Indian investors are right now sceptical about making any investments in the solar sector. This is mainly due to the fact that JNNSM has been in waiting mode for months, as the Central government has been indecisive and has failed to take a stand on how JNNSM should move forward. The main reasons behind this delay are political controversies over the domestic content of solar products and budget problems
By Srabani Sen
Tuesday, May 27, 2014: Despite immense potential, solar power is an underutilised energy resource in India. Currently, India is the fifth largest consumer of energy in the world, and will rank third by 2030. The country receives over 5000 trillion kWh of solar energy every year, which is far higher than the annual power consumed in India. Hence, India has huge potential for solar PV and, with the right government policy support, can become a major player in the global solar market. Why, then, is this valuable resource being underutilised?
India’s solar PV market grew by 75 per cent in 2010 and by 50 per cent in 2011. Solar installations in India amounted to a capacity of 1004 MW in 2013, compared to 986 MW in 2012.
However, in 2014, new solar installations are forecast to amount to just 1000 MW, which is similar to the 2012 and 2013 levels, indicating that there will be no growth in solar installations this year. Moreover, barring a few exceptions, no solar PV power plant is expected to be commissioned this year under the Jawaharlal Nehru National Solar Mission (JNNSM), unless the government approves the first batch of Phase II of the JNNSM. The Cabinet is believed to be still evaluating the proposal for various reasons, including the lack of funds and uncertainties over starting new projects before the Lok Sabha elections.
—Pramath Ranjan, general manager, channel sales, solar division, Jakson Engineers Ltd
WHY IS THE PACE OF PV INSTALLATION SLOW?
There are multiple factors behind the slow pace at which solar power installations are growing in India, particularly during the last two years. Most of the solar power projects have been stalled because, currently, India is in a trade dispute with the US at the World Trade Organisation (WTO), regarding the domestic content requirement (DCR) in JNNSM Phase II projects. The US claims that DCR rules discriminate against US manufactured solar cells and modules. In Phase II, India has extended DCR rules to include thin film technology as well.
Says Vivek Chaturvedi, chief marketing officer, Moser Baer Solar, “There was not only very little new business done last year due to delays in JNNSM Phase II, but Tamil Nadu (TN) and Andhra Pradesh (AP) faced several policy and power purchase agreements (PPAs) related challenges, which had an impact on installations last year.”
Another major cause for the slow growth rate in solar power installations is the difficulty faced in making a project economically viable. This is because of the reverse auctions that have pushed down profit margins. High initial costs and lack of easy and consistent financing options also form barriers in solar installations.
According to Pramath Ranjan, general manager, channel sales, solar division, Jakson Engineers Ltd, fluctuations in the dollar’s rate and the global economic slowdown, which may get reversed in the second half of this financial year, have also hit the Indian solar market. “Fewer success stories, and the time frame for the return on investment ranging from eight to 10 years, compel investors to think twice,” he adds.
Another hurdle in the deployment of large scale solar installations is that the strong demand for PV has far outpaced the supply, and hence, stalled the growth of the solar sector.
“Improper formulation and implementation of appropriate policies can be cited as another hurdle,” says Ritu Singh, manager, business development, Chemtrols Solar Pvt Ltd.
Adds Gopal Darbari, managing director, Effectron Luminex Ltd, “No disbursement of subsidies by the Ministry of New and Renewable Energy (MNRE) and the state governments, despite submission of claims by installers and buyers, is deterring new buyers from investing in the solar sector.”
Moreover, procedural problems such as the need to secure financing from multiple sources and approvals from several agencies like the MNRE, the Indian Renewable Energy Development Agency Ltd (IREDA), the Planning Commission, and the Ministry of Agriculture and Rural Development, further delay installations.
