The Indian Solar Market: Policies & Outlook
Solar power is regarded as a key strategic energy source that can address India’s long-term power requirements. On average, India has 300 sunny days per year and receives an hourly radiation of 4 to 6 kWh/m2/day. Even if 10% of India’s land mass was used for harnessing solar energy, installed solar capacity would be at 8,000GW, or around fifty times the current total installed power capacity in the country.
The Jawaharlal Nehru National Solar Mission (referred to as the NSM) was launched by the Ministry of New and Renewable Energy (MNRE) in 2009. It provides preferential feed-in-tariffs (FiTs) to power produced from solar energy. Several states like Gujarat, Rajasthan and Karnataka have also followed the NSM and have implemented their own policies. Maharashtra, Haryana and Uttarakhand have implemented broad renewable energy policies (but not solar specific).
In addition to FiT-based programmes, the federal government, through the Central Electricity Regulatory Commission (CERC), has introduced Renewable Purchase Obligations (RPOs) for renewable electricity. As a further push for encouraging electricity generation from solar energy, solar specific RPOs have been introduced as a subset of RPOs.
The installed capacity in India as of December 2011 stood at 158.5MW . This is projected to increase to around 6GW in 2016 and surpass 25GW around 2022.
National Solar Mission
The NSM targets solar PV and CSP installations of 20GW of grid-connected and 2GW of off-grid solar power by 2022. In the first of its three phases, from 2010 to 2013, the government incentivized the construction of 500MW of solar PV and 500MW of CSP grid-connected power plants. Project allotment has been split into two batches (allotted in December 2010 and December 2011) of 150MW and 350MW for PV projects.
Winners of projects for batch two were announced on December 2nd 2011, through reverse bidding i.e. developers that offered the highest discount on the initial tariff of INR 15.39($0.39)/kWh were awarded the projects. Twenty seven projects worth a total of 350MW were allotted for an average FiT of INR8.7 ($0.22)/kWh. A maximum size of 20MW was allowed for a single project. An individual or consortium of developers could bid for a maximum of three projects up to 50MW.
Gujarat Solar Policy
Gujarat was the first Indian state to launch its own solar policy in 2009, which is operative until 2014. The initial target was to achieve an installed capacity of 500MW. Given the interest from a large number of developers and the likelihood that a significant number of the initial projects will not materialize, the government allocated projects worth 935MW (PV+CSP). This is the only policy, which has awarded projects with a fixed FiT, on a first-come-first-served basis. For the new control period, i.e. for projects commissioned after January 28th 2012, the new tariff is set at INR 10.5($0.263)/kWh for the first 12 years and INR6.3 ($0.156)/kWh for the next 13 years.
Rajasthan Solar Policy
The Rajasthan Solar Policy, launched in July 2011, has a long-term target of 12GW of installed solar power in the state by 2022. In the first phase, PV projects worth 300MW will be awarded through a competitive bidding process. The FiT offered has been revised to INR8.85 ($0.22)/kWh from INR13.19 ($0.33)/kWh. The policy promotes domestic manufacturing by providing incentives for developers with manufacturing facilities in Rajasthan. Due to its high irradiation levels and availability of space, Rajasthan is likely to become the hub of solar power generation in India.
Karnataka Solar Policy
Karnataka announced its solar policy in July 2011 and targets 350MW of projects by 2016. The state has tendered bids worth 80MW. The last date to submit the bid was November 24th 2011. The selected projects were yet to be announced as of February 2012. The size of individual projects is limited from 3MW to 10MW. The policy has no domestic content requirement.
The RPO mechanism
RPOs are the minimum amount of renewable electricity that obligated entities (distribution licensees, open access and captive producers of 1MW and above) must have as a percentage of their total generated electricity. They can meet this obligation either by purchasing the required quantity of solar electricity directly from producers or by buying solar Renewable Energy Certificates (RECs). It is currently set at an average of 0.25% of the total electricity generation. An electricity generating entity connected to the grid, generating 100MWh of electricity in a year, is therefore obligated to generate 0.25MWh from solar energy.
Obligated entities that fail to meet their RPOs will attract a penalty. CERC has determined that the penalty for non-compliance, measured in terms of the shortfall of solar electricity is INR13.4($0.34)/kWh per for the year 2012. The order from CERC is implemented by India’s individual states through their respective State Electricity Regulatory Commissions (SERCs). The SERCs then fix their own RPO requirement and timeline for fulfilling it. The RPO mechanism is meant to act as a demand pull for solar power in India.
The REC Mechanism
RECs are certificates issued to any generating entity selling renewable electricity to the grid at the Average Pooled Purchase Cost (APPC) of the relevant distribution utility or to third-party consumers at a mutually decided price. Each mega-watt hour of electricity generates one REC, which can then be sold in the open market directly to obligated entities that have a shortfall in their RPO compliance or via an exchange for spot trading.
