Hoping for Stability: Can solar power developers expect a correction in the short term?

Can solar power developers expect a correction in the short term?

The solar power segment continues to be the key driver of new capacity additions in the clean energy sector. It installed 1,369 MW of new capacity during the period April-June 2019. Falling tariffs have increased the demand for solar power in states, leading to a decline in the cost of modules. However, legacy challenges such as lack of land availability, transmission constraints and high cost of capital continue to dampen investor confidence, thus impacting developer margins. At the “Solar Power in India” conference organised by Renewable Watch, a host of developers deliberated on the issues existing in the Indian solar power market, the possible solutions and the outlook for the industry. Excerpts…

Sanjay Aggarwal, Managing Director, Fortum India

In India, Fortum is currently involved in four sets of activities. The first is solar power generation, which is Fortum’s mainstay. The company has around 1 GW of installed solar power capacity in India. It is focusing not only on India but other parts of the world as well, including Montenegro and Russia. The company is also looking to set up a large waste-to-energy plant in the city of Jakarta. Besides the capacity under development, Fortum intends to add about 300 MW of solar capacity per annum in India. In addition, the company is developing a bioethanol refinery as part of a 50 per cent joint venture with the Numaligarh refinery. Its third vertical in India is electric vehicle (EV) charging infrastructure. At some point in time, Fortum will combine the EV charging infrastructure with solar to reduce the charging dependency on conventional power. Fortum’s fourth line of activity in India is reduction in NOx emissions from the primary combustion in coal-based power plants.

Over the next decade, the renewable energy environment only seems to be improving as the share of renewables in power generation will increase even if coal remains the mainstay for generation. Meanwhile, the intermittency of wind and solar power will be addressed as battery costs fall. At present, the rate of decline in battery storage costs stands at around 25 per cent, which might improve in the next few years. The improvement is not expected to be on the back of renewables but because of greater EV penetration. The demand for batteries will encourage manufacturers to increase capacity. As a result, the cost of solar-plus storage may fall over the next three to four years.

In the past few months, many things have changed in the Indian solar market in terms of tenders, awards and projects. This relates to the imposition of safeguard duties and cancellation of tenders. If these uncertainties can be removed, there is enough investor appetite for solar power in India. For a long time, the industry has focused only on tariffs, which has put developers in a mess with the states. Bringing one tariff across the country would be unfair to states where the agricultural load is high. For the same capacity, there can be a difference of 25-30 paise per kWh between states that have a high irrigation component and those that do not.

Modules are at a stage where a 10-20 per cent reduction in prices is still possible. The module prices would largely depend on the capacity China decides to install in the given year. If China’s domestic consumption of modules increases, then the overall prices will increase. Also, the effect of the deviation settlement mechanism (DSM) on tariffs is still unclear. Many states are struggling with DSM penalties, which may have a huge impact on tariffs. Such issues are even more pronounced in the case of solar parks where multiple power plants feed their power into one substation, and one might end up paying for the inefficiencies of another. Another point that is seldom factored in is the cost of disposal of modules after their effective lifetime.

In the near future, new photo voltaic technologies are expected to come up in the global solar industry, which may lead to a reduction in tariffs. Module manufacturing processes are likely to undergo a change, resulting in lower cost of components and overall reduction in module costs. The efficiencies of mono-PERC and bifacial technologies are likely to increase. All these developments are bound to have an impact on the per unit cost of solar power.

Sunil Kulkarni, CEO, Renewable Energy, Shapoorji Pallonji Infrastructure Capital Company

Shapoorji Pallonji Infrastructure Capital Company (SPICC) has constructed and commissioned 500 MW of solar power capacity. Of this, 200 MW has been divested, bringing our effective operational capacity to 300 MW. Another 920 MW is currently under construction. SPICC has also won the first floating solar project, which will be installed at the Rehan reservoir. The company has plans to achieve a cumulative capacity of 2,000 MW over the next two years. Sterling and Wilson, one of the largest engineering, procurement and construction companies in the world, is controlled by the Shapoorji Pallonji Group and will soon be going for an initial public offering.

Whatever problems the renewable energy sector is facing will be sorted out eventually. Many issues are a result of an industry-wide euphoria of winning projects, driven by the shift from small to large projects and a better overall business environment. Initially, to encourage the uptake of projects, the interest rates were reduced and bank lending norms were eased. However, most of these incentives have stopped now. Things are bound to change over a period of time and corrective action will be taken. Considering that these projects have a short gestation period, developers may get stuck in a less conducive environment. Hence, smaller developers may shut shop while the large players may survive.

