New solar policies in India expected to increase demand; help improve margins

In Q1 2013, Indian states including Tamil Nadu and Andhra Pradesh have each announced policies for the allocation of 1 GW of PV projects. Allocations in Tamil Nadu were undersubscribed and a capacity of 226 MW has been allocated. Meanwhile, in Andhra Pradesh, the allocation process was oversubscribed, but the final allocated capacity is yet to be confirmed.
In addition, towards the end of the previous quarter, project allocations were announced in the states of Uttar Pradesh for 200 MW, Punjab for 300 MW and Karnataka for 130 MW.
Going forward, a capacity of 750 MW under phase two of the National Solar Mission (NSM) is expected. According to India’s Ministry of New and Renewable Energy (MNRE), the allocation process will begin this May. Combined, these new allocations are expected to account for around 2 GW of demand in the second half of 2013, and a blockbuster year for capacity additions in 2014.
In the last previous quarter, 226.5 MW of PV capacity was installed, taking India’s total installed capacity to 1.4 GW as of March 20 2013. The largest capacity addition of 221.5 MW was achieved in Rajasthan, of which 183 MW is under batch two of phase one of the NSM and 38.5 MW is under the Renewable Energy Certificate (REC) mechanism.
Policy update:
National Solar Mission
According to the draft guidelines for phase two of the NSM, MNRE had planned to allocate 800 MW through a bundling of power mechanism (as in phase one of the NSM), and 750 MW through a Viability Gap Funding (VGF) mechanism.
For a large part of the last quarter (January to March), MNRE had been trying to arrange for unbundled power from the Ministry of Power (MoP) to carry out the tariff based bidding component of allocations based on the bundling of power.
However, as there is only a limited amount of unbundled power available and all the states in India demand access it, the MoP has been unwilling to provide any more unbundled power for the NSM. Consequently, MNRE has now decided to go ahead only with the allocations for 750 MW based on Viability Gap Funding (VGF).
Under this mechanism, a standard tariff will be provided by the power distribution companies. This would typically be higher than their standard price of procurement as this would allow them to also meet their Renewable Purchase Obligations (RPOs).
According to the draft guidelines document, this tariff could be pre-fixed, at say, INR 5-6 (US$0.09-0.11)/kWh. Based on this, project developers will bid for the capital required to make their projects financially viable. Bidders can bid for a maximum VGF of 40% of the benchmark capital cost fixed at INR 80 million ($1.48 million)/MWp.
According to the market, a shift away from feed-in tariffs (FIT) and towards VGF will promote installation of substandard projects. To address this issue, the guidelines envisage 25% payment at the time of delivery of at least half of the major equipment at the site, 50% on completion of the plant and the rest after one year of operations, meeting the requirements of generation.
State policies
The south Indian states of Andhra Pradesh and Tamil Nadu had announced ambitious targets for solar power installations as a means to solve the power crisis situation that exists in these states.
The power deficit in the southern grid in India has gone up from 3% in 2011, to 16% in January 2013. Solar power is the only option for these states to get quick access to power.
Kerala, another south Indian state, too has published a draft solar policy on February 27. This makes it the ninth Indian state to release a solar specific policy document. Under the draft policy, Kerala has set itself a target of an installed capacity of 500 MW by 2017, and 1,500 MW by 2030. Late last year, Kerala initiated a 10,000 rooftop solar power program.
These three south Indian states are the first in the country to have announced their plans to offer net-metering to power consumers. This is a significant step forward for the Indian solar market.
Until now, the Indian market has only focused on large utility-scale projects, but the new policies in these states are encouraging distributed generation that promises to provide a sustainable demand for solar and growth for the market.
Another trend that has emerged from Kerala and Tamil Nadu is that of transferring the renewable purchase obligation from power distribution companies to large power consumers.
Most of the power distribution companies in India suffer from heavy losses and have been largely unable to meet their renewable purchase obligations. In such a scenario, it makes sense for these states to transfer these obligations to large power consumers which already pay high power tariffs and are anyway close to grid-parity. Going forward, the demand for solar from these power consumers will become another key driver in the Indian solar market.
The north Indian states of Uttar Pradesh and Punjab have also initiated processes for the allocation of 200 MW and 300 MW of PV projects, respectively. The last date for submission of bids for both the states is April 25.
Close to 1.5 GW of PV is currently under development in India. Projects that are now achieving financial closure and are finalizing vendors are mostly from states like Madhya Pradesh and Karnataka. New projects in Tamil Nadu, Rajasthan and Andhra Pradesh are starting the project development process and are looking for debt financing options.
Bridge to India expects a capacity of over 1 GW to be installed in 2013. Going forward, there is a lot of momentum building up for capacity additions in 2014.
Projects under the second phase of the NSM and in states like in Tamil Nadu, Andhra Pradesh, Madhya Pradesh, Karnataka, Rajasthan, Punjab and Uttar Pradesh are all expected to be commissioned next year. By our estimates, 2014 will see a capacity addition exceeding 2 GW.
A clear trend that is emerging from the recent biddings and a flurry of announcements is that the competition for projects (and the aggressive bidding) is reducing. While some developers bid aggressively in Andhra Pradesh, we have seen L1 bids for certain locations in the state as high as INR 8.89 ($0.18)/kWh.
In Tamil Nadu too, while some bids were aggressive, the average bid came out to be in the range of INR 8/kWh ($0.16)/kWh. We can expect a similar trend to continue in Uttar Pradesh and Punjab.
Allocations under the NSM are unlikely to be as oversubscribed as they have been in phase one. This is primarily due to two reasons: (i) excess capacity of projects are available in the market through various state policies; and (ii) the introduction of the VGF is expected to make it difficult for developers to obtain financing as there are bankability issues with regards to the new off-takers.
Many international companies had dropped India from their group of focus-countries in 2012, which was a slow year. They should now re-consider and take a look at India again. In addition to increased demand this year, we expect convergence towards more sustainable prices in the market, allowing for better margins across the sector.
Edited by Becky Beetz.
About the author
Jasmeet Khurana is head of market intelligence at Bridge to India, a solar energy consulting company founded in 2008 and based in New Delhi, India, as well as Hamburg and Munich, in Germany. Bridge to India offers services in three fields: Market Intelligence, Project Development and Strategic Consulting.