The solar industry has been facing several issues since the announcement of the National Solar Mission in 2010. The industry picked up pace in the past year as a result of competitive tariffs and the tender pipeline announced by the Ministry of New and Renewable Energy (MNRE). However, the possible levy of a safeguard duty and the unavailability of adequate transmission infrastructure are deterring developers from participating in the new tenders. Domestic module manufacturing is insufficient to meet the current demand at competitive prices; however, it is essential for the segment’s growth. At Renewable Watch’s recent “Solar Power in India” conference, key developers discussed the current state of affairs in the segment, the challenges and the market outlook…
What is your outlook for the Indian solar market? Do you think India will be able to achieve its targets?
In terms of achieving the overall target for solar, I think it is a question of “when” and not “if”. Therefore, given the macro energy scenario, a capacity addition of 100 GW or more is doable but we have to see if this will be set up by 2022 or if it will spill over. Two key issues preventing the achievement of the target are liquidity of funds and the availability of a transmission system for utility-scale solar.
I choose to be an optimist here. Five years ago, we never thought of setting up the capacity we have today. Likewise, MNRE’s tender volume of 30 GW or more might look unfeasible now. Given the development scenario, China could have a big impact on reaching our goals. The recent drop in Chinese allocations could be beneficial for India in terms of module availability at low prices. So, it will be easier to get close to MNRE’s targets with a combination of available capacity and low tariffs.
I think the government has set a very ambitious target. The Solar Energy Corporation of India (SECI) is planning to tender 5-6 GW of capacity in each quarter, which is a positive development. Of course, there are quite a few challenges too.
The number of players available to absorb this capacity is important. Currently, all the large independent power producers have a pipeline of 500 MW to 1 GW, which needs to be executed over a 12 to 24-month period and a huge capital investment. While GW-scale tenders are great for capacity addition, availability of capital to set up this capacity has to be looked at. The existing players are already finding ways to raise substantial equity. Many companies have opted for initial public offerings and perhaps more are lined up. In addition, there are transmission as well as land availability challenges. So far, solar capacity addition has been good because most of the development took place in solar parks. However, if land has to be acquired by developers themselves, the pace of capacity addition would automatically slow down. In addition, developers will have to set up transmission infrastructure to evacuate power, which will be time consuming. The tenders may be bid out, however, the on-ground implementation of projects will surely face challenges, which will ultimately be reflected in the installed capacity.
What is your expectation in terms of actual capacity addition over the next few years?
I would say that we could achieve the commissioning of about 80 per cent of the 30 GW target set by the MNRE. A professor at Stanford, Tony Seba has introduced the concept of “God parity”. According to this concept, by 2030, the cost of generation through solar is going to be so low that it is going to be less than the cost of transmission. At this point of “God parity”, the entire conventional model of the power sector could become redundant.
It would make sense to generate power at the point of consumption and, therefore, save up on transmission costs. While this is a far-fetched scenario, it reiterates the fact that tariffs are falling day by day.
I think we could have a capacity addition of 10-12 GW a year. Over the past few months, SECI and NTPC have released many large tenders. However, I do not know how this capacity will be evacuated. For the first few initial large tenders, the capacity could be evacuated but, down the line, things may get worse unless the country enhances its transmission capacity.
What is your view on the uncertainty related to the safeguard duty?
I think any sort of duty will definitely discourage manufacturing as has already been seen in the US and Europe. When the US and Europe levied duties on imported panels, the solar industry went bankrupt. I think a similar situation will arise in India because levying duties will drive the cost of energy upwards and lead to a lower demand.
Currently, India does not have the necessary supply chain and the ecosystem to create a product competitive with Chinese prices. This could probably happen in the future if the government comes out with a manufacturing policy and provides incentives to lower the cost of capital and taxes.
P. Vinay Kumar
The government has given a pass-through to the developers for compensating them through a hike in tariff in case a safeguard duty gets imposed. However, the increase in tariffs could be an issue for the industry. Discoms buy solar power because of its affordability and sustainability. If the solar tariffs go up while the power deficit is narrow, the demand for solar power will reduce.
The safeguard duty, aims to promote domestic manufacturing. This is a key goal of the government and any country with such an extensive renewable energy programme should have a strong domestic manufacturing industry. Therefore, we have to assess if levying safeguard duties is the best way of achieving this goal, particularly in a price sensitive market like India. We already have tenders linked with domestic manufacturing capacities. In addition, public sector units are already looking at setting up projects with domestic content requirement.
So there are alternative methods that could prove to be more effective than implementing a safeguard duty, considering the current domestic manufacturing industry. Once domestic manufacturing scales up and reaches the required level, India could levy duties. But in the current scenario, imposition of duties could be detrimental.
