The fundamentals of the solar sector have shifted. After years of panel price drops, module prices have gone up this year by about 10 percent, while the rupee has fallen about nine percent. As this occurs, policy, with all its changes and delays, have not been able to keep up with the rapidly changing solar market environment.

There has been a total of 622 MW of installations in India in the first seven months of 2013, with only 73 MW installed in the last three months. Solar has tremendous promise as one of the most attainable sources of power in India and represents a great future for the economy, industry, jobs, and environment. To achieve this future, India needs to avoid distractions and maintain focus on creating a fertile policy environment for private and foreign investments in the power sector.

The decisions made by India to pursue anti-dumping investigations and domestic content requirements (DCR) have all but paralyzed the sector. Nobody knows what is coming next. The Indian economy continues to face challenges with slow growth, high interest rates and a weak rupee, making life harder for solar developers.

It is naïve to think that India can impose DCRs and anti-dumping tariffs without negative repercussions and at the same time look to increase exports to and attract investments from these same markets. As we witnessed in the United States vs. China and the EU vs. China trade cases, there is bound to be retaliation. In a recent development, the United States launched an anti-dumping investigation into steel pipes exported by India and other countries on behalf of its domestic oil and natural gas industry, while Ontario lost its DCR case with the Word Trade Organization.

With the government desperately looking to attract foreign direct investments due to deteriorating economic conditions, India is sending the wrong message to investors with the anti-dumping case and DCRs. Instead, they should provide long-term policy visibility and a growth roadmap.

Here is what we are hearing from major stakeholders:

Manufacturers
Indian manufacturers see DCRs and anti-dumping tariffs as the only way to survive price competition. After talking with several Indian manufacturers (with a combined 500+ MW in module manufacturing capacity), the picture that is slightly different than reported in media. The lowest capacity utilization  mentioned among them was 60-70 percent while a few of them said it was in 80-90 percent range.

Developers/EPCs
Developers and EPCs working in India stated that they are not opposed to locally-manufactured products. If anything it would make procurement much easier. However, they claim that local manufacturers do not provide the kind of warranties to back up their products that come with European and American panels. They also said that local manufacturers are unable to match the price and efficiency parameters. Developers also allege that local manufacturers themselves import panels, and place their own label/stamp on it.

Developers are also being hit by a weak rupee, high inflation and the recent panel price increases. Various state governments insist on L1 bidding (matching the lowest bid), adding even more pressure which has made project financing extremely challenging with banks questioning project viability due to low tariff levels. Lack of knowledge among state agencies was another concern by developers, with many states insisting that developers match the lowest bids from other states without understanding the differences between states in solar insolation, land costs and other issues. L1 bidding has become the number one hurdle in financing projects through state policies.

Unlike manufacturers, Indian project developers are not as well organized and lack a unified voice and leverage, something that is sorely needed when it comes to policy decisions.

Policy Makers
Ministry of New and Renewable Energy (MNRE) acknowledged the dilemma and the complexity of applying tariffs and DCR selectively; local module manufacturers want DCR and duties on imported modules but not necessarily on cells because they import cells. Cell manufacturers want duties on imported cells but not on wafers because they import wafers. Meanwhile DCR is effectively shutting out all other PV technologies except c-Si.

India doesn’t want “cheap” foreign panels but who will pay for more expensive local panels? MNRE is looking to Viability Gap Funding (VGF) as the way to combat increased costs.

VGF has now morphed into a funding/subsidy mechanism to absorb the high cost of DCR mandated by the government. It was also suggested that developers should petition in a unified way for revised tariffs if they think costs have gone up.

Financial Institutions
Financial institutions want policy certainty and stability. Among institutions that are funding or looking to fund solar projects, there is a growing concern about L1 bidding being adopted by states as it is seen as a “race to the bottom” with bidders required to meet the lowest bid. Banks see very thin margins with these low bids and are concerned that corners will be cut in order to keep costs low, resulting in poor project quality. Another huge concern is the financial health of the off-takers as state utilities struggle financially, maintaining doubtful credit worthiness. It is up to the government to have a payment guarantee mechanism in place to give confidence to financers. Of the financial institutions we spoke with, most said they are taking a slow and deliberate approach as the policies are “too complicated and unpredictable”.

None of the financial institutions we spoke with were interested in financing Renewable Energy Certificate (REC) projects due to lack of enforcement of Renewable Purchase Obligations (RPO) and uncertainty surrounding them. REC bids last month were around Rs.9 (~$0.15) while projects were bidding in the Rs.7 (~$0.12) range under state policies.

Land acquisition and grid evacuation issues were the other major concerns. Land acquisitions are getting more complicated causing further delays. Lenders prefer a system similar to Gujarat’s, where the state government helped with land acquisition and ensured evacuation.

Update on Various India State Policies

JNNSM

Phase I Batch 1 – PPAs for Batch 1 projects were signed for 610 MW (140 MW-PV, 470 MW-CSP). 130 MW of PV projects have been commissioned and only one 50 MW CSP project has been completed out of the 470 MW that were originally due to be commissioned by May 2013. The remaining projects have been given an extension until March 2014.

CSP developers have blamed the delays on a shortage of heat transfer fluid (HTF) and lack of accurate ground-measured Direct Natural Irradiance data (even though it is the responsibility of the developers to make sure they have accurate data before bidding). After speaking with two main HTF suppliers, one supplier said supplying HTF took longer because CSP developers started negotiations late in the project development process. The supplier also pointed to over 35 successfully completed on time projects. The other supplier said that they have the required HTF and cited the fact that they just completed supplying to the world’s largest solar plant.

