Stable Non-Protectionist Solar Policies Will Help Attract Much-Needed
Foreign Investments into India
By: Raj Prabhu, CEO, Mercom Capital Group
The fundamentals of
the solar sector have shifted. After years of panel price drops, module prices
have gone up this year by about 10 percent, while the rupee has fallen about nine
percent. As this occurs, policy, with all its changes and delays, have not been
able to keep up with the rapidly changing solar market environment.
There has been a total of 622 MW of installations
in India in the first seven months of 2013, with only 73 MW installed in the
last three months. Solar has tremendous promise as one of
the most attainable sources of power in India and represents a great future for
the economy, industry, jobs, and environment. To achieve this future, India
needs to avoid distractions and maintain focus on creating a fertile policy
environment for private and foreign investments in the power sector.
The decisions made by India to pursue anti-dumping
investigations and domestic content requirements (DCR) have all but paralyzed
the sector. Nobody knows what is coming next. The Indian economy continues to
face challenges with slow growth, high interest rates and a weak rupee, making
life harder for solar developers.
It is naïve to think that India can impose DCRs
and anti-dumping tariffs without negative repercussions and at the same time
look to increase exports to and attract investments from these same markets. As
we witnessed in the United States vs. China and the EU vs. China trade cases,
there is bound to be retaliation. In a recent development, the United States
launched an anti-dumping investigation into steel pipes exported by India and
other countries on behalf of its domestic oil and natural gas industry, while
Ontario lost its DCR case with the Word Trade Organization.
With the government desperately looking to
attract foreign direct investments due to deteriorating economic conditions, India
is sending the wrong message to investors with the anti-dumping case and DCRs.
Instead, they should provide long-term policy visibility and a growth roadmap.
Here is what we are hearing from major
Indian manufacturers see DCRs and anti-dumping
tariffs as the only way to survive price competition. After talking with
several Indian manufacturers (with a combined 500+ MW in module manufacturing
capacity), the picture that is slightly different than reported in media. The
lowest capacity utilization mentioned
among them was 60-70 percent while a few of them said it was in 80-90 percent
Developers and EPCs working in India stated that
they are not opposed to locally-manufactured products. If anything it would make
procurement much easier. However, they claim that local manufacturers do not
provide the kind of warranties to back up their products that come with European
and American panels. They also said that local manufacturers are unable to match
the price and efficiency parameters. Developers also allege that local manufacturers
themselves import panels, and place their own label/stamp on it.
Developers are also being hit by a weak rupee, high
inflation and the recent panel price increases. Various state governments
insist on L1 bidding (matching the lowest bid), adding even more pressure which
has made project financing extremely challenging with banks questioning project
viability due to low tariff levels. Lack of knowledge among state agencies was
another concern by developers, with many states insisting that developers match
the lowest bids from other states without understanding the differences between
states in solar insolation, land costs and other issues. L1 bidding has become
the number one hurdle in financing projects through state policies.
manufacturers, Indian project developers are not as well organized and lack a
unified voice and leverage, something that is sorely needed when it comes to policy
Ministry of New and Renewable Energy (MNRE) acknowledged
the dilemma and the complexity of applying tariffs and DCR selectively; local
module manufacturers want DCR and duties on imported modules but not
necessarily on cells because they import cells. Cell manufacturers want duties on
imported cells but not on wafers because they import wafers. Meanwhile DCR is
effectively shutting out all other PV technologies except c-Si.
doesn’t want “cheap” foreign panels but who will pay for more expensive local
panels? MNRE is looking to Viability Gap Funding (VGF) as the way to combat
has now morphed into a funding/subsidy mechanism to absorb the high cost of DCR
mandated by the government. It was also suggested that developers should
petition in a unified way for revised tariffs if they think costs have gone up.
Financial institutions want policy certainty and
stability. Among institutions that are funding or looking to fund solar
projects, there is a growing concern about L1 bidding being adopted by states
as it is seen as a “race to the bottom” with bidders required to meet the
lowest bid. Banks see very thin margins with these low bids and are concerned
that corners will be cut in order to keep costs low, resulting in poor project
quality. Another huge concern is the financial health of the off-takers as
state utilities struggle financially, maintaining doubtful credit worthiness. It
is up to the government to have a payment guarantee mechanism in place to give
confidence to financers. Of the financial institutions we spoke with, most said
they are taking a slow and deliberate approach as the policies are “too
complicated and unpredictable”.
of the financial institutions we spoke with were interested in financing Renewable
Energy Certificate (REC) projects due to lack of enforcement of Renewable
Purchase Obligations (RPO) and uncertainty surrounding them. REC bids last
month were around Rs.9 (~$0.15) while projects were bidding in the Rs.7 (~$0.12) range
under state policies.
acquisition and grid evacuation issues were the other major concerns. Land
acquisitions are getting more complicated causing further delays. Lenders
prefer a system similar to Gujarat’s, where the state government helped with
land acquisition and ensured evacuation.
Update on Various India
I Batch 1 – PPAs for Batch 1 projects
were signed for 610 MW (140 MW-PV, 470 MW-CSP). 130 MW of PV projects have been
commissioned and only one 50 MW CSP project has been completed out of the 470
MW that were originally due to be commissioned by May 2013. The remaining
projects have been given an extension until March 2014.
developers have blamed the delays on a shortage of heat transfer fluid (HTF)
and lack of accurate ground-measured Direct Natural Irradiance data (even
though it is the responsibility of the developers to make sure they have
accurate data before bidding). After speaking with two main HTF suppliers, one
supplier said supplying HTF took longer because CSP developers started
negotiations late in the project development process. The supplier also pointed
to over 35 successfully completed on time projects. The other supplier said
that they have the required HTF and cited the fact that they just completed
supplying to the world’s largest solar plant.
though the reasons behind CSP project delays are suspect, CSP developers were
successful in getting a 10 month extension, and if the projects are completed
within that timeframe they will receive tariffs between Rs.10.49-12.24
(~$0.18-$0.20), a premium of almost 40-50 percent over PV projects (most of
which are currently bidding in the Rs.7-8/~$0.12-0.13 range).
is time to get rid of the required PV:CSP ratio for good and let the market
decide on the best and most cost-effective technologies.