Solar power tariffs are likely to increase in the near future. At present, most of the tenders are launched by NTPC Limited and the Solar Energy Corporation of India (SECI). There is limited response to state bids, where the average tariff is around Rs 3 per kWh and is expected to increase further. While a large number of projects are going the solar park way, which again keeps tariffs low, not many solar parks are likely to be tendered in the near future. Moreover, interstate transmission system (ISTS) connectivity and the transmission availability may prove to be a bottleneck for the ISTS bids going forward. The tariffs for non-solar park projects are also slightly higher in the Rs 2.70 per kWh range. Meanwhile, the cost of land is increasing and the gestation period of projects has reduced from 24 months to 21 months. All these factors will have an adverse effect on projects. The capacity of the developer to absorb the risks in a low-tariff scenario may no longer exist. As a result, tariff correction may take place in the next three to four months.

In the short term, module prices will be on the rise. As the demand shifts from monocrystalline and polycrystalline modules to mono and poly-PERC (passivated emitter and rear cell) modules, the prices may show a bit of an imbalance over the next three to four quarters as the market looks to stabilise. Moreover, Chinese manufacturers have now understood that the Indian market functions on low prices. Once price parity is achieved in the Indian market, demand will stabilise and volumes will force the module prices to come down. Operations and maintenance (O&M) prices are also likely to reduce.

K.V. Sajay, President, Solar, Wind and Regulatory Affairs, Hero Future Energies

Hero Future Energies has a balanced operational portfolio of around 1.2 GW, of which 50 per cent is solar and 50 per cent wind. The next 1.2 GW currently under development is expected to comprise 70 per cent solar and 30 per cent wind power. The company plans to achieve a cumulative capacity of about 5 GW. It has been progressing at a slow but steady pace with the objective of building good quality assets that last for 25 years. The solar power price is already below the average power purchase cost of any of the discoms. Automatically, it becomes the preferred choice of power for discoms as seen in some of the recent tenders invited by Gujarat, Rajasthan and other states. There are operational challenges that most  independent power producers (IPPs) are bearing. These relate to the cost of debt, hedging cost, module cost and inverter cost. If the cost trend goes the wrong way, many IPPs may be wiped out or the projects may be stranded. This is where the government needs to bring in certainty regarding issues like land approvals.

In the recent past, the industry has taken some surprising turns with module prices being revised downwards every three or four months. In terms of technology, the industry is gradually moving from polycrystalline to mono-PERC bifacial modules, leading to a reduction in their prices. There has been a slight improvement in module efficiencies as well. The prices may not increase much due to these technological improvements. Such changes in the value chain add to the project and installation costs but these may average out in the long run. For example, trackers were earlier designed to use 60 tonnes of steel per MW. They are now using 45 tonnes of steel per MW. The liquidity crunch in the market may increase by a few paise per kWh here or there, and tariffs may remain in the band of Rs 2.50-Rs 2.70 per kWh.

There are going to be many more changes in technology, largely dominated by Chinese manufacturers. The move towards mono-PERC is important because it is one of the most efficient modules existing in the market. The competition among technologies and manufacturers is helping project developers in reducing the cost of energy. What may not change are land and O&M costs. However, the entire cost matrix will average itself out.

Gaurav Sood, CEO, Sprng Energy

Sprng Energy has a cumulative portfolio of 1.75 GW. This includes 800 MW of wind power, of which 100 MW is operational while the rest is under construction. The company also owns 950 MW of solar power capacity, of which 450 MW is operational while 500 MW is under construction. The company is looking to build a total portfolio of around 2.5 GW over the next couple of years. From a private equity investor’s point of view, India stands out in the global market in terms of scale and magnitude of targets. Thus, there is an overall optimistic outlook. However, based on how the market has evolved over the past two years, the viewpoint has become slightly pessimistic. While solar power tariffs have reduced substantially, the risks remain the same and are being passed on to the developers, for instance the imposition of safeguard duties. Moreover, international investors rely solely on NTPC and SECI as counterparties, which are also bidding for the projects. Considering themselves pure traders, they are unwilling to stand behind power purchase agreements (PPAs). For example, in some of the recent PPAs, they tried to put the complete payment obligation on the discoms, which defeated the purpose of bringing them as counterparties. The most important component of solar plants is the module. It behaves like a commodity in the market, making it difficult to predict which way the prices will go. With the introduction of competitive bidding, the project margins have become quite thin. If module prices tend to increase, then the contracts may no longer be enforceable, making this a huge risk for developers and investors.

While the solar industry has achieved very fine tariffs, these could still be lower. The direction of tariffs depends on two key factors – module pricing and the cost of financing. The scale of projects is meant for institutional investors only. These investors have a similar rate of return expectation, which has been fine-tuned already. So, as long as the input parameters are reducing, and the developer can maintain the same rate of return, the tariffs will surely decline. If it goes the other way, the tariffs will automatically go up. So, the industry seems to have achieved equilibrium.

The efficiency of modules will continue to improve, which may lead to cross-reductions in the cost of solar power. Globally, the overall demand and supply will be highly dependent on China’s installation plans. Since most of the manufacturing is concentrated in China, the country’s role in the overall demand and supply becomes important. Globally, as well as in India, the focus is now increasingly shifting to operational efficiency. There are many technologies and opportunities waiting to be deployed in projects such as robotic cleaning and drone-based thermography.