Even though the reasons behind CSP project delays are suspect, CSP developers were successful in getting a 10 month extension, and if the projects are completed within that timeframe they will receive tariffs between Rs.10.49-12.24 (~$0.18-$0.20), a premium of almost 40-50 percent over PV projects (most of which are currently bidding in the Rs.7-8/~$0.12-0.13 range).

It is time to get rid of the required PV:CSP ratio for good and let the market decide on the best and most cost-effective technologies.

Phase I Batch 2 – 300 MW of the 340 MW Batch 2 projects have been commissioned so far with the remaining 40 MW delayed and most likely to be canceled.

JNNSM – Phase II

Phase II of JNNSM, which was supposed to be rolled out at the end of last year, has been delayed and is pending cabinet approval. According to MNRE, the approval may come at the end of August, but that’s with a big “maybe”.

As part of JNNSM Phase-II Batch-I, Solar Energy Corporation of India (SECI) has announced a draft Request for Selection (RfS) to set up grid-connected solar PV projects for a total aggregate capacity of 750 MW under the VGF scheme. The draft proposal is pending cabinet for approval. The bidding process will be divided into two parts, Part A and Part B. Bidders can apply for projects under Part A or Part B or both Part A and Part B. Projects under Part B will have a DCR – the only difference between the two. The percentage of DCR is still being decided.

Under VGF, developers will sign a PPA for 25 years to sell power at a fixed tariff of Rs.5.45/kWh (~$0.09/kWh). In the case of accelerated depreciation, the tariff will be reduced by 10 percent to Rs.4.95/kWh (~$0.08/kWh). The maximum limit for VGF is 30 percent of the project cost, or Rs.2.5 crore/MW (~$416,667/MW), whichever is lower.

REC

According to MNRE, even though they push the issue with state electricity regulatory commissions to ensure RPOs are met, most states are not able to absorb the high cost of renewable power due to financial difficulties. With general elections looming, it doesn’t look like much will change in the near term unless other states follow Maharashtra’s lead in enforcing RPOs.

Tamil Nadu

Tamil Nadu announced a 1,000 MW tender in December 2012 for PV projects. Tamil Nadu used L1 bidding process (the lowest bid has to be met by all bidders). This resulted in a very low (Rs.5.47/kWh; ~$0.09/kWh) bid which was deemed unviable and prompted TANGEDCO (the state Discom – or government utility) to fix Rs.6.48/kWh (~$0.11/kWh) as the acceptable bid. Fifty-two developers have signed letters of intent for a total of 698 MW. It will be interesting to see how these projects get funded as financial institutions told Mercom that Rs.6.48 (~$0.11) is not a tariff that will support project financing, especially considering the credit-worthiness of TANGEDCO. Tamil Nadu said that a DCR will be imposed on state projects, with the rules coming out in about three months. This is the first time we have heard of a DCR imposed on state projects.

Gujarat

Gujarat currently has 857 MW of PV plants commissioned so far under its state policy, the most of any state or policy. Gujarat, known as the most business-friendly state, is inexplicably seeking to cut the tariff rate it pays to projects, citing the excessive profits. Gujarat Urja Vikas Nigam, the state-run bulk buyer of solar power, has submitted a petition to regulators because of the ”unjustified and windfall gains” by project owners. Considering that the Chief Minister of Gujarat is a frontrunner for the position of Prime Minister, if the opposition party wins the elections, this move to cut tariffs might not go far.

Madhya Pradesh

Madhya Pradesh has about 300 MW in the pipeline that is due to be commissioned this year.

Andhra Pradesh

The Andhra Pradesh government has decided to allow any company to set up a solar project in the state at Rs.6.49 (~$0.11) per kWh, even to those who have not participated in the recently-concluded competitive bidding for 1,000 MW. This announcement comes after a little over 200 MW of projects were selected through L1 bidding. This is a challenging tariff to get projects financed considering the rupee is down almost 10 percent this year and module prices are up.

The Government of India has also given its initial go-ahead on splitting the state of Andhra Pradesh into two states, Telangana and Andhra Pradesh. Solar power projects are expected to be affected and possibly delayed, but we are awaiting more details.

Chhattisgarh

Chhattisgarh announced a solar policy with a goal to develop 500-1,000 MW of PV projects by 2017. While PPAs were expected to be signed for 225 MW, except for 3 MW, most are pending due to land acquisition and financing problems.

Maharashtra

On July 22, in a move that some believe might herald similar actions in other states, Maharashtra’s Electricity Regulatory Commission (MERC) issued an order for enforcement of RPOs in the state. MERC ordered 93 obligated entities to demonstrate RPO compliance by March 31, 2014, for the past four years up to that date or face fines that could reach as high as Rs.13.40 (~$0.22)/unit. It will be a wait-and-see situation until this latest threat is backed up with action. The impact of real enforcement could be significant as Maharashtra is one of the largest energy producing (and consuming) states in India. The obligated entities will be required to add approximately 400 MW of solar by the deadline. Of course, MERC will have to set up a monitoring and verification system in order to prove entities have complied with their requirements or are subject to fines. 

Punjab

Out of the 300 MW proposed, Punjab opened bidding for about 250 MW of PV projects. With average tariffs ranging in the Rs.8.20-8.40 (~$0.13-0.14)/kWh range, these are some of the healthiest tariffs among Indian states.

Note: Dollar-rupee conversions were calculated at $1 = Rs.60. The Indian Rupee is trading at record lows.

About Raj Prabhu

Raj Prabhu is CEO of Mercom Capital Group, llc, a clean energy communications and consulting firm with offices in the United States and India. Mercom consults its clients on market entry, strategy, policy, due-diligence and joint ventures. For more information, visit: http://www.mercomcapital.com. Mercom’s clean energy reports can be found on: http://store.mercom.mercomcapital.com/page/.