Forecasting a brighter future
By Raj Prabhu
It has been a quiet year for the Indian solar sector, with installations at 900 MW so far this year and final numbers forecasted to be similar to last year. With 420 MW of concentrated solar power projects missing commissioning dates, India may not register any significant year-over-year installation growth for 2013, even as the global solar market is forecasted to grow ~20%.
The guidelines and requests for selection (RfS) have finally been published for Phase II Batch I, for 750 MW of photovoltaic (PV) projects. Unfortunately, India has decided to include domestic content requirements for half (375 MW) of PV projects, which may be enough to cause a trade dispute but not enough to help domestic manufacturers.
The challenges faced by the economy this year also affected solar industry. The market has seen high inflation, a ~8% rise in module prices and a ~15% rupee depreciation, all of which contributed to project costs. At the same time, reverse auctions in India continue to defy odds and go in the opposite direction with record low bidding, especially in states that have an L1 type bidding mechanism (lowest bid must be matched by all) in place. Current economic conditions, solar irradiance and off-taker creditworthiness do not look to be reflected in these bids. With bids fluctuating almost 50% over the year when comparing state-to-state, it is imperative to have deep insight and market intelligence to be successful.
India is entering election season with state elections in Chhattisgarh, Madhya Pradesh, Mizoram, Rajasthan and Delhi due next month. According to the guidelines by the Election Commission of India, non-agricultural land transactions cannot be approved by the government during election season without the approval of the Chief Electoral Officer. This will delay any solar projects that are in the middle of land acquisitions by a few months.
With some states yet to sign power purchase agreements (PPAs) and upcoming state and general elections, our preliminary estimates are tentatively at 1,750 MW of solar installations in India for 2014. Although the projected installation growth looks impressive, it includes 420 MW of CSP projects that did not get installed in 2013.
Current market conditions: Project developers are unsure they can make profits at the low bids we see in some states, that utilities are objecting and putting up hurdles against large corporations starting captive power projects. They are afraid to lose these big paying customers but they are also not providing quality power without cuts. This is a development we will continue to monitor.
Surprisingly, manufacturers were upbeat, feel that demand has improved, and hope for continued domestic content requirements. In our conversations with manufacturers representing close to 50% of the solar manufacturing capacity in India, capacity utilisation rates were quoted in the 70-100% range, which is completely at odds with the ~25% utilisation rates quoted in the media in an effort to get help from the government.
Financial institutions are very focused on quality projects that have strong credible partners and good engineering, procurement and construction (EPC) providers. Panel manufacturer credibility is very important to some banks. One large bank said that they have not yet financed a single project so far that is using domestically-manufactured panels. They see DCR as a concern. Because of low bids and credit rating of utilities, banks, fearful of inconsistent payments, are concerned about lending to projects. Most said that they need more clarity before they lend on VGF projects.
Policies in select state are:
JNNSM – Phase I
Phase I Batch I: PPAs for Batch I projects were signed for 610 MW (140 MW-PV, 470 MW-CSP). 140 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 150/470 MW CSP projects are in advanced stages of development. Once commissioned, these projects will receive tariffs between `10.49-12.24 (~$0.18-$0.20), a premium of almost 40-50% over new PV projects (most of which are currently bidding in the `6.50-8.00/~$0.11-0.13 range).
These projects will not be penalised for delaying up to a year. It is time to eliminate the required PV: CSP ratio for good and let the market decide on the best and most cost-effective technologies.
Phase I Batch II: 330 MW of the 340 MW in Batch II have been commissioned with the remaining 10 MW delayed and most likely will be canceled. Under JNNSM – Phase II, as previously mentioned, after almost a year of delays, final guidelines and RfS for JNNSM Phase II Batch I were published recently.
750 MW of grid-connected PV projects will be auctioned under the viability gap funding scheme. Because of the delay in announcing Phase II, these projects are not expected to be commissioned until at least May 2015.
Out of the 750 MW, 375 MW will have a separate bidding process and will have a domestic content requirement under which solar cells and modules used must be made in India.
Under VGF, developers will sign a PPA for 25 years to sell power at a fixed tariff of `5.45/kWh (~$0.09/kWh). In the case of accelerated depreciation, the tariff will be reduced by 10% to `4.75/kWh (~$0.08/ kWh). The maximum limit for VGF is 30% of the project cost, or `2.5 crore/MW (~$416,667/MW), whichever is lower.
Another major change in the guideline compared to the draft proposal is the payment schedule which has not been welcomed by developers. The VGF payment will be released in tranches: 50% on successful commissioning of the full capacity of the project, and the rest progressively over the following 5 years (10% each year) subject to the project meeting generation requirements (CUF) within a specified range per the policy guidelines.
Tamil Nadu: The state announced a 1,000 MW tender in December 2012 for PV projects. It used an L1 bidding process.
Fifty-two developers have signed letters of intent (PPA due to be signed shortly) for a total of 698 MW at `6.48 (~$0.11/ kWh). Developers have 10 months to commission these projects from the date of PPA signing.
Gujarat: The state has 857 MW of PV projects commissioned under its state policy. Gujarat, known as a business friendly state, inexplicably sought to cut the tariff rate it pays to projects, citing excessive profits from project owners.
The petition for this cut was rejected but Gujarat Urja Vikas Nigam Limited (GUVNL) is planning to file an appeal with regulators.
Andhra Pradesh: has decided to allow any company to set up a solar project in the state, including those who have not participated in the recently-concluded competitive bidding for 1,000 MW.
The Government of India has also given its initial go-ahead on splitting the state of Andhra Pradesh into two states, Telangana and Andhra Pradesh which could happen next year.
Punjab: Of the 300 MW proposed, Punjab opened bidding for about 250 MW of PV projects. PPAs are expected to be signed for these projects next month.
Kerala: The 10,000 rooftop solar power plant programme is being implemented of which approximately 6,000 installations are complete. The remaining 4,000 installations are up to 1 kWp in size and meant for captive use. The government expects to develop 330 MW of solar projects of which 50 MW are due to be commissioned by December 14, 2013.
The author is CEO, Co-Founder of Mercom Capital Group.