Solar Under Cloud

Even as India rolls out the world's most aggressive solar energy programme, falling tariff and squeezing margins threaten to derail the country's ambitious 100-GW plan.
By Anilesh S. Mahajan   Delhi     Print Edition: April 24, 2016
Solar Under Cloud
Paying the Price: The initial investment to set up a solar photovoltaic is pretty high and that's making governments wary

It's a tough task ahead for Pashupathy Gopalan, the President of US-based SunEdison Asia Pacific. Most of his peers have already pronounced the demise of his pet project, the 500-MW solar park in Andhra Pradesh, long before it has even taken off.

In November, Gopalan had stunned everyone by quoting an all-time low tariff of Rs 4.63 per KWh - trouncing the previous low of Rs 5.05 per KWh by a fair margin and a long haul from the Rs 17.91 per unit in 2010. After signing the letter of intent (LOI), he is now busy stitching together a financial closure for the project before the July 2016 deadline.

However, even before he has formally approached the financial institutions, they have already indicated their discomfort in financing such projects. What makes Gopalan's job even more difficult is the fiscal health of the parent company, which has been in the news, globally, for all the wrong reasons. It has not only found it difficult to manage cash, but there's every chance that the company will face a $1.4-billion technical default for failing to file its long-expected annual report. Further, SunEdison had to call off its acquisition of Continuum Wind Energy, a Sin-gapore-based company with assets in India, soon after a June 2015 announcement, followed by the termination of yet another acquisition bid for renewable energy company Latin American Power having assets in Chile and Peru, in October.

SunEdison's rivals in India as well as in the US believe that the company had tried its hands at too many things for its own good, and the aggressive bids were part of the same strategy. However, though his failure to attract financers might sound like music to his rivals, it could also potentially derail India's aggressive solar power roll out for 100 GW capacity additions by 2022 -arguably the world's most aggressive target. But, in spite of the odds, Gopalan is confident of achieving financial closure. "The bankers will get to know of my business plan once I reach them. I have several options in my hand. We will be heading for the financial closure by May this year."

Piyush Goyal, Minister of State with Independent Charge for Power, Coal, New and Renewable Energy (Photo: Vikram Sharma)

"It would be unfair to expect them (state governments) to buy (solar) electricity at a higher cost"

At present India has just over 10 GW of solar projects under development, with cumulative solar installations of 5,632 MW and about 8.4 GW expected to be auctioned off over the next few months. Solar market observer, Bridge to India, estimates that India may add 4.8 GW in 2016 and over 9 GW in 2017, excluding the rooftop solar installations and open-access solar markets. If this happens, India could jump to become the fourth largest solar market in the world, after China, the US and Japan this year, and overtake Japan in 2017.

In fact, the solar power segment has changed dramatically in the past five months. SunEdison's bid was followed by the Rajasthan leg of NTPC's bid for 420 MW in six blocks of 70 MW each, where Finnish company Fortum took the tariff to Rs 4.34 per unit. The other winners included Rising Sun Energy (two blocks for Rs 4.35 a unit), Solairedirect (two blocks for Rs 4.35 a unit) and Yarrow Infrastructure (one block for Rs 4.36). Subsequently, a sub-Rs 5 tariff became the new normal.

The survival of the projects, however, will be linked to SunEdison's capability to convince lenders and investors. "The PPA (power purchase agreement) allows me to look for equity partners, and we are considering offloading 49 per cent of the equity as well," says Gopalan, adding that he would convince lenders to believe in his business model. To maintain the high spirits and sub-Rs 5 tariff, the developers would have to limit their construction costs to below Rs 5 crore per megawatt capacity. At today's prices, this is secularly considered as 'risky and difficult' to finance by lenders - unless it is backed by the government's viability gap funding.

State-owned NTPC is rolling out 15 GW of projects in different parts of the country, including Andhra Pradesh and Rajasthan, and that is expected to take care of a large part of construction risks. But still, it is difficult to build projects for less than Rs 5 crore a megawatt. "Currently, most domestic banks are unwilling to fund projects below Rs 5 per kWh because they fear that failed projects could end up on their books as non-performing assets. Some companies that have bid below Rs 5 per kWh are now in trouble and there could be more such cases in the future unless developers pull back and some sanity is restored," says Raj Prabhu, CEO and co-founder, Mercom Capital Group, a global cleantech communications and research firm.

