From the developers’ perspective, the year 2018-19 has been a mixed bag of opportunities as well as disappointments. While developers welcome the clarity on grid connectivity related issues, many of them feel that the imposition of safeguard duties on solar imports could affect the growth of this segment. Developers share their views on the key developments, challenges and the future opportunities in the renewable energy sector. Excerpts…
What have been the most noteworthy developments in the renewable energy space in 2018?
The global shift towards renewable energy is driven by the developing nations and India is one of the leaders of the pack. The country’s installed renewable energy capacity stood at 71 GW until a few months back and the renewable auction capacity has increased around 68 per cent this year compared to 2017, which is a very positive sign. For the first time in history, India’s annual renewable capacity addition surpassed that of coal in 2017, which indicates the imminent dominance of renewable energy in the Indian energy basket. Wind projects awarded under Solar Energy Corporation of India Limited (SECI) Tranche-I have started being commissioned since August 2018, which also signifies a successful transition of the industry into a bidding regime. CERC issuing a new order for handling the massive number of ISTS-connectivity applications at PowerGrid for renewable energy projects is another major development in the industry.
The most noteworthy developments in the renewable energy space can be looked at in three different aspects, technology, financing and tariff discovery. While technology has improved a lot in the past year, the cost of the module per MWp dropped drastically, and there has been efficiency improvement of modules. In the financing space, credit availability has gone down while the cost of credit has gone up. This has adversely affected the smaller independent power producers (IPPs). Also, as the renewable energy market has matured in the country, a lot of institutional investors are taking advantage by investing in the sector directly or by investing in funds that are used to set up renewable energy projects. Tariffs have remained quite low, even dropping to a lifetime low of Rs 2.44 per unit.
A key development occurred on the regulatory side when CERC issued the procedure on grid connectivity for renewables. In India, the responsibility for getting connectivity to grid for all projects, apart from those located in solar parks, lies with developers. Prior to the issue of this procedure, getting connectivity for new projects was quite challenging, particularly for new wind IPPs as connectivity and bays on most of the existing substations were allocated to original equipment manufacturers and existing developers. Hence, this procedure is a welcome move for the entire developer community.
In your opinion, what are the biggest challenges and risks looming in the renewable energy sector in India?
The weakening of the rupee against the dollar and rising interest rates are two factors that seem to impact the industry adversely in the short term. The enormous value of non-performing assets in the banking sector causes funding or liquidity crunch across the industry sectors, including that of renewable energy. The government’s Ujjwal Discom Assurance Yojana, intended to improve the financial position of discoms, has not produced the desired outcome. The chronic financial illness of discoms continues to hurt the sector, ensuing huge delays of generation payment and curtailment in renewable power procurement by discoms. With potential renewable sites being depleted fast, procurement of land and right of way for new project sites will become more difficult in the coming days. Owing to its intermittent nature, and with a greater number of wind and solar projects getting connected to the grid, it will be more difficult to manage the grid.
The biggest issue is the non-availability of credit coupled with its high cost. The second challenge pertains to the irregular timeline of bids. A lot of bids came between July and August, but after that, only a few bids were announced and most of them were postponed. This hinders the planning process of developers. Third, the government’s aim to reduce tariffs makes developers vulnerable to a lot of risks, as bidding at low tariffs can make certain projects financially unviable. The interest rates are going up and the currency is getting depreciated. The reduction in the cost of modules is the only positive trend for developers.
The foremost challenge is the uncertainty regarding the Change in Law clause in the PPAs. For instance, there was uncertainty whether the imposition of goods and services tax (GST) would be considered as Change in Law and how this would be treated. Fortunately, CERC recently declared the imposition of GST as Change in Law and directed that the pass-through should be treated as a one-time settlement. The industry expects a similar treatment on the recently imposed safeguard duties on solar photovoltaic (PV) imports under Change in Law. The matter is still subjudice but solar developers have to pay the safeguard duty of 25 per cent, which is substantial and is causing concern both for IPPs as well as lenders. There are a lot of financial risks for developers when solar projects are being executed. The uncertainties regarding the Change in Law clause and its timely treatment have added to the risks for developers.
The second challenge is connectivity related, which has been addressed to some extent after CERC’s recent regulation. However, further clarification is required with respect to the earlier allocated bays. The third challenge is the issue of currency depreciation on the one side and interest rates becoming higher on the other. With liquidity crunch in the market, the financing scenario is quite challenging at present.
What is your opinion about the safeguard duties imposed on solar imports from China and Malaysia? How will it impact the import profile?
The quality of the imported solar panel was already a concern for the industry. The safeguard duty can put the Chinese players under pressure to further bring down the price so that they do not lose much share in the Indian market. This desperate effort from the Chinese players will further deteriorate the quality of solar panels that they supply. The safeguard duty will certainly bring growth in the domestic solar manufacturing industry and support the “Make in India” initiative of the government. However, the domestic supply alone will not only be enough to meet the growth target as 90 per cent of the solar panel demand has been met through imports till date.
