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The Solar Mirage

India's solar capacity addition is slowing as viability of projects and host of other issues trouble developers
twitter-logoPB Jayakumar | Print Edition: June 28, 2020
The Solar Mirage
Illustration by Raj Verma

ACME Solar, one of the largest solar power companies in India, shook up the sector three years ago. It bagged a contract from state-run Solar Energy Corporation of India (SECIL) to set up a 200 megawatt (MW) plant in Rajasthan with a bid of Rs 2.44 per unit. This was the lowest tariff quoted for solar power in India. It triggered a price war and steeply reduced solar energy prices in India.

In the first week of May, ACME decided to terminate the contract by invoking the "force majeure" clause citing coronavirus. The reasons it gave included over 15 months delay in land acquisition, impact of coronavirus outbreak on suppliers of solar cells and modules from China and delay in setting up of transmission networks. It is reportedly trying to monetise some of its projects.

In another development a month ago, Shapoorji Pallonji Infrastructure (SP Infra) sold its five operational solar energy assets, including 169 MW in Maharashtra and 148 MW in Tamil Nadu, to global investment firm KKR, for Rs 1,554 crore. It was one of the largest deals so far in India's solar power segment involving a private equity player.

On February 6, billionaire Gautam Adani-promoted Adani Green Energy sold half its stake in 2,148 MW solar power assets to Total Gas & Power Business Services SAS for $510 million. It was one of the largest deals in India's solar energy space, after Tata Power's acquisition of Welspun Renewables for Rs 9,249 crore in 2016.

Despite the move to bring in a new Electricity Act to reform the power sector, all is not well with the country's hyped solar energy sector, which started adding huge capacities after 2014 following an ambitious government plan. To top this spree of asset sales, there are no takers for new projects. Capacity addition plans have gone for a toss. Power demand has shrunk, demand-supply gap is narrowing, growth is slowing, developers are finding it difficult to raise funds, land acquisition is still an issue and debt-laden state procurers want to sign fresh power purchase agreements (PPAs) at a lower cost (they say earlier bids were too high and costs have fallen since then).

If projects continue to falter like this, India's capacity addition will be way short of the 100 GW target by 2022. The Covid-19 crisis is adding fuel to the fire. The Paris-based International Energy Agency (IEA) has estimated that India's solar photovoltaic (PV) sector additions will fall 23 per cent in 2020. Power demand has seen a 25 per cent drop due to the lockdown, and IEA predicts a 6 per cent year-on-year decline this year, worsening the plight of solar sector companies.

Though the government has announced a Rs 90,000 crore low-cost loan facility to bail out state distribution companies as part of the Covid-19 package, the issues the sector is facing are deep and require fundamental changes, say experts.

Government Attempts

The draft amendment to the Electricity Act 2003 is expected to bring in a new tariff policy. The government is also working on a policy for the solar sector to balance the interests of different stakeholders.

Such interventions are needed. In recent years, many states have picked up legal battles with solar project developers for entering into fresh PPAs at lower costs than in the original agreements. The reason is simple. The current solar power tariffs (Rs 2.50-2.87/kWh) have stabilised at 20-30 per cent below the cost of existing thermal power in India, and up to half the price of new coal-fired power, says a study by Institute for Energy Economics and Financial Analysis.

India is seeing a big shift towards higher share of variable renewable energy, which is leading to system integration issues, says the IEA. "Decarbonising existing fossil fuel plants, thrust on renewables like solar, digitising and upgrading the transmission and distribution network and decentralising power to the last mile should be priorities," says Sunil Mathur, CEO and Managing Director, Siemens India. Thrust on hybrid power and latest energy storage solutions are necessary, say experts.

The fight against climate change is helping the solar cause, but that is not enough. Though energy and emission intensities of India's GDP have decreased by more than 20 per cent over the past decade, total energy-related carbon dioxide (CO2) emissions continue to rise. "India's per capita emissions are 1.6 tonnes of CO2, well below the global average of 4.4 tonnes, while its share of global total CO2 emissions is some 6.4 per cent," says the IEA.

Bhaskar Rakshit, Principal, Lead-Power, Kearney India, says renewable capacity under different stages of construction is about 30 GW (18 GW solar and 10 GW wind); the supply chain and labor shortage challenges emanating from the current crisis will lead to delays in new renewable project construction. According to one estimate, these projects are worth Rs 3.5 lakh crore.

The crisis can also be an opportunity. "In renewables, where digital is being used to manage project construction and plant operation and maintenance, the current crisis will accelerate use as companies look to minimise the impact on construction and operations due to potential labour shortages," he says.

Domestic Manufacturing

A lion's share of modules required for India's solar capacity is imported from China. India has failed to create an environment for large-scale local manufacturing.

Though solar capacity has increased 13 times since 2014, local manufacturing of equipment has not kept pace. By December 2019, India had deployed 84 GW of grid-connected renewable electricity and is targeting 175 GW by 2022. India's electricity mix will eventually include 450 GW of renewable energy capacity. Still, India sources 80 per cent of its solar modules from China, and business has been impacted due to measures implemented to combat the spread of the virus, says a study by ratings agency Crisil.