According to draft guidelines for Phase II of the JNNSM, the MNRE had planned to allocate 800 MW through a ‘bundling of power’ mechanism, and 750 MW through a viability gap funding (VGF) mechanism. MNRE has been trying to arrange for unbundled power from the Ministry of Power (MoP), to carry out the tariff-based bidding component of allocations based on the bundling of power. However, as there is only a limited amount of unbundled power available and all the states demand access to it, the MoP has been unwilling to provide any more unbundled power for JNNSM. Consequently, the MNRE has now decided to go ahead only with allocations for 750 MW based on VGF. Under this mechanism, a standard tariff will be offered by the power distribution companies. This would be higher than their standard price of procurement as this would allow them to meet their renewable purchase obligations (RPOs) as well.
According to market experts, a shift from feed-in tariffs (FIT) and towards VGF will promote the installation of sub-standard projects. To address this issue, the guidelines envisage 25 per cent payment being made at the time at least half the major equipment is delivered at the site, 50 per cent on completion of the plant and the rest after one year of operations, subject to the project meeting the power generation requirements.
Raghunandan, vice president, Kotak Urja Pvt Ltd, aptly explains the situation. He says, “The question is, whether Phase II is going to be an experiment? It is to be remembered that solar power plants are always estimated to function for more than 25 years, with a performance warranty of the modules for almost the whole period. The most important element of installation is quality and following the highest standards in installation practices, which make the warranties meaningful. Unfortunately, none of the project developers who forayed into MW scale power plants have well established experience.” For example, a 40 MW power plant in Rajasthan was assessed for its performance and quality of product components only after a year of commissioning. Of the 160,000 modules (250Wp each), 6000 modules (3.75 per cent) were found to have developed the defect of hot spot failures. This defect was found when the investigating agency did infrared imaging of the modules. The investigation revealed that the yield also dropped, and this was due to other factors such as loose connections, cable damages, potential induced degradation (PID) of PV modules, poor grid uptime, inverter-related component failures, etc.
“This example clearly indicates that the industry has not yet reached the ‘finish line’ when it comes to learning. This has indirectly resulted in the slow pace of installations in India. A successful business model will involve not only a good technology, but also financial viability of the lifecycle performance. A project will attract good financial support when it proves the returns, and the proof of return lies in the quality,” says Raghunandan.
However, Vivek Chaturvedi believes that there will be large scale activities in 2014, as new business has gained significant traction and PPAs are being signed. Also, under JNNSM Phase II, 750 MW worth of bids will take place, besides the new bids in Madhya Pradesh (MP) and Rajasthan, which have been completed. Some power projects and PPAs will also get signed this year in Uttar Pradesh (UP) and Punjab.
STATES THAT DID WELL IN 2013
Many states across India are competing with each other to install large scale solar power projects. A number of states have also announced ambitious solar power policies and have organised competitive auctions of solar power projects.
States like Gujarat, Rajasthan, MP and Karnataka have done extremely well in solar installations, and have well planned solar policies. They have commissioned new solar power projects as well.
Gopal Darbari points out that although Gujarat and Rajasthan did very well in solar PV installations, they did not do much in the off-grid domain. PV plants help private power distributors/operators and the industry. People in rural areas cannot afford to pay the security money for solar energy connections or for electricity every month. They need off-grid products. Vivek Chaturvedi informs that TN, Kerala, AP and Chhattisgarh did well with respect to off-grid installations.
The policies of TN and AP are under litigation for various reasons. Ritu Singh states, “Considering the tremendous amount of sunlight available in the Indian subcontinent, we feel that every Indian state can come up with PV installations. What is lacking is proper government support and policies. States and Central governments should together, with enhanced understanding, execute the policies.”
States Raghunandan, “While a few states announced very ambitious solar policies, they also introduced regulatory constraints, which are artificial in nature and will curtail the aggressive growth of the sector. The policy makers are being too careful about regulatory elements, not considering the fact that the discoms are not ready to implement the net metering system. This has further slowed down the pace of solar power installations. It is already over 10 months since the Karnataka Regulatory Board announced the solar power rate as Rs 9.56 per unit, but till now, not a single demonstration plant on net metered solar power has been proposed, which otherwise would have kick-started a big movement.”
