Winter has already approached and the month of December is also knocking our doors. Before we plan for Christmas and New Year holidays, I reckon, this is the perfect time to look back on the past one year journey of our solar industry and do some analysis on it.
This New Year not only brews the heat of election season but will be a spectacle blueprint of democracy stating on how the current government has rendered to the current socio-economic ecosystem.
No doubt! The current government has taken many steps in order to boost the renewable energy sector, predominantly the solar space. Not just in the country but in overseas market as well. A few among the major steps taken by the Central Government includes – Taking active part in fulfilling its commitment towards COP21 accord; taking lead role in the formation of International Solar Alliance; putting ambitious target of achieving 227 GW of renewable energy capacity by March 2022; spreading awareness globally about opting renewable energy to reduce carbon emission; taking decision on safeguard duty; transparent bidding; low tariffs etc.
However, on the domestic front, industry is dealing with various issues and seeks more clarity on issues like, Goods and Services Tax (GST), Safeguard Duty etc.
In my journey of exploring more about the current scenario of solar space in the country – its growth & development, bottlenecks related to the policies, its future as per government’s ambitious plans for the sector and on top of the above, expectations of solar industry from the new government ahead of elections next year. A few among the well-known industry veterans – P. Vinay Kumar, Former CEO, Brookfield India Renewables; Ashish Khanna, President Renewables, Tata Power; Kapil Maheshwari, CEO, Hinduja Renewables; Ashit Maru, Co-Founder, MYSUN; and Pinaki Bhattacharyya, CEO, AMP Solar; discussed extensively about their expectations and major concerns from the present as well as future government, that will take charge post-elections. They hope the New Year aligned with the torching fate of solar industry will resonate a new eye of milestones and achievements in coming years.
“We have lost sight of the original goals in the mad rush to lower (and often unviable) tariffs, which has proved to be the death knell for the industry.”
“We see solar rooftop moving from a fringe option that has been for the last several years to a mainstream source for last mile connectivity in the energy sector.”
“The fall in solar capacity addition in FY19 is attributed to factors like: Safeguard Duty on modules, GST on Solar EPC, INR depreciation.”
“The recent imposition of 25% safeguard duty on imported solar panels has put a dent in the middle of the road.”
“Issues such as safeguard duty and GST pass through had created an overhang because of which new bids/ PPAs were deliberately held back.”
India’s solar capacity addition to fall by 55% in current FY19. Being a year for elections, what are your expectations for 2019?
P. Vinay Kumar
The falling trend is worrisome, especially in the context of the rollout that is needed to meet the 113.49 GW audacious goal. In part the problem is, our fixation with tariffs. While public policy and the transparent bidding have been able to drive prices down sharply,
we need to circle back to the original goals of the solar mission. We need to remember that, the solar mission was conceived as an integral part of the national action plan for climate change. The idea was to decarbonise the Power sector, reduce GHG emissions and align with on our INDC commitment under the Paris Accord. The objective was to achieve climate change objectives and generate power sustainably and economically. The fixation with tariffs, seems to have turned this paradigm over its head. We have lost sight of the original goals in the mad rush to lower (and often unviable) tariffs, which has proved to be the death knell for the industry. While we can attribute quite a few reasons for the recent lack of interest in bidding – principle among the reasons are the unrealistically low tariff caps specified for the bids, uncertainty on safeguard duty beyond its current 3 year remit, increasing interest rates and the weakening rupee. All these need to be addressed if the sector needs to get back on its feet and start running.
Given the fact that at present the solar power market is largely driven by government policies, the outcome of upcoming elections can have some bearing on the near to medium term fortunes of this market. The successive governments at the Centre, irrespective of its constituents in India, have to a large extent been supportive of renewable energy generation. Whereas, the present government which is in the last year of its 5-year term has been particularly more assertive on pushing the share of renewable energy in the overall generating capacity of power in the country.
At a policy level, there is no ambiguity on the importance of the role of renewable energy and solar within this sub-segment in the overall power sector. Of the 175 GW of renewable capacity envisioned by 2022, a good chunk of 100 MW is expected to come from solar alone. This government had also taken a lead role in establishing the International Solar Alliance (ISA) along with other countries like France and some 30 plus countries have already ratified the ISA framework and with a total membership of some 120-odd countries. From an election point of view, we don’t expect any major change to take place at a policy level, irrespective of who comes to power in May 2019. Having said that, investors would perhaps feel more assured if the signals emerging after the general elections assure continuity of the government’s support post-mid-2019.