The safeguard duties have been imposed for two years, but there is uncertainty regarding the extension after two years. So, the developers planning to import after two years may be at risk. There are already a lot of uncertainties in the financial market. Hence, after imposing safeguard duties, the policymakers could have released some liquidity in the banking system to ease the financial load of developers.
Since more than 85 per cent of the global solar PV module production is done in China, the safeguard duties will not impact the import profile to a large extent. India requires huge volumes of modules to cope with the large capacity additions planned in the near future. This would be possible only through imports, especially since India does not even have 1 GW reliable and high quality solar cell production capacity at present. Hence, for projects without a pass-through option, safeguard duties will lead to an increase in project costs, and tariffs will also rise. Since the safeguard duties have been imposed for only two years, the time is too short to attract significant domestic manufacturing.
What are your views on the feasibility of the recently quoted low solar and wind tariffs in the long run? How can the government ensure that project quality is not compromised in a low tariff scenario?
The wind and solar tariffs discovered in recent auctions are highly unlikely to be sustained in the upcoming bids. Low-cost funding, technological improvement, input cost reduction and finally competition are understandably the factors dragging the tariffs downward. However, potential wind and solar sites are about to deplete gradually with further rounds of auctions. With inadequate evacuation infrastructure and low-yielding sites, tariffs will take a reverse trend to go up. Placing an upper cap on the tariff puts more pressure on the developers to take a hit on critical financial and technical aspects. The upper cap on the bid tariffs thus deteriorates the quality of the projects; rather there should be a lower cap on tariffs, which the bidders should not cross to go below.
The drawback of the bidding regime is that there is no scope for small investors to participate in auctions due to minimum capacity limit set up in the auctions. A major chunk of the capacity added in the wind sector is contributed by small-scale investors till date and the existing bidding regime only suits IPPs with large-scale projects to remain in the industry. Allowing small-scale investors to be part of the industry would bring more investment capital to the industry.
Another concern is the competitiveness of foreign manufacturers, which is much higher when compared to domestic manufacturers, owing to the technological advantage that they possess. Domestic suppliers find it very challenging when put in the fray with their foreign counterparts in auctions.
Not all developers, but some of them may compromise on the project quality to survive in a low-tariff regime. The size of the project is crucial to judge whether the tariff is viable or not. Large solar parks, which generate a large amount of power, can be financially viable with low tariffs. However, the same tariff will not be viable for smaller projects and some such projects may also turn out to be non-performing assets for banks.
Bankable developers working on large projects are not going to compromise on project quality. Developers are not only responsible for setting up the project but also for operating the asset for 25 years. On the solar power side, tariffs are quite sustainable at the current levels. However, the impact of currency depreciation, interest rates, safeguard duties and site-specific solar radiation have to be factored in, while deciding the feasibility of these tariffs.
Wind power is slightly different as high wind speed sites will slowly be exhausted and tariffs will automatically rise in lower wind resource sites. The second issue with wind is connectivity, which still needs to be addressed fully.
What new opportunities do you see in the renewable energy spa3ce in India?
With potential wind sites getting depleted fast, exploration on the possibility to install larger capacity wind turbines with more than 3 MW and higher plant load factors should be pondered upon by developers. There is lot of scope for research and development (R&D) to resolve the associated shortcomings with renewable power, particularly wind and solar. Serious efforts to promote offshore wind, battery storage, net metering, decentralised use of renewable power and wind-solar hybrids are required to move the sector forward. New government schemes and policies to promote R&D and start-ups in these emerging areas need to be framed and implemented by the authorities. Repowering of old turbines and forecasting and scheduling are other arenas to look at, which will supplement the growth of the sector. Though the promotion of open access scheme has a place in the Electricity Act since its inception in 2003, it has not seen the expected growth due to various reasons. A policy framework to promote open access in the renewable sector should be developed.
Solar-wind hybrids obviously have a lot of growth potential as they will lead to an efficient use of land and transmission network. The government should make sure that the structure of the tender is designed in a better manner to avoid due date extensions. Another opportunity is the large-scale deployment of storage technologies. However, a concrete policy or plan for the promotion and manufacturing of storage technologies is yet to be announced. After five years, the battery storage market is expected to mature and be at par with the current solar and wind market segments. Offshore wind technology looks promising as well but innovative business models are needed to make them more commercially viable.
Solar-wind hybrids in India are possible in only four to five states. Higher land cost for solar (particularly where the wind resource is good) and challenges associated with co-locating solar and wind can largely impact the feasibility of these projects. In the offshore segment, the capital costs involved are quite huge, and project execution timelines from the concept to the commissioning are long, with fairly high project execution risks. All these would lead to higher tariffs and since India has high price-sensitivity towards tariff, the long-term viability of these projects needs to be ascertained. Energy storage systems should be encouraged and a right policy framework needs to be developed for promoting energy storage. Energy storage systems are essential to support the increasing grid penetration of renewables.