Sunny Days Ahead?

Positive indicators for solar power growth

India’s renewable energy capacity has grown at an average annual rate of 11 per cent between April 2017 and March 2021, with roughly 35 GW of capacity installations. Solar power alone has been responsible for 27 GW of the total capacity additions, while wind, bioenergy and other sources have lagged far behind. Solar installations have increased at an impressive growth rate of 34 per cent during this period. This rapid scale-up has been a result of the creation of a highly competitive market enabled by a favourable regulatory environment, a global decline in module prices, and the entry of large investors with deep pockets and a huge appetite for risk. Without doubt, the Indian government has been at the forefront of providing the necessary policy support, besides a transparent project allocation mechanism to create a competitive market, which has enabled this impressive growth in the solar power segment.

Over the years, the government has made regular interventions to ensure continued private sector investment inflow in the segment. For instance, to address developer concerns on account of Covid-19, a blanket time extension of five months (extendable up to a maximum of six months on a case-by-case basis) was provided for the commissioning of renewable energy projects. Similarly, the waiver of interstate transmission system charges and losses on the supply of power generated from solar and wind power projects was extended until June 30, 2023. A proposal to increase the minimum permissible limit for net metering for rooftop installations to 500 kW is also under consideration. Moreover, a green term ahead market has been launched to enable market-based renewable power procurement.

These recent developments certainly give cause for cheer. First, despite the Covid-19 pandemic, solar power tariffs have dropped to sub-Rs 2 per unit levels for the first time in the country’s history, showing that solar power continues to be the most competitive source of power. Second, global investments are continuing to pour in, with significant equity investments, demonstrating sustained investor confidence in the segment. Third, there has been a renewed focus on manufacturing, with new government schemes and incentives aimed at promoting local production of solar cells and modules. Finally, there has been an increased uptake of corporate power purchase agreement (PPA)-based solar, solar-wind hybrids, floating solar and solar plus storage rather than plain vanilla rooftop or utility-scale solar projects. These emerging areas of growth will ultimately pave the way for solar power expansion in the next decade.

Renewable Watch analyses these positive development trends and likely impediments, and assesses the future outlook for solar power in India…

Record low tariffs

Despite the pandemic, the renewable energy sector witnessed a slew of tenders from central as well as state agencies, the majority of them in the solar power space. According to Renewable Watch Research, 15,620 MW of utility-scale solar capacity was auctioned between March 2020 and May 2021. Moreover, record low tariffs have been discovered in the past year owing to strong creditworthiness on the back of direct PPAs with central government agencies, supplemented by the financial backing of deep-pocketed large investment groups.

The first record low tariff was discovered in the Solar Energy Corporation of India’s (SECI) 2 GW solar tender (Tranche IX) in June 2020. A tariff of Rs 2.36 per kWh was quoted by Solarpack Corporacion Tecnologica SA for 300 MW of project capacity. Other successful bidders were Enel, Eden Renewables and Ib Vogt, which secured 300 MW each, at a tariff of Rs 2.37 per kWh. At the same tariff, Amp Energy won 100 MW. ReNew Power and Ayana Renewable Power won 400 MW and 300 MW respectively, at Rs 2.38 per kWh. Among the key reasons for the record low tariff were zero safeguard duty for developers, low-cost financing from foreign backers and a pass-through of basic customs duty (BCD) under change in law provisions. This was followed by another record low in November 2020, also in a SECI auction for 1,070 MW of solar capacity in Rajasthan. The lowest tariff quoted was Rs 2 per kWh by Saudi Arabia’s Aljomaih Energy and Water Company, which won 200 MW, and Sembcorp subsidiary Green Infra Wind Energy Limited, which won 400 MW. NTPC Limited bid at a tariff of Rs 2.01 per kWh for 600 MW of capacity but received 470 MW. The impressive drop of Re 0.36 per kWh in tariffs between the June 2020 and November 2020 auctions is a testament to the viability of solar projects even at low tariffs in India, especially in sunny states such as Rajasthan.