The fall in solar capacity addition in current FY 19 is attributed to factors like: Safe Guard Duty on modules, GST on Solar EPC, INR depreciation. Rooftop sector has installed more than a GW last year and 2019 will also see a good growth in Rooftop Installations. Utility scale Installation could see a phase of slow growth because of internal and external factors, delay in auctions and lukewarm response to few bids. Having said that, I must also add that solar power has already reached grid parity so the economic benefits will continue to drive this sector in spite of any changes in Government policies.
The expected fall in capacity additions is due to various government changes in policy and execution that have slackened the pace of the industry in the past year. As the country is already behind its solar targets for 2022, the government really needs to seriously consider steps to accelerate the process. However, as elections are just around the corner, solar and renewable energy should be a focus area for both parties, and in 2019 we should expect some announcements and policy changes, that at least on the surface steer the industry in the right direction.
Since it takes around 12 months to commission new projects, the lull in new capacity addition is more a reflection of the slowdown in bidding activity last year across utility and non-utility scale solar. Issues such as safeguard duty and GST pass through had created an overhang because of which new bids/ PPAs were deliberately held back. However, with the government making a sustained effort to address issues affecting the sector approx. 22-25 GW have already been bid out this year.
Keeping project sizes and implementation timelines as outlined under the bids, we can expect these capacities to start coming onstream in 2019 through to 2020. We should therefore expect an increase in new capacity addition next year.
The rooftop solar market continues to register a robust performance growing at a pace of 70% annually. What are your expectations and ambitions for this sector?
P. Vinay Kumar
This is one area that has been neglected by Policy and initiative. If we remember the original target was to achieve a 40 GW (out of the 100GW) by 2022 only by rooftops. Rooftops represent the real strength of solar technology which is the essence of a strong distributed resource. It is modular, scalable and distributed. Our obsession with large grid scale solar plant is warped and to an extent misplaced. The sector despite some valiant attempts is largely unregulated and underserved. Lack of access to finance, weak debt access to Opex operators and a EPC eco-system that is yet mature has been the bane of the sector. The value arbitrages for businesses (commercial and industrial) installing rooftop is immense considering the wide gap between Grid tariffs and the LCOE of rooftop solar. This value driver is a much more stronger incentive for growth for the sector than any subsidy that the government can come up with. Infact many studies have actually shown that incentive structure can actually impede growth in this sector. The need of the hour is to roll back subsidies, improve credit flow and ensure compliance with quality norms in this rooftop sector.
Growth in the solar rooftop market has been very encouraging in the last couple of years. We see solar rooftop moving from a fringe option that has been for the last several years to a mainstream source for last mile connectivity in the energy sector. There is every reason to expect growth in the solar rooftop market in order to continue to witness the positive story in the next few years, particularly because it is backed by the strong socio-economic agenda of the government to provide power for all under the Pradhan Mantri Sahaj Bijli Har Ghar Yojana, or Saubhagya as it is popularly known. It is not just the ‘democratisation’ of power generation with the solar rooftops that is driving the market, but also the role of digital technology (such as Internet of Things (IoT) that is helping even household consumers to turn into power producers with an option to sell back excess power to the grid and save their monthly energy bill.
Another key driver to the growth of bright ideas like solar rooftop is the changing profile of the consumers that are increasingly becoming more enlightened or what we at Tata Power call the ‘Reflex Generation’. These are the new age consumers who take personal responsibility for their consumption behavior and its impact on the environment they live in. So, the cost-effectiveness of solar rooftops that create a good mix of ideas, economic and social objectives, is working well for the future of this market.
Rooftop sector had a slow start as the public needed time to understand the benefits. In our country, most Rooftop projects are driven for electricity savings rather than the desire to go for green energy hence scaling the tipping point was important. Government’s target to achieve 40 GW by 2022 is a progressive move as many rooftop projects have been aggregated for e-bidding making it attractive for large developers who have the appetite for investments in this field. From the growth trajectory of last 2 years, I must say that Roof top solar market will be having a dominoes affect where-in it will become a commodity play for roof owners. The e–vehicles use in India and Government making solar generation coupled with charging infrastructure license free has the potential to drive solar roof top sector.
