620MW (150MW-PV, 470MW-CSP).

Batch 2 – Batch 2 projects are expected to be announced in May 2011 for 300MW (PV). NTPC Vidyut Vyapar Nigam Ltd., the sole off-taker of grid-connected solar power under JNNSM, (NVVN) has confirmed that, like Batch 1, there will be another auction process with a starting bid of Rs. 15.04 ($0.33).  NVVN has said that it is unlikely that the selection criteria will change, but if it does, the decision will come from Ministry of New and Renewable Energy (MNRE).

JNNSMRoadMap-April2011
STATES

With the FIT system gone under JNNSM, the next viable option for developers will be with state-level solar policies. Most states have implemented their own FITs (many following JNNSM’s lead, may opt for an auction system in the future).  The main concern with states is that most power utilities (state owned) are financially weak and many are already operating at a loss and depend on government subsidies to survive and operate. This creates uncertainty for developers and investors as they are unsure if they will get paid on time after signing PPAs with state owned power utilities.

The State of Gujarat has the most aggressive solar policy with announced projects of about 1,000MW, which currently exceeds announced JNNSM projects.  In Gujarat, several developers recently missed the project deadline and instead opted to pay a fine of Rs. 10,000 rupees ($222) a day/MW for the first 60 days and Rs. 15,000 thereafter.  A 1MW project delayed for a year will only cost Rs. 51,75,000 ($115,330).  If fines remain low, developers may decide to take their time and wait for costs to drop so they can get better returns. 

RENEWABLE PURCHASE OBLIGATIONS (RPO) / RENEWABLE ENERGY CERTIFICATE (REC)

In January of 2011, the government announced an (RPO) program with a solar carveout which will benefit the solar sector. How they will enforce these RPOs is an issue as most utilities are state-owned and it would become a self-imposed penalty if goals are not met. 

A solar REC mechanism was also announced with a  floor price of Rs. 12,000 ($269) per MWh and forbearance price of Rs. 17,000 ($381) per MWh. These prices may change considering this was announced before the FIT was eliminated. The REC mechanism will help in ensuring RPO compliance as most solar projects are being developed in only a handful of states.  80% of CSP projects and 72% of PV projects currently being developed under JNNSM are located in Rajasthan as project developers try to maximize the capacity utilization factor due to the state’s high solar insolation levels.

India’s solar market is still in a nascent stage with both national and state policies only recently beginning to take shape.  The second and third quarters of 2011 will be telltale quarters as financial and project deadlines become due.

 
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