To smoothen out things a bit, Central Electricity Regulatory Commission also believes that the cost of solar projects in India can come down to Rs 5.01 crore per MW. But there is a rider. The calculations were done considering the US dollar at Rs 64.58. The continuous deprecation of the Indian currency will, however, put a spanner in the works, more so, as most developers plan to import panels from China. To put things in context, panels will account for 62 per cent of the total cost of a solar park.

And Sumant Sinha, CEO of ReNew Power, one of the country's biggest players in renewable energy, is a worried man. "Ideally we should have gone for a scenario where the two aspects (crashing tariff and 100 GW target) could complement each other." ReNew Power had chased SunEdison's aggressive bid till Rs 4.85 per unit, but came up with a higher bid of Rs 5.17 in the next round of auctions. Sinha is of the view that the current low tariffs do not augur well for the government's target of achieving 100 GW in the next seven years. "We need many more players and many more investors to be entering the sector rather than shying away from it on account of low returns," he adds. But if Gopalan manages to meet the June target, we could see a turnaround.

Cascading Effect

In February, a group of farmers in Punjab protested the state government's decision to scrap bids under the famers' solar policy. The policy was formulated in July prompting farmers to install capacities of between 1 MW and 2.5 MW. The Punjab Energy Development Agency (PEDA) had announced a tariff of Rs 7.4 per Kwh and by January-end, 381 farmers had submitted their proposals. During the reverse bidding process, however, one of the farmers quoted the lowest tariff at Rs 6.25 per Kwh. But till then the country had seen the freefall of tariff. Soon, Punjab developed cold feet and decided not to declare the results. "There was little we could do. The state government is rationalising the bids and looking for ways to cut down the price to as low as possible," says a senior official of the Punjab government. The reason for scrapping the project could be political, as the state is heading for the assembly polls early next year.

The states are critical in India's plans for the installation of 100 GW solar power capacity. Out of the current solar photovoltaic (PV) pipeline of 23 GW, tender bids for 15 GW have already been submitted, while tenders for 8 GW are still pending. The Ministry of New and Renewable Energy (MNRE) believes that India would add 12 GW of solar capacity in 2016/17, most of which would be executed by states. But there is something that makes experts sceptical about these developments - in the past nearly 40 per cent of state projects were either significantly delayed or scrapped. The reasons include delays in signing of PPAs, land acquisition, transmission and financing. "In the present context, however, the biggest hurdle is determining an acceptable tariff," says a senior official in the know who refused to be identified.

And, it is not out of context. Out of the total 1,485 MW capacity allotted under state tenders between October 2011 and September 2014 nearly 50 per cent, or 680 MW, were delayed or partially lost. Out of this, almost 10 per cent of projects are stalled. "Stalled projects are making most state governments wary about the crashing tariffs," the officer adds.

For instance, Telegana delayed signing the letters of approval with many players after SunEdison's bid. When the state offered 2 GW solar projects in a staggered manner in November 2015, Canada-based developer Skypower won four bids, including a 50 MW project with the lowest bid of Rs 5.17. But, it took Chief Minister K.C. Rao and MNRE Minister Piyush Goyal's intervention for the state government to finally sign the LoA with minor alterations in the contracts in the first week of March. "The states must realise that in solar power projects, no two projects can get you a similar price. There is a tendency among bureaucrats of developing cold feet for fear of getting flak or inquiries. There has to be a transparent mechanism to achieve it and let the market decide the real tariff," says a CEO of a big solar power company, on the condition of anonymity. Sinha of ReNew Power also wants the government to move away from reverse auctions.

Rahul Munjal, Founder & MD, Hero Future Energies (Photo: Vivan Mehra)

"It does not make sense to set up manufacturing units in India when the world can offer you cheaper modules"

However, Goyal backs the reverse auctioning method and says crashing tariffs is good for states. "Most of the states are taking a fiscal recovery route for their distribution companies with the UDAY scheme. It would be unfair to expect them to buy electricity at a higher cost," he says, adding that more transparency would ensure further price fall. All said and done, Goyal needs to take cue from the failures and ensure states do not force the projects to shut shop.