It’s true that the rooftop solar market in the past year has shown considerable growth, however, the recent imposition of 25% safeguard duty on imported solar panels has put a dent in the middle of the road, and coupled with the weakening Indian currency, rooftop solar has become an expensive proposition for customers especially in the residential segment. But when it comes to rooftop solar, there is continued interest from the commercial and industrial segments as more and more organizations and businesses are looking to go solar. We hope this trend grows going into 2019 and accelerates further.
Rooftop solar is naturally insulated against market related risks that hinder the large solar market such as land acquisition, access to evacuation, tender inconsistencies, SEB financial health etc. and hence has managed to register growth even when the large scale market is slowing down. Having said that, India has not even scratched the surface of its rooftop solar capacity target of 40 GW. Policy uncertainty on issues such as continuance of net metering, exemptions from duties and surcharges have been holding back large scale adoption of rooftop solar.
Another issue is the pace of long term debt financing through multilateral institutions and banks is very slow and not matching the pace of rooftop solar execution.
The sector needs a sustained focus from the government in terms of drawing up a long term strategy outlining and implementing regulations (such as compulsory utilisation of rooftop space, mandating large customers to adopt solar etc) and incentives (such as feed-in tariff and net metering etc).
With the right push, rooftop solar has the potential to drive India towards its fulfilling its target of 40 GW installed capacity by 2022. Thus, promoting rooftop solar may well be the key to India realizing its solar power potential and emerging as one of the largest solar market in the world.
How do you think coordination between different agencies and constraints in transmission capacity and land acquisition is slowing down the utility scale solar power addition in India? And what should be done to overcome this situation.
P. Vinay Kumar
It is easy to berate the government and the Ministry for transmission constraints coming in the way of solar and wind rollout. The problem is actually quite simple to frame. Transmission systems take time to build. Typically, transmission lines of the EHV variety take 2-3 years to get commissioned. While, solar rollouts happen in 6 -12 m of PPA being signed. It is common manufacturing philosophy while designing manufacturing systems with multiple processes, that we project output of the system by looking at the bottleneck processes. So, in essence we need to temper the 113.49 GW solar target, by viewing it through the transmission bottleneck filter. Given the transmission bottleneck and the designed growth in transmission capacity, how much solar can be added – and that needs to be the target.
We cannot have a generation capacity in isolation and independent of the transmission capacity. Transmission has been a neglected piece of the Indian power sector evolution. World over the investment in transmission has often matched investment in generation. In India however, transmission investment have traditionally lagged generation investments. We have to think of speeding up the privatisation of transmission and come up with innovative ways of tackling right of way issues in line construction which are the single biggest determinant of the time to commission for transmission lines. We have shown that evolved policy works well on the road front. There is a need to replicate the same lesson learnt in the T&D sector.
Lack of coordination between different agencies and the constraints on land and transmission infrastructure is not new to the solar power market. By its very fundamental nature and unlike thermal power, the pressure on land in the solar market is a natural and expected constraint that utilities in the renewable sector have to live with. But there is another side to this story, which is the emergence of rooftop solar as a viable option for household, commercial and industrial consumers. If this segment of the market continues to grow as we expect it to, the land related issues would be a thing of the past and not a major risk for investors. It is this idea that makes us believe that the generation of solar power has to be on a utility or large scale concentrated only in select parts of the country. That would be like thinking in terms of thermal power projects to implement solar power projects. The industry and consumers alike are starting to move away from such conventional ideas. Recent numbers are also indicating this trend. Around 1.2 GW of utility-scale solar was added in the third quarter of 2018 that took the total capacity addition in the first half of the current fiscal to 1.9 GW, recording a 43% and 44% fall over the respective periods last year. Reading this trend along with the government’s plans to add 40 GW of rooftop solar by 2022 (within the 100 GW of solar power discussed earlier) tells the full story of the direction we are headed.
Constraints in transmission capacity and curtailment could hamper the growth of solar power was well known to the industry. 24*7 solar power can help to reduce this drawback. The transmission utilities have traditionally been the slow in power sector as government projects take lot of time for execution. The solar power project can be completed in 12 months from conception to commissioning, wherein a transmission project may remain stalled for years due to various challenges. This is changing now in many states. The private sector is also helping in shortening the timelines for mega transmission utility projects. Land acquisitions problems are being resolved as many states have declared dedicated solar parks for solar and hybrid power where the land is aggregated by state departments. To further improve Government land only suitable for solar power should be aggregated at district level and solar parks be planned by all states with a time bound plan which can be leased out on a 30 years lease on very economic terms. This will help developers set up projects with speed while the land will continue to remain with the government.