Consequently, just a month later, another a tariff drop of Re 0.01 was witnessed in Gujarat Urja Vikas Nigam Limited’s 500 MW solar tender (Phase XI). The figure, which represents the lowest tariff for solar projects in the country, was quoted by all four winning bidders. Of the tendered capacity, 200 MW was allotted to NTPC Limited, 100 MW was allotted to Torrent Power Limited, 80 MW to Al Jomaih Energy and Water Company Limited and the remaining 120 MW to Aditya Renewable Energy Private Limited, under the bucket filling method. The success of these auctions by way of historically low tariffs is a positive prognosis for the entire solar segment, especially in view of the Covid-19 pandemic.

Significant capital inflow

A key reason being cited for the dramatic drop in solar power tariffs is the financial backing of large investors with deep pockets and a huge appetite for risk. Solar power projects in the country are attractive to foreign investors due to regulated returns from fixed tariffs and the long-term nature of cash flows. Thus, with equity financing continuing to dominate the solar power landscape, many international developers have entered the Indian market and are bidding aggressively for solar projects, aided by low-cost financing.

For instance, all the winners in the June 2020 SECI auction had foreign investment backing. Spanish company Solarpack Corporacion Tecnologica quoted the L1 tariff of Rs 2.36 per kWh. The other winners included Italy’s Enel Green Power; Germany’s IB Vogt; New York-based Eden Renewables; Canadian developer AMP Energy; Ayana Renewable Power, backed by the UK’s development finance institution, the CDC Group; and ReNew Power, backed by Goldman Sachs, among other investors. A similar trend was witnessed in the November 2020 SECI auction. Saudi Arabia-based Al Jomaih Energy and Water Company and Singapore-based Sembcorp Energy’s Indian subsidiary, Green Infra Wind Energy, were the winning bidders, along with state-owned NTPC Limited. Apart from new projects, there is a huge demand for operational assets as many large foreign and Indian investors want to expand their clean energy portfolios quickly, without getting involved in the time-consuming process of winning a bid and then actually executing the project. These assets attract a good valuation in the market, creating a favourable merger and acquisition environment, as many business groups want to sell their solar portfolios, unable to withstand the stiff competition.

A case in point is Adani Green Energy Limited (AGEL) announcing the signing of a share purchase agreement in May 2021, to acquire 100 per cent stake in SB Energy India, a large player in the Indian clean energy space. The announcement signifies the largest acquisition in the renewable energy sector in India, at an enterprise valuation of about Rs 260 billion. AGEL will acquire SB Energy’s renewable energy portfolio of 4,954 MW, of which 84 per cent comprises solar projects. This trend is likely to continue in the future as investors continue to acquire assets and expand their portfolios and sellers find good valuations to sell their projects owing to low exit barriers.

Focus on manufacturing

India’s solar industry is at present heavily dependent on imported solar modules and cells, which led to severe supply chain restrictions during the first of the pandemic wave. The government has been making major efforts to promote domestic manufacturing of these products, as a part of its Make in India initiative. To this end, in March 2021, a BCD of 25 per cent on solar cell imports and 40 per cent on solar module imports has been imposed. This will make imports more expensive and create a level playing field for domestic manufacturers. The duty will come into effect from April 1, 2022. Further, there will be no grandfathering of projects already auctioned as the new duty will be applicable from April 2022. Moreover, in a bid to enhance the country’s domestic solar manufacturing capabilities, the government launched the production-linked incentive scheme for high efficiency solar modules with an outlay of Rs 45 billion. This National Programme on High Efficiency Solar PV Modules aims to achieve multi-GW-scale manufacturing capacity for high efficiency solar PV modules. As a part of this scheme, solar PV manufacturers will be selected through a transparent competitive bidding process and incentives will be disbursed for five years post the commissioning of the solar PV manufacturing plant, on the sale of high efficiency solar PV modules. Further, manufacturers will be rewarded for higher efficiencies of solar PV modules and for sourcing material from the domestic market.

India has ambitious plans to set up 300 GW of solar power capacity by 2030, of which 260 GW remains to be set up. Thus, there is a tremendous market opportunity for solar cells and modules over the next decade, which can be met by local manufacturers. Already, domestic manufacturers such as Vikram Solar, Tata Solar, Adani Solar and Premier Energies have announced capacity expansion plans, and large developers such as ReNew Power and Azure Power have also decided to foray into this space. Provided the quality of solar modules is assured so as to compete with world-class products, India has the scope to become a leading supplier of solar components.