A policy framework that ensures long-term off-take at sustainable prices is necessary to boost domestic solar equipment capacity, says Shailendra Roy, MD & CEO, L&T Power and Whole-time Director, L&T. "As an example, China changed its focus from generation to manufacturing and went on to set up large solar plants that offered it economies of scale, helping it lower costs and capture the global market," he says. Apart from China, Southeast Asian nations such as Vietnam, Taiwan and Korea can supply modules. But India's solar ecosystem is mostly centred around the ability of China to supply equipment at very low prices with its mass manufacturing capacities and research and development already in place. "It may not be economically viable for most developers to switch to alternate sourcing options as they have bid for projects on the basis of the Chinese module cost structure," says Bhaskar Rakshit. It takes about Rs 4,000-5,000 crore per GW of capacity addition.

India's current installed module manufacturing (the main component of solar equipment) capacity is close to 8 GW, but most of it is underutilised due to lack of demand. India, European nations and the US have made attempts to prevent "dumping" by China with higher import duties but not succeeded. "Even with the new duties, solar panels imported from China ($0.16-0.20/watt) are cheaper than domestic modules ($0.25-0.28/watt). Solar panels from Korea are priced at $0.22-0.24," says Gyanesh Chaudhary, Managing Director, Vikram Solar, a leading domestic solar equipment maker. He adds that while Korea and Vietnam are building solar manufacturing capacities, they are far from matching China's scale, financial support, skilled manpower and prices.

Of the $1.5 billion worth of solar equipment imported by India in the first nine months of FY20, $1.2 billion was from China. India had imposed a 25 per cent safeguard duty on import of solar cells in July 2018, but this was later reduced to 15 per cent. It is applicable until July 2020. A basic customs duty of 20 per cent was also announced on import of solar cells and modules in Budget 2020.

Utkarsh Sinha, Managing Director, Bexley Advisors, says external factors like falling oil prices and Covid outbreak are likely to cause stress in sectors like alternative energy. "Particularly, transactions that were on the verge of culmination may face reassessment and re-evaluation," he says. Total global corporate funding, including venture capital funding, public market and debt financing into the solar sector in Q1 2020 was $1.9 billion, 31 per cent lower compared to $2.8 billion in Q1 2019, says a Mercom Capital study.

Falling Growth

India's target is 175 GW clean energy capacity by 2022, of which 100 GW is solar, with investments of around $80 billion. But as on January 31, 2020, installed solar capacity was only 34 GW. Solar installations dropped 12 per cent in 2019 to 7,346 MW from 8,338 MW in 2018. While large-scale solar projects, which accounted for 85 per cent of installations with 6,242 MW capacity, saw a 7 per cent decline, only 1,104 MW of rooftop solar was added, a drop of 33 per cent year-on-year.

At the end of 2019, cumulative solar installations reached 35.7 GW - 31.3 GW (87.6 per cent) by large-scale projects and 4.4 GW (12.4 per cent) by rooftop solar installations (according to Mercom). The Parliamentary Standing Committee on Energy, which expressed its dissatisfaction over missing of yearly solar energy capacity addition targets, said in a report that the MNRE has the huge task of "commissioning the remaining 65 GW of solar energy capacity in just about two and a half years to meet the 100 GW solar energy capacity target by 2022". This means an average of more than 26 GW per year. The ministry claims it can meet the targets and that 9,000 MW capacity is likely to be commissioned in FY21.

The fact, however, is that not many have bid for projects in the recent past. In November last year, 734 MW of solar tenders were floated, about 49 per cent less that November 2018's 1.4 GW. There were no auctions in November 2019. In October, 2.7 GW was tendered, but only 1.3 GW was auctioned. January 2020 saw an increase of 70 per cent growth month on month solar projects, which included two big tenders - a 1.2 GW tender from SECI and a 1.5 GW retender by Rewa Ultra Mega Solar in Madhya Pradesh.

The sector is grappling with a host of other issues, too. The overall economy is slowing down, there are delays in payments by distribution companies, PPAs are being renegotiated, production is less, there is difficulty in forecasting and scheduling, apart from funding issues, reimbursement delays, tariff caps, higher cost of participating in tenders, and evacuation infrastructure availability? the list is long. Investments are also falling. In CY 2018, they totalled $9.8 billion compared to $11.5 billion in CY 2017. Investments in the Indian solar industry were $970 million in the Q1 2020, 66 per cent lower than the $2.8 billion recorded in Q1 2019.

Most large economies are shut and there is minimal activity in solar markets. "Solar project M&A was the bright spot in this time of uncertainty, proving once again that solar is a safe long-term bet. The worst maybe yet to come but hope is that activity picks up in the second half of the year," says Raj Prabhu, CEO of Mercom Capital Group. A few fixes can turn around the situation. Removing tariff caps in reverse auctions, timely payments by government agencies and facilitating loans can get the solar power sector moving again. Realistically, solar installations are estimated to be 65-70 GW by 2022, way below the 100 GW mirage.

@pb_pbjayan

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