Phase I Batch 2 – 300 MW of the 340 MW Batch 2 projects have been
commissioned so far with the remaining 40 MW delayed and most likely to be
JNNSM - Phase II
Phase II of JNNSM, which was supposed to be
rolled out at the end of last year, has been delayed and is pending cabinet
approval. According to MNRE, the approval may come at the end of August, but
that’s with a big “maybe”.
part of JNNSM Phase-II Batch-I, Solar Energy Corporation of India (SECI) has
announced a draft Request for Selection (RfS) to set up grid-connected solar PV
projects for a total aggregate capacity of 750 MW under the VGF scheme. The
draft proposal is pending cabinet for approval. The bidding process will be
divided into two parts, Part A and Part B. Bidders can apply for projects under
Part A or Part B or both Part A and Part B. Projects under Part B will have a DCR
- the only difference between the two. The percentage of DCR is still being
VGF, developers will sign a PPA for 25 years to sell power at a fixed tariff of Rs.5.45/kWh (~$0.09/kWh). In the case of accelerated depreciation, the tariff
will be reduced by 10 percent to Rs.4.95/kWh (~$0.08/kWh). The maximum limit for
VGF is 30 percent of the project cost, or Rs.2.5 crore/MW (~$416,667/MW),
whichever is lower.
to MNRE, even though they push the issue with state electricity regulatory commissions
to ensure RPOs are met, most states are not able to absorb the high cost of
renewable power due to financial difficulties. With general elections looming,
it doesn’t look like much will change in the near term unless other states
follow Maharashtra’s lead in enforcing RPOs.
Nadu announced a 1,000 MW tender in December 2012 for PV projects. Tamil Nadu
used L1 bidding process (the lowest bid has to be met by all bidders). This
resulted in a very low (Rs.5.47/kWh; ~$0.09/kWh) bid which was deemed unviable
and prompted TANGEDCO (the state Discom - or government utility) to fix Rs.6.48/kWh
(~$0.11/kWh) as the acceptable bid. Fifty-two developers have signed letters of
intent for a total of 698 MW. It will be interesting to see how these projects
get funded as financial institutions told Mercom that Rs.6.48 (~$0.11) is not a
tariff that will support project financing, especially considering the credit-worthiness
of TANGEDCO. Tamil Nadu said that a DCR will be imposed on state projects, with
the rules coming out in about three months. This is the first time we have
heard of a DCR imposed on state projects.
currently has 857 MW of PV plants commissioned so far under its state policy, the
most of any state or policy. Gujarat, known as the most business-friendly state,
is inexplicably seeking to cut the tariff rate it pays to projects, citing the excessive
profits. Gujarat Urja Vikas Nigam, the state-run bulk buyer of solar power, has
submitted a petition to regulators because of the ”unjustified and windfall
gains” by project owners. Considering that the Chief Minister of Gujarat is a
frontrunner for the position of Prime Minister, if the opposition party wins
the elections, this move to cut tariffs might not go far.
Pradesh has about 300 MW in the pipeline that is due to be commissioned this
Andhra Pradesh government has decided to allow any company to set up a solar
project in the state at Rs.6.49 (~$0.11) per kWh, even to those who have not
participated in the recently-concluded competitive bidding for 1,000 MW. This
announcement comes after a little over 200 MW of projects were selected through
L1 bidding. This is a challenging tariff to get projects financed considering
the rupee is down almost 10 percent this year and module prices are up.
Government of India has also given its initial go-ahead on splitting the state
of Andhra Pradesh into two states, Telangana and Andhra Pradesh. Solar power
projects are expected to be affected and possibly delayed, but we are awaiting
announced a solar policy with a goal to develop 500-1,000 MW of PV projects by
2017. While PPAs were expected to be signed for 225 MW, except for 3 MW, most
are pending due to land acquisition and financing problems.
July 22, in a move that some believe might herald similar actions in other
states, Maharashtra’s Electricity Regulatory Commission (MERC) issued an order
for enforcement of RPOs in the state. MERC ordered 93 obligated entities to
demonstrate RPO compliance by March 31, 2014, for the past four years up to
that date or face fines that could reach as high as Rs.13.40
(~$0.22)/unit. It will be a wait-and-see situation until this latest threat is
backed up with action. The impact of real enforcement could be significant as Maharashtra
is one of the largest energy producing (and consuming) states in India. The
obligated entities will be required to add approximately 400 MW of solar by the
deadline. Of course, MERC will have to set up a monitoring and verification
system in order to prove entities have complied with their requirements or are
subject to fines.
of the 300 MW proposed, Punjab opened bidding for about 250 MW of PV projects.
With average tariffs ranging in the Rs.8.20-8.40 (~$0.13-0.14)/kWh range, these
are some of the healthiest tariffs among Indian states.
Note: Dollar-rupee conversions were calculated at $1 = Rs.60.
The Indian Rupee is trading at record lows.
About Raj Prabhu
Prabhu is CEO of Mercom Capital Group, llc, a clean energy communications and
consulting firm with offices in the United States and India. Mercom consults
its clients on market entry, strategy, policy, due-diligence and joint
ventures. For more information, visit: http://www.mercomcapital.com. Mercom's clean energy reports can be found on: http://store.mercom.mercomcapital.com/page/.