Emerging areas of growth

With rapid technology advancements and the declining cost of energy storage systems, the government has been focusing on innovative tenders, including solar-wind hybrids and round-the-clock (RTC) power supply, rather than plain solar and wind auctions. In addition to cost synergies, such measures help address the critical issue of the intermittency of renewable power sources and improve grid stability. It is a bonus that such projects can compete with traditional models on pricing, with tariffs remaining below Rs 3 per kWh. For instance, in May 2020, SECI’s first renewable energy RTC tender for 400 MW was fully subscribed by ReNew Power at a tariff of Rs 2.90 per kWh, with an annual escalation of 3 per cent for 15 years. Similarly, SECI’s auction for solar-wind hybrids in December 2020 witnessed tariffs as low as Rs 2.41 per kWh, which is just a few paise higher than the tariff witnessed in the June 2020 SECI auction for 2 GW of solar power. Another segment garnering significant interest is floating solar. The country has many waterbodies in the form of lakes, ponds and reservoirs that are suitable for deploying such projects. With a potential to set up more than 500 GW of solar power capacity on just the reservoirs of thermal and hydropower plant and precluding land acquisition issues, floating solar is poised to grow rapidly in the coming decade. Thus, the past few months have seen a flurry of project proposals and tenders across the country, with both public and private agencies intending to capitalise on this massive opportunity.

Apart from technology advancements, there has been innovation on the business model front as well. The commercial and industrial (C&I) solar segment has been expanding significantly, supported by developers that benefit from attractive tariffs and assured timely payments as well as by C&I consumers who want to switch over to cheaper and greener solar power from the more expensive grid-based power. The highly affordable opex model, entry of specialised IPPs with customisable packages and the cross-subsidy surcharge-free group captive model have led to rapid solar power deployments in the C&I segment, with even large institutional consumers such as metro rails, Indian Railways and airports opting for solar. The demand for C&I solar power is likely to continue in the future, with more consumers and developers capitalising on this massive opportunity.

The way forward

Like any other infrastructure sector, solar power development is also fraught with many challenges. Policy uncertainty, especially on account of the imposition of duties and taxes, continues to be a cause for concern for investors as this creates volatility in the market. This includes the imposition of BCD with no sunset clause as well as frequently changing net metering policies across states. In addition to this, the recent Supreme Court order on laying high voltage power lines underground in a bid to protect the Great Indian Bustard will prove to be expensive for developers and lead to right-of-way issues. Solar power projects are planned for 25 years, and investors need assurance of risk-free returns on their investments, which is often made difficult by the lack of clarity on long-term policy direction.

The past few months have witnessed a decline in capacity additions, with just 5.4 GW being added in 2020-21, against the annual target of 11 GW. This is partly due to the delays caused by the first wave of the Covid-19 pandemic, owing to supply chain restrictions and logistical challenges, as well as the unavailability of manpower at project sites. The situation has been further exacerbated by the state discoms’ unwillingness to sign PPAs or their renegotiating PPAs in the hope of getting lower tariffs. Meanwhile, the payables from discoms to developers continue to pile up, affecting project returns. On the project execution side, land- and transmission-related issues continue to cause delays. Meanwhile, for financiers, it is critical that tariff adoption and state approval of PPAs and power sale agreements are done in a timely manner, and land and transmission availability is ensured so as to reduce project-related risks.

The second wave of the pandemic has added to these difficulties and there is no clarity regarding the capacity installations that will be achieved this year. Thus, short-term project delays are likely to impact installations and capacity addition could be restricted in the next few months. Moreover, the achievement of the 100 GW solar power target may shift by a few months to over a year, depending on how promptly the government, the renewable energy industry and the bulk power offtakers (discoms) address the inherent issues that the segment is facing. The good news, however, is that this slump will be temporary and the segment will bounce back sharply, indicating an improved medium-to long-term outlook for the segment, provided policies and regulations are streamlined across states, along with efficient implementation at the ground level.

As India moves into a new decade with more digitalised processes, innovative business models and energy storage integration, bureaucratic hurdles will need to be overcome and complicated processes streamlined in order to make India a market leader on the global solar power stage.

By Khushboo Goyal

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