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India Solar Handbook 2017 

India is expected to become the third biggest solar market worldwide in 2017 with new capacity addition of 8.8 GW, a rise of 76% over 2016

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The Indian government has released final Goods and Services Tax (GST) rates under the new indirect tax regime proposed to be rolled out from July 1. The biggest surprise for the power and renewable sector is the announcement of 18% tax rate for solar modules as compared to a present effective rate of zero. In contrast, GST rate for coal has been lowered to 5% as against current rate of 11.69% and most other renewable projects and equipment including wind mills, waste to energy plants, tidal energy plants and bio-gas plants and even solar power based devices or generating systems have been classified under the 5% rate bracket.

  • The new regime will result in an increase of 18% in module cost, about 12% in inverter cost and 3% in all service costs – increasing overall project cost by about 12%;
  • New rates would hit more than 10 GW of ongoing utility scale projects and pose a threat to their viability;
  • It is critical for MNRE to step up and play a coordinating role with central and state regulators to ensure that the process of tariff adjustment is as smooth as possible;

As of today, most states levy a 5% Value Added Tax (VAT) on solar modules. However, in practice, the actual tax rate levied is zero because of waiver on import duty and VAT in many states. Effective tax rate on solar inverter imports will also go up from 5.15% to 18%. The new regime will therefore result in an increase of 18% in module cost, about 12% in inverter cost and 3% in all service costs – increasing overall project cost by about 12%. Importantly, we do not believe that the new rate structure will give any advantage to domestic manufacturing as cost of import of raw material, including cells and wafers, will go up in the same proportion.

There was widespread expectation that solar modules would be classified under zero or 5% bracket to continue growth momentum in the sector. However, sharp reduction in equipment costs and solar tariffs seems to have convinced the government that the sector doesn’t need any more financial incentives.

Nonetheless, more than 10 GW of ongoing utility scale projects would be hit badly by the new rates. The Ministry of New and Renewable Energy (MNRE) has been verbally assuring the industry that it will be insulated from any GST impact by passing any burden through to the offtakers. But we believe that this process will be complex and challenging. First, there are multiple templates for power purchase agreements (PPAs) in the country with huge variation in change in law provisions. Second, the DISCOMs will obviously resist any tariff increase particularly when tariffs for new auctions are reaching all-time lows. Third, the entire process for tariff determination, ratification and documentation amendments would easily take up to 6 months or even more. Meanwhile, developers will be under pressure to complete projects on time and lenders will be unwilling to fund extra costs. It wouldn’t be surprising if this process leads to cancellation of some projects altogether.

It is critical for MNRE to step up and play a coordinating role with central and state regulators to ensure that the process of tariff adjustment is as smooth as possible.

We believe that the long-term prospects of the industry would not be impacted by GST move as an increase in tax rates will be quickly offset by falling costs. A commercially viable, non-subsidy dependent sector is naturally more sustainable in the long run. However, we do wonder why solar equipment is attracting higher taxes than coal or other power equipment.

FULL STORY

Last week, Solar Energy Corporation of India’s (SECI) 750 MW utility scale auction in Bhadla solar park saw tariffs fall to a new astounding low of INR 2.44 (US¢ 3.79)/ kWh. This comes after much brouhaha over tariffs falling to INR 3.25/ kWh (levelized) and INR 3.15/ kWh in Rewa, Madhya Pradesh and Kadapa, Andhra Pradesh respectively in the last three months. At the same time last year, tariffs for most tenders were observed around INR 4.60 (US¢ 7.1)/kWh mark. What explains a tariff reduction of almost 50% in one year or 25% in just three months?

Winning bidders for the two tenders in Bhadla include ACME (INR 2.44/kWh, 200 MW), Softbank (INR 2.45/kWh, 300 MW), Phelan (INR 2.62/kWh, 50 MW), Avaada (INR 2.62/kWh, 100 MW) and Softbank (INR 2.63/kWh, 100 MW).

A key obvious contributor to falling tariffs is sharp reduction in module prices, down almost 30% in the last one year. And developers seem to be pricing in similar price reduction going forward – at about US ¢ 23/Wp in the next 10 months. Although module industry dynamics remain benign, it seems a very bold call to price such reduction in base case.