States that have the potential: On the other hand, TN, AP, Odisha, Haryana, UP, Punjab, the states of the northeast, Sikkim, Bihar, Chattisgarh and Uttrakhand have great potential for solar power generation. Some of these states have also drafted their own solar policies.
Worst performers: However, among the slow movers are the high energy consuming states like Delhi, Maharashtra, Punjab and AP. West Bengal (WB), Manipur, Chhattisgarh, Jharkhand, Pondicherry, Jammu and Kashmir, Tripura, Kerala and Mizoram are also moving forward at a very slow pace. WB has got its first 5 MW plant; a few solar plants have been commissioned in Delhi, Jharkhand and Chhattisgarh as well, but when compared to their potential, these states have not performed well. Despite getting 350 days of sunlight a year, Delhi has set a meagre target of generating just 2 per cent (of its needs) through solar power and has achieved only 0.01 per cent.
There is no development in some states like Himachal Pradesh, Assam, Arunachal Pradesh, Nagaland, Sikkim, Meghalaya and Goa. They do not have any solar policy either.
“The finance sector is unprepared to handle solar power plant business. Except for the micro finance offered for off-grid, rural and pumping projects through government channels, there is no drive in the banking sector to offer backing to the grid market. Bankers are yet to realise the viability of solar power plants. While Gujarat has demonstrated how things can change, states are yet to release this indirect benefit to the government,” says Raghunandan.
Gujarat has led in the implementation of solar power plants in 2013. While the state faces issues of over capacity of solar power due to its total installed capacity exceeding 18000 MW, the potential for states like Maharashtra and Rajasthan to take over and lead in Phase II is very high. “Developers see a higher potential in these two states due to land availability at cheaper prices, the readiness of state grids, grid uptime being relatively higher than other states, and higher radiation,” adds Raghunandan.
In 2012, TN had announced an ambitious plan of setting up capacity to generate 3 GW of solar power (to be achieved by 2015), but till date, the state has been able to generate only 30 MW of solar power. “This gap is mainly due to over enthusiasm. Also, the legal interventions by consumer unions like Spinning Mills Union and Electricity Consumers Association, are slowing down the implementation in TN further,” informs Raghunandan.
WHY INDIAN INVESTORS ARE SHYING AWAY
Although the Indian solar market is struggling, the future looks positive. However, Indian investors are right now sceptical about making any investments in the sector. This is mainly due to the fact that JNNSM has been in waiting mode for months, as the Central government has been indecisive and has failed to take a stand on how JNNSM should move forward. The main reasons behind this delay are the political controversies over the domestic content and budget problems.
Vivek Chaturvedi, however, does not believe that Indian companies are not investing in the solar industry. “The majority of the investments in the solar sector are driven by Indian companies. And if cost, availability of funds and ease of doing business is ensured, the existing policies can lead to a significant increase in investments. However, domestic companies are looking for a level playing field,” he adds.
According to Pramath Ranjan, “Lack of a consistent solar policy is keeping the Indian companies from investing in the solar sector. Subsidies are only on paper (the MNRE lacks funds currently). The late approval of projects and late disbursement of subsidies are the main reasons for companies shying away from investing in the sector.”
Ritu Singh feels that the solar industry is yet to prove itself as a good investment. Investors looking for an average rate of return of 18-22 per cent do not consider this industry as reliable enough to invest in. Some companies that are currently investing in the solar industry in India are Jakson, Mahindra, Vikram, Welspun, Azure Power, Tata Cleantech, Green Infra, Effectron, etc.
Project developers consider the following parameters while investing in solar power plants — state grid demand, grid uptime, land costs, land policy of the state, cyclone and flood frequencies, etc. States like Gujarat, Rajasthan, Maharashtra, AP, MP and TN offer a developer-friendly land procurement process.