Imports Squeeze Tariffs

The current cost of domestic modules to set up plants is not helping the cause of solar power projects in India because they are attracting 70-75 paise more tariff than projects based on imported modules, especially Chinese. "In today's context when the competition is focusing on cutting corners and reducing tariff by every possible paisa, the Chinese modules make more sense," says Gopalan.

For example, on March 16 2016, the 100 MW NTPC tender in Rajasthan saw three winning bids that were very close - between Rs 5.06 and Rs 5.07 per kWh. And, three months ago Inderpreet Wadhwa-promoted Azure Power had won two projects in Andhra Pradesh with a combined capacity of 100 MW for Rs 5.12 per KWh, followed by Adani Group's Prayatna Developers with a bid of Rs 5.13 per kWh for a 50 MW plant. Both offers show a huge price differentiation compared to SunEdison Asia's bid of Rs 4.63 per KWh. However, in spite of a rap on the knuckles from the World Trade Organization, Power Minister Goyal indicated that India will appeal against the decision and continue to support domestic players. "The major impact of squeezing of tariff is severe on the domestic manufacturers," says Gyanesh Choudhury, Director, Vikram Solar, adding: "There is a direct 17 per cent export benefit for Chinese players. Else, we are competent to compete with them." In fact, Wadhwa believes that once solar parks are set up, power should, at some point in time, come down to Rs 0.

Recently, a think-tank, Bharat SolarPower Develop-ment Forum (BSDF), had taken a stand on helping domestic manufactures, as they were not happy with the fall in tariff. "We are fine with the 100 GW target, but the recent dip in tariff is also creating a situation where domestic players are going out of business. This would mean more flow of foreign capital and no employment generation in India. This is not acceptable to us," says B.P. Sharma, Convenor, BSDF. He insists that pushing solar manufacturing is necessary to generate more employment, along with strengthening the Make in India programme.

Make in India: The Answer

India is also in the process of finalising the draft policy that former DIPP secretary Amitabh Kant had prepared just before leaving office, to promote large-scale solar equipment manufacturing. Kant had suggested setting up of GW-scale manufacturing setups like those in China. India does not have presence in manufacturing polysilicon, ingot or wafer creation. Domestic manufacturers, including MoserBaer, Indosolar, Vikram Solar and Waree Technologies, are not capable of taking on global majors. In fact, companies with deep pockets, such as Tata Solar, Adani Group and SBG Cleantech (a joint venture between Japanese Telecom, SoftBank Corp, Sunil Mittal's Bharti Enterprise and Taiwan-based Foxconn Technology), could be India's answer to them. Chinese company Trina Solar is also looking at setting up a manufacturing unit in India.

The policy has provisions for value-gap funding (VGF) and central financial assistance (CFA). However, the big drawback of the draft policy reviewed by BT is the scale of investment required. The draft expects players to manufacture polysilicon, and create ingots and wafers out of them, besides fabricating cells before assembling the modules. "Globally there is no player who does all the work. Polysilicon is a chemical process, whereas wafers are semi-conductors and modules are just assembly of parts. There is no synergy in this," says Sharma. Now, the RSS-backed BSDF is pushing Goyal to go for segregated approach and help production according to the expertise of the players.

Sumant Sinha, CEO, ReNew Power (Photo: Vivan Mehra)

"We need more players and more investors to be entering the sector rather than shying away from it on account of low returns"

"It does not make sense to set up manufacturing units in India when the world can offer you cheaper modules," says Rahul Munjal, Founder and MD, Hero Future Energies. Raj Prabhu of Mercom Capital Group agrees: "The government should reconsider venturing into the manufacturing business and instead focus on removing hurdles, such as high duties, provide world class infrastructure and let the free markets work." In fact, the US initiative to support manufacturing by funding solar technology companies ended disastrously, with most going bankrupt because they could not compete with low-cost panels from China. Things have not been any better in Europe.

"Successful manufacturers around the world have achieved massive scale and rapid efficiency improvements that have brought down costs. Achieving similar economies of scale in India will require massive investments without guaranteed success," says a CEO, requesting anonymity. The only solution Indian manufacturers are offering is anti-dumping duties against Chinese imports. It is not there on the agenda of Goyal as yet, but RSS is trying to bring it back on his table. This churn will continue, but Goyal needs to keep most of his blocks together to prevent derailing of the 100-GW dream. Let's hope at the end India emerges victorious.

 

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