Fall in Indian debt cost by up to 1.00% per annum over the last year (equivalent to tariff reduction of approximately INR 0.10/ kWh), higher irradiation in Bhadla (INR 0.15/ kWh), lower solar park charges (INR 0.05/ kWh) and stronger Rupee go some way in explaining the tariff reduction. Another relevant factor is improvement in SECI’s credit rating. The participating bidders’ list in Bhadla tender shows that both Indian and international developers are growing comfortable with SECI offtake risk.

But the other very important factor is increased competition amongst developers due to fewer new tenders and complete lack of pipeline visibility over the next year. We have maintained for some time that the Indian solar market is getting overheated and that these tariffs are unsustainable.

Falling tariffs are a double-edged sword for the sector. They make solar power more attractive for consumers but are also making investors and lenders jittery. In the near term, they are also creating uncertainty in the minds of policy makers and creating new risks for older projects auctioned at 2-3x higher tariffs.

FULL STORY

The pace of new tender announcements and completed auctions has slowed down significantly in the last year (-68% and -59% respectively). Southern states have frontloaded capacity buildout – Andhra Pradesh (installed plus tendered capacity of 74% as against March 2022 target), Telangana (70%), Karnataka (69%) – and are bound to slow down. Amongst other large states, Maharashtra and Gujarat, like many others, have surplus power availability and remain unenthusiastic to large solar procurement programs.

  • Some states that have completed auctions with prices of INR 4.00-5.50/kWh in the last 6-12 months are refusing to sign PPAs creating uncertainty in the market;
  • Visibility for new tenders has dropped sharply because of surplus power supply in most parts of the country;
  • Gujarat and Uttar Pradesh could be the two major demand drivers for solar power in the coming years;

Rewa and Kadappa tender results have given new food for thought to policy makers, DISCOMs, project developers and investors. Greenfield solar power at current prices of INR 3.00- 3.50 (US 5¢)/ kWh should create strong demand pull in the medium-to-long term. But in the near term, it is leading to buyer’s remorse for projects already built and under development. In particular, states that have completed auctions with prices of INR 4.00-5.50/kWh in the last 6-12 months (Jharkhand, Andhra Pradesh, Haryana) are refusing to sign PPAs, which is creating uncertainty in the market.

With states unwilling to sign new PPAs, both National Thermal Power Corporation of India (NTPC) and Solar Energy Corporation of India (SECI) are delaying proposed tenders and the pipeline of tenders is running dry. Recently, Gujarat also dropped its plan for setting up a new 4,000 MW coal-based power project because of sufficient supply of power. But encouragingly, the state has indicated that it wishes to focus on renewable power for future procurement. Gujarat is setting up two new solar parks for 500 MW each but the state’s price expectation is believed to be around INR 3 (US 4.7¢)/ kWh in the wake of recent auctions.

BRIDGE TO INDIA believes that as one of the few large states with high power deficit, Uttar Pradesh (UP) could be a major demand driver for solar power in the coming years. The state has the largest peak demand-supply gap in the country and rural electrification rate is as low as 60%. Even though UP has historically been a tough state for private businesses because of poor law and order situation and highly erratic power supply, the state is making steady progress under central government’s UDAY scheme. The new BJP government also seems more business friendly and has made reliable power supply as one of its core policies.

To know more about the performance of various Indian states and our long-term estimates for the market including results from our latest India Solar CEO Survey, read our newly released report – India Solar Handbook 2017.

FULL STORY

We are going to introduce electric vehicles in a very big way,” India’s Minister of Power, Piyush Goyal, stated last week. The Ministry of Heavy Industries and the NITI Aayog are working on a comprehensive policy for promotion of electric vehicles. This policy is expected to provide support for both domestic manufacturing and scaling consumer demand.

  • India’s electric vehicles industry is nascent with just 0.1% global market share and almost no competitive advantage;
  • Other countries, particularly China, are spending billions of dollars subsidizing local companies to push them at the forefront of storage and electric mobility technologies;
  • Growth in electric vehicles can facilitate greatly in energy transition but the market poses formidable infrastructure and financing challenges for Indian policy makers;

India has made little progress in electric mobility since the announcement of the National Electric Mobility Mission Plan in 2013 aiming for over 6 million electric/hybrid vehicles by 2020. As per available government data, only 790 battery operated electric passenger cars were sold in India in 2015-16 (global market share of 0.1%). The National Electric Mobility Mission Plan provides financial incentives of up to INR 138,000 (USD 2,100) for electric and hybrid vehicles. But the budget of INR 1.75 billion (USD 27 million) for FY 2017-18 is too low considering that the ministry’s own estimate for the program is INR 140 billion (USD 2.2 billion) annually.