Even though Karnataka has a bigger manufacturing base of PV modules and inverters, the state is not investor-friendly when it comes to land procurement. When we look at the allotment of projects by the Solar Energy Corporation of India (SECI) in JNNSM Phase II, Waree Energy leads in the DCR segment with 50 MW and Azure Power leads in the open category with 40 MW. The lowest VGF is sought by Swelect Energy (Rs 13.5 million/MW) and the highest by Welspun (Rs 24.5 million/MW). In the open category, Gujarat Power Corporation has sought the lowest VGF of 1.75 million/MW and Sunil Hitech Engineers the highest of 13.5 million. Interestingly, four government-owned companies have also been allocated projects.
“Even though the lifecycle performance of the power plants is yet to be established, the bullish stance of the industry is commendable. The industry has demonstrated that its enthusiasm has increased from Phase I to Phase II, now it is for the policy makers to pave the way for increased participation,” says Raghunandan.
How the majors are faring: Let’s look at how some of the solar giants are doing in the market. Premier Solar Systems, like most other module manufacturers, is currently manufacturing at a lower capacity due to the increasing imports of cheaper modules from China and Taiwan. It is, therefore, banking on its EPC (engineering, procurement and construction) business and taking up projects like the 50 kW carport installation at Hyundai’s India centre.
Tata Power is also increasing its module exports to Europe and the US. However, it says that its domestic cell and module manufacturing facility is ‘running at full capacity.’
Moser Baer is currently concentrating on the Japanese market, as it sells around 80 per cent of its modules in Japan at a higher price compared to what it can get in India.
However, some overseas companies are investing in the Indian solar market. Recently, three Canadian companies, through a consortium, have proposed to invest about US$ 1 billion in Odisha, for developing a 500 MW solar power plant and solar panel manufacturing unit.
IS INDIA THE RIGHT PLACE TO INVEST IN?
Despite all the hurdles and the slow pace of growth in the solar industry, insiders believe that the Indian solar sector is absolutely the right place to invest in. “With abundant sunny days, vast tracts of barren land, and the country’s energy deficit, India is an ideal country for solar installations,” says Vivek Chaturvedi.
Ritu Singh feels that from the perspective of infrastructure and government support, India lags behind.
Gopal Darbari, however, says that with millions of users without grid power in rural areas, India has great potential to develop such systems not only for lighting but also for rural drinking water supply, irrigation, etc. “Any power system built on solar PV power is a quick starter, with the advantage of being able to expand when the needs arise. One thing that is very important in all such installations is the concept of ownership, that is, every user in rural areas must contribute towards building the solar power system. Nothing should be for free,” he says.
“India is indeed the right place for the deployment of solar PV installations. Probably the right time is yet to come. Most solar PV power plants are available with a CUF (capacity utilisation factor) of between 15-20 per cent and yield of around 1.5 million units per MW/year. In spite of the key deliverables being in place, the pace of installation is slow. Sometimes, it appears that the slow pace is a result of slow moves by the policy makers. If the industry response to the Phase II of the JNNSM is analysed, it can only be called overwhelming. While Phase II intends to develop 750 MW, applications are in for 2170 MW. This is a clear indication that the industry is aggressive while the slow pace is mostly due to the conservative approach of our policy makers,” concludes Raghunandan.
What’s the cure? Vivek Chaturvedi points out that the availability and lower cost of capital, the ease of doing business, single window clearance, implementation of solar purchase obligations, announcement of tariffs in line with wind power, net metering for smaller installations, and a level playing field for manufacturers will drive growth in the Indian solar sector.
Gopal Darbari, on the other hand, feels that a defined policy for MW-scale solar farms and off-grid micro power systems for rural people will help. The CSR (corporate social responsibility) route, with incentives to companies for developing micro power systems in rural areas, will boost the growth of such systems at minimal costs.
Electronics Bazaar, South Asia’s No.1 Electronics B2B magazine