Not just utility scale but even open access solar projects have struggled with the challenge of lack of coordination between different arms of the state and central governments which is holding up efficient implementation of capacity. Instances such as lack of land ownership records, delays in transferring and converting land and right of way (for transmission lines) have resulted in developers missing implementation deadlines and/or higher project costs. At the same time there are examples of good practices such as single window clearance processes that are being followed by some states. These practices should be adopted by all states and policymakers should support the developers by acting as the coordinating agency for all project related clearances and approvals. This would not only expedite project development but also potentially bring down tariffs further as developers perceive lower risk associated with project permitting and implementation.
If there is better coordination and clarity between government utility agencies, there should be better progress observed in the utility scale.
Financing has always being a challenge in India. Kindly tell us your expectations from our policy makers to ease this situation.
P. Vinay Kumar
Developers complain about financing when they go to lenders with unviable projects. It is bogey that is often raised in such cases. While admitting that there are some systemic factor playing out in the banking sector and the NBFC sector at this point of time, which might stifle credit flow to the power sector and make raising debt a challenge, I really think there is no deep problem that would make the sector unattractive to lenders other than aggressive tariffs and poor offtaker quality. Both need to be addressed to make debt financing easier. INVITS and other structures should improve availability of financing and this is bound to happen over the next few years.
Financing challenges for utilities in solar power are due to a combination of several factors including safeguard duties, aggressive bidding, and high operational costs. The combined effect of these could be a challenge for the viability of largescale solar projects in securing money to bankroll such projects. The government, at state levels, are also pushing to lower the tariff rates for solar power which is now consistently heading south with new records set recent bids that went well below Rs 2.5 per unit in some markets. While lower tariff is good for greater adoption of clean energy like solar, it does add some pressure on generating companies to maintain the financial viability of particularly large-scale projects. This is also the reason why we have seen a few projects been scrapped in the recent past. As mentioned earlier, these challenges can to some extent be overcome by stronger adoption of rooftop solar where generating capacity moves from large utility-scale projects to very small ones where the consumer takes full control of the generating part as well.
Solar power projects are getting bankable than before as the financial institutions have begun to understand the PV technology and the returns. However, projects bagged at very low tariffs will face challenges when these have to operate on long term basis. Developers have to be very professional in managing their solar power assets where they are able to maximise their returns. I feel good asset management with global KPIs will differentiate the asset classes. Policy makers should provide single window clearance to solar projects in all states so that the project approval timeline can be minimised. Financial closure after due diligence should be available in few weeks rather than 3-4 months being taken at present. A standardised method for financial approval of solar power projects will help make the process easier for developers and remove bottlenecks of most lending institutions. Rising interest rates have been a concern for IPP’s to raise Debt.
One of the biggest inhibitions and challenges Indian customers face when considering solar is financing and with recent policy changes and the weakening Indian currency, it looks to continue to be a challenge. Policy makers should really consider the current financial situation and aim to make solar affordable for the end consumer. There also needs to be greater interest from banks and NBFCs to offer consumers financial options and loans to help them afford solar better. To deal with this challenge we at MYSUN have begun offering customers flexible payment options and recently we have unveiled an exclusive deferred payment plan exclusively for SMEs and MSMEs, where a customer has to just pay 25% of the total cost, while their savings from the solar system pays the remaining balance cost.
Securing debt has always been a challenge in the Indian solar industry and lenders are only now getting comfortable with lending to utility scale projects. However, that is not the case for the rooftop/ non-utility segment. Lenders are yet to come to grips with the unique characteristics of this segment and there is no established framework for lending in this space. Ideally, policymakers should address lender concerns around sustainability of policy provisions for the non-utility scale projects. Policy makers should ensure that once a policy has been announced the same should not be revoked or modified in order to avoid creating policy uncertainty in the minds of the lenders.
Apart from this the policy makers should also speak with lending agencies to understand their concerns with long term lending to non-utility segment and address those through appropriate policy measures.
Additionally, the State electricity regulators must be empowered and given responsibility to prevent generation or distribution companies from backing out of their commitments and penalize them for not honoring the payment timelines as per the PPAs/ failing to meet their commitments. This would improve bankability of state discoms and in turn boost lender confidence towards the sector as whole.