What is your view in terms of equipment price movements over the next few years?
I think, given the overcapacity in China, the low efficiency multi-crystalline polysilicon modules would be available at prices that are viable for clearing the inventory. Therefore, developers with contracted capacities could be in a position to ask for lower module prices. Once the inventory is liquidated, the supply chain could shift predominantly to monocrystalline and higher efficiency technologies.
China accounts for about 90 per cent of the world’s module supply chain, due to which they had control over the global pricing of power for some time. However, the cutback in subsidies in China is going to have a long-term impact on the pricing power of some Chinese manufacturers. So, while a dramatic decline will be seen in the 30-odd GW of inventory, by 2020, stability would most likely return.
The cutback in subsidies in China will most likely result in a 35 per cent drop in the prices of polysilicon modules in 2019, followed by a 15 per cent drop in 2020.
The cutting back of subsidies by China is going to have a short-term impact, which will level out in the long term. The demand-supply situation resulting from the subsidy cutback will help clear inventories in the short term, leading to price pressure. But in the long term, prices will reduce driven by efficiency improvements.
What is the importance of having domestic manufacturing or localisation? Can the government actually succeed in what it is trying to do?
This debate has existed since the solar industry started, the choice is between creating a local supply chain protected under duties and creating a market with abundant competitively priced solar energy. Both of these are mutually exclusive, and creating comparative tariffs is counter intuitive to creating a duty-driven incremental supply chain.
P. Vinay Kumar
In the ongoing anti-dumping investigation, the Ministry of Finance will give a final directive based on a larger viewpoint, which is beyond the narrow confines of petitioners. The solar module manufacturing segment has many downstream jobs, which will be at stake if the market gets stalled. In our attempt to protect the interests of a few manufactures by imposing the safeguard duty, we should not neglect the interests of the entire sector.
The downstream industry is less capex intensive, which makes its development easier. However, securing investments becomes challenging when going upstream as visibility for the supply situation is unclear at present. An enabling environment with clear incentives is required in the current over-supply situation, along with clear off-take commitments.
Has there been any improvement in discom bankability? Has there been an increase in the receivables?
Both the amount and age of receivables is increasing along with the pool of receivables. However, discoms have an obligation to pay NTPC first, and then, the remaining is paid to the rest. It is a warning trend that could become the single biggest issue wherein growth of the sector would be impeded.
P. Vinay Kumar
In some states, the receivables time period has come down from eight months to barely about two to three months now. However, the trend is especially worrisome in the southern states where a bulk of the renewable capacity is installed. While the delayed payment period for wind has gone up to seven to eight months, for solar, it is slightly less.
SECI and NTPC auctions usually get aggressive bids as investors see more bankability in these projects. Investors are very particular about which discoms to target, and mostly leave out the C-rated discoms. However, the receivable cycle has been increasing in even the good discoms, which is a source of concern for everyone.
What are the two things the government could do to improve the current situation?
Apart from fixing the leaks in the distribution system, the other thing is to look at quality standards. This should not be limited to the implementation of the BIS certificate on modules, but include the whole gamut of standards – technology, construction, decommissioning, health and safety, and other aspects.
Second, we need to address the time mismatch between the required transmission capacity and the upcoming solar generation capacity. Solar projects are set up faster as compared to the transmission capacity. Transferable development rights can be created so that developers can work in advance towards transmission planning. This should alleviate the challenge in terms of paucity of transmission. If started today, it will come into market maybe two years down the line, because it takes two years to build a long high voltage interconnect. With the developers actually committing to building the high voltage interconnection ahead of a PPA, this can be a sure shot way of addressing the problem.
P. Vinay Kumar
The first thing would be to look at the structure of the power purchase agreements (PPAs). The PPA structure, as it stands now, has essentially helped lower tariffs in the midst of increasing competition. But there is much more that solar can do, even without the help of storage. In the absence of ancillary service markets in India, PPAs should be reframed to look at things solar power can do to support grid flexibility. The second task would be to resolve transmission issues. The only way to do this is to bundle the tender with the transmission capacity available. Otherwise, the entire bidding engine will be stalled, ultimately affecting the upcoming solar capacity.
First, handholding is required for transmission connectivity agreements as well as land, as the developers are taking a lot of risks on various factors and these tariffs are really not appropriate for the risk being taken. And if these risks really pan out, it is going to affect developers and will eventually hit the overall appetite of investors. Second, the project pipeline needs to be looked at with respect to the larger scheme of things, that is, the overall demand-supply dynamics in the country.