Shrinking revenues owing to low solar power tariffs are exerting a downward pressure on developer margins. This calls for a change in project development strategies at all levels in order to reduce costs and improve profits. Currently, the engineering, procurement and commissioning (EPC) segment, which is a key component of solar project development, is undergoing a strategic shift.
Until a few years ago, companies in the solar EPC market deployed their in-house capabilities at each stage of the contract. However, with declining tariffs and shrinking profits, many companies decided to streamline their operations by subcontracting or outsourcing various elements of the project, while remaining the overall executors. This “uberisation” of the solar EPC market helped save costs on overheads, equipment leasing/purchase, etc. and improved margins for contractors. This also increased competition as a company’s entry into the market was no longer dependent on its ability to perform EPC tasks but on how well it managed them.
As the scope of work expanded to include everything from concept to commissioning, and beyond, EPC companies moved from the role of project facilitators to that of solution providers. The transformation of EPC contractors to turnkey solution providers has happened in the past two to three years, when the number of projects in the Indian solar EPC market increased significantly and tariffs started declining rapidly. This shift has opened up several business opportunities for EPC players. Further, the execution of the complete project, instead of only the EPC component, is expected to improve margins. Increasingly, these contractors are also providing operations and maintenance capabilities, especially to developers/owners whose core competency lies elsewhere. Further evolution of the EPC strategy took place with the digitalisation of the market. As information technology penetrated into the solar power segment, companies readjusted their business models to include automation as a key element. The emergence of automation technologies has led to leaner operations, leading to high capital costs initially, but greater savings over the project lifetime. With the use of smart meters, and automated billing and construction techniques, plant operations have become easier. The use of the supervisory control and data acquisition system for remote monitoring, drones for maintenance operations and automated robotic arms for panel cleaning are some recent examples of innovative technology adoption in solar power plants. The EPC companies are increasingly employing these to become more efficient, improve operational margins and reduce project lifetime costs.
Prices and market share
In 2016-17, the Central Electricity Regulatory Commission released the benchmark solar power project costs, wherein EPC accounted for nearly 80 per cent of the total project expenses, at Rs 45.83 million per MW. This includes civil works, procurement and installation of equipment and construction of mounting structures, connectors, cables, junction boxes and trackers, etc. The EPC cost has been declining steadily over the past few years, in tandem with falling module prices. As the competition in the market is on the rise, players are increasingly offering more services per rupee spent. Moreover, with greater capacities being installed every year, companies are achieving economies of scale, enabling them to offer services at lower costs.
According to BRIDGE TO INDIA, EPC costs in the utility-scale solar segment recorded a decline of about 22 per cent in 2016-17 over the previous year. From Rs 49 per watt in the first quarter of 2015 to Rs 35 per watt in the same quarter in 2017, prices fell at a compound annual growth rate of 8.7 per cent. EPC prices in the rooftop solar segment witnessed an even sharper decline of about 27 per cent during the same period. Prices fell consistently by Rs 3 per watt through all four quarters of 2016-17 to stand at Rs 45 per watt in the last quarter as against Rs 57 per watt in the corresponding quarter in 2015-16.
The solar EPC market in India is quite fragmented, with the top seven players accounting for only 29.2 per cent of the market in 2016-17, according to BRIDGE TO INDIA. About 52.7 per cent of the market was occupied by companies that undertake self-EPC. Sterling & Wilson led the market with 9.2 per cent of the share during 2016-17, followed by Mahindra Susten with 6.1 per cent. Tata Power Solar and Vikram Solar were tied for the third place with 3.8 per cent share each.
In 2017-18, EPC works for over 3.3 GW of solar power capacity have been contracted so far in the utility-scale solar segment. Of this, 1.1 GW (or about a third of the total capacity) was contracted in February 2018 due to the year-end rush to execute contracts and award tenders. This includes 760 MW of EPC contracts awarded by Karnataka Renewable Energy Development Limited at various locations in the state. The two largest capacities have been awarded to Shapoorji Pallonji (185 MW) and ACME (106 MW). These are followed by ReNew Power with 99 MW, Asian Fab Tec Limited with 85 MW and Emmvee Solar Systems with 80 MW of solar EPC contracts. The remaining 265 MW has been awarded to various other companies including Rays Power Infra.
Meanwhile, Siemens Gamesa won two contracts for 100 MW and 60 MW from a leading utility and an independent power producer (IPP) in Tamil Nadu and Karnataka respectively. Larsen & Toubro won a 100 MW solar EPC contract from NLC India in Tamil Nadu and another 100 MW from SB Energy One under the Bhadla Solar Park. In December 2017, the Solar Energy Corporation of India Limited released tenders for 750 MW of solar capacity in the Bhadla Solar Park. The contracts were won by Hero Future Energies (300 MW), SBE Four (200 MW), Azure Power (200 MW) and ReNew Power (50 MW).
In the rooftop solar EPC segment, the Railway Energy Management Company released a 67.38 MW rooftop tender in September 2017. The biggest winners of these contracts were Mytrah Energy (30.87 MW) and Azure Power (25.26 MW). In the same month, Gujarat Urja Vikas Nigam Limited released tenders for 500 MW of rooftop solar power plants. Azure Power won the contract to develop 260 MW of rooftop solar capacity.
In November 2017, the Ministry of New and Renewable Energy (MNRE) issued the country’s solar tender trajectory, according to which 6 GW will be tendered in March 2018. According to the plan, 30 GW will be tendered in 2018-19 and 2019-20 each. A total of about 80 GW is expected to be installed to achieve the 100 GW solar power installed capacity target by 2022. This translates into an opportunity for EPC contractors. Assuming EPC prices remain constant at Rs 35 per watt (first quarter of 2017) through the next five years, the total size of the EPC market is expected to reach Rs 2.8 billion by 2022.
Going forward, the solar EPC market in the country is expected to undergo consolidation. The primary reason for this is the increase in the share of companies with in-house EPC capabilities, from 47.5 per cent in 2015-16 to 52.7 per cent in 2016-17. Moreover, large IPP and integrated utilities are likely to develop internal EPC capabilities to improve project economics. Meanwhile, in the face of competition, stand-alone EPC companies are expected to either consolidate with bigger players or integrate into complete project developers and power producers. The key to increasing returns will, however, depend not only on improving service quality but also on increasing the number of contracts in order to help achieve economies of scale.