Many automotive groups including Mahindra, Toyota, Maruti Suzuki, BMW and Volvo already sell battery operated electric or hybrid models in India. Other suppliers are expected to join this market soon but these companies are looking to rely almost completely on imports for key components including batteries. So far, the only exception is a recent announcement from Suzuki Motor Corporation, Toshiba Corporation and Denso Corporation to manufacture lithium-ion battery packs in India.

In comparison, China is a world leader in electric vehicles with over 50% global annual market share. Local manufacturers such as BYD and BAIC are world leaders in this market. The country is considering ramping up progress even further and wants 8% of all vehicles to be electrically powered by next year. China is spending billions of dollars subsidizing local companies to push them at the forefront of electric mobility technologies. It accounted for half of the USD 16 billion in subsidies offered to new-energy car makers in the past decade.

Electric vehicles market is growing rapidly worldwide fueled by stricter environmental measures, technology improvements and cost reduction in energy storage. It is also seen as a vital link in achieving energy transition. That explains the lead taken by the power minister, Piyush Goyal, on the electric mobility initiative despite automobiles falling under the ambit of the Ministry of Heavy Industries. Growth in sales of electric vehicles will lead to more demand for (renewable) power, help in creating a flexible demand source to tackle intermittency issues of renewable power and reduce reliance on (mostly imported) oil.

The ambitions now need to be backed with actions. But while India has a large domestic market, it lacks the fiscal capability and ambition of China and the technology expertise of Japan or South Korea. There are also formidable infrastructure and financing challenges and addressing these will not be easy.

FULL STORY

First round of bids was submitted for Solar Energy Corporation of India’s (SECI’s) 750 MW tender in Bhadla Solar Park, Rajasthan last week. A total of 33 developers are believed to have submitted bids for an aggregate capacity of 8,750 MW – an oversubscription of almost 12x. Coming in the wake of intensely competitive bidding in Rewa and Kadappa tenders, the signs are that competition for new projects is getting fiercer particularly as the supply of new projects has slowed down in the last twelve months.

  • The large oversubscription in Bhadla can be attributed primarily to easing up of new tender announcements and greater private sector interest in the sector;
  • Lower solar tariffs should ideally provide demand boost for solar projects but ironically they are adding to short-term slowdown as central and state governments reconsider procurement policies;
  • We expect a slight reduction in new solar capacity addition in India in 2018 before activity picks up again from 2019 onwards;

Most of the active project developers in India including Adani, ReNew, Acme, Azure, SolaireDirect (Engie), FRV, Sembcorp, EDF, Canadian Solar, Aditya Birla, Shapoorji Pallonji, Mytrah, Fortum and Trina Solar have participated in this tender. Notably, Welspun has made a comeback after the sale of its assets to Tata Power. ReNew, SoftBank and Saudi based Alfanar have submitted bids for the entire 750 MW capacity. Adani and SolaireDirect have bid for 550 MW and 500 MW respectively.

We believe that the large oversubscription in Bhadla tender is primarily due to slowdown in new tender issuance but improved credit rating of SECI is also a relevant factor.

The Indian government’s announcement of 100 GW solar target led to a big surge in new tender announcements in H2/2015 and H1/2016 with some large states front-loading their solar power procurement programs. At the peak of tender activity in 2016, SECI tenders were oversubscribed by only about 2x (Maharashtra 450 MW, Andhra Pradesh 400 MW) or even undersubscribed (Odisha 300 MW, Karnataka 950 MW). But growing interest from many large global and domestic solar developers in the sector combined with slowdown in new tenders is leading to a tough competitive environment for project developers.

Figure – Solar tender auction completion

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The main problem here is sustaining a high level of new solar power demand from states when many of them are facing power surplus. Solar tariffs in the sub-INR 3.50/ kWh (US¢ 5.4) range should provide huge demand boost for solar power in the long run but ironically, lower tariffs have led to unique challenges in the short-term. Central and state governments are reconsidering their procurement policies leading to postponement of some tenders. Meanwhile, some DISCOMs, having completed auctions with higher tariffs (notably Jharkhand and Odisha), are now having second thoughts on signing PPA’s.

We believe that this short-term lull will lead to fierce competition for new tenders and a slight reduction in new solar capacity addition in 2018 before activity picks up again.

 

 

FULL STORY

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