RECs are not generated by renewable energy projects that sell electricity to the grid at a preferential tariff (to avoid a double subsidy). Electricity producers already selling power at a preferential FiT are not allowed to later switch to the REC mechanism. The trading of RECs was launched on the Indian Energy Exchange (IEX) – the principal trading exchange for RECs in India on February 23rd 2011.
Although each solar REC is worth a minimum of INR9.3($0.23)/kWh (guaranteed floor price), the solar REC market is yet to pick up in India. The main challenge it faces, is the lack of a long-term predictability of REC pricing. The current REC floor and forbearance prices are fixed for five years, i.e. they are only applicable through 2017. Post 2017, the status of the prices are yet undecided. Developers who build their case on RECs face problems in raising debt because they are unable to project their returns accurately for the loan repayment period. As of January 2012, there have been no solar RECs traded. So far, only one solar PV project of 8.5MW is known to be registered by Jain Irrigation Systems Ltd. in Jalgaon, Maharashtra which is still under construction.
As of December 2011, the total installed capacity for solar installations in India stands at 158.5MW for solar PV and CSP. January 2011, in contrast, had just 24MW in total installed capacity. The last quarter of 2011 alone has seen additions of 101.5MW of PV and 5.5MW of CSP. The largest capacity addition of 40MW of PV has been in Gujarat under its solar policy. Installations have also taken place in Maharashtra, Haryana, Chhattisgarh, Orissa and Punjab under the Rooftop & Small Solar Power Generation Programme (RPSSGP) implemented by the Indian Renewable Energy Development Agency (IREDA). Maharashtra also has a 2MW PV project by MAHAGENCO, the state power generation company, selling power directly to the state utility, outside of a defined solar policy. This project has been commissioned primarily to meet its RPO. MAHAGENCO is also developing a 75MW PV project for direct sale to the state utility. Such projects are expected to become more common as states begin to strictly enforce their RPOs. This is expected to open up a large market for EPC players to engage with.
There are a few projects under batch one of phase one of the NSM that have not been completed before the deadline of January 10th 2012. This is because these projects were also late in attaining financial closure. Under the Gujarat solar policy, around 150MW worth of projects have not attained financial closure and are expected to be either resold or dropped by the developers. Around 400MW worth of projects had acquired land only around early November 2011. The commissioning deadline for these projects was December 31st 2011. The deadline was then extended to January 28th 2012; projects have missed this deadline as well and are now penalized. These projects will also receive a lower FiT once commissioned. According to BRIDGE TO INDIA’s assessment, a lower FiT will not affect project IRRs drastically as capital costs have decreased by approximately 20% since January 2011. Given the experience of the NSM with lowered tariffs, and given the falling cost of solar, developers are confident of the viability of projects at lower FiTs.
There are several challenges affecting project execution. Project financing has remained a challenge for a vast majority of projects in India. Most developers have to push large amounts of equity into their projects. For debt, they have had to provide heavy collaterals. For large companies, banks are comfortable providing debt with complete recourse to their balance sheet. For smaller companies, banks expect to obtain all the assets of the company, including office furniture, as collateral. In addition to this, the cost of debt is at an all-time high in India. The Indian economy has seen consistent interest rate hikes by the Reserve Bank of India in the past year. A large number of projects are now relying on export credit agencies (ECAs) like the US-EXIM bank.
Land availability and its acquisition continue to be a major problem. There are many local and bureaucratic hurdles to be overcome. Local infrastructure is also an issue for projects; this includes poor on-site conditions, lack of transmission lines and local law and order problems. While there is an ample supply of solar modules in the market, a crunch in the supply of balance of system (BoS) components and associated raw materials is proving to be a bottleneck for construction. Almost all the projects are under construction at the same time and the vendors are taking orders from multiple EPC players. Due to capacity limitations, such vendors are unable to deliver their orders on time. In addition, there is a shortage of construction equipment like overhead cranes, earth movers and drillers which is causing delays and cost over-runs.
The graph above shows the year-on-year solar PV capacity addition by the various central and state policies in India based on FiTs. This segment is the first driver to push the market into a financially viable industry.
Projects that have already been commissioned before the implementation of the NSM fall under the migration scheme. All projects availing of FiTs thereafter will rely on either the central policy i.e. the NSM or the state policies like Gujarat, Rajasthan and Karnataka.
Project selection and commissioning takes place in phases, for example the NSM has facilitated three phases for its implementation and a further segregation of the first phase into two batches for projects to be commissioned in financial years 2011-12 and 2012-13. The state policies like Gujarat, Rajasthan and Karnataka are also facilitated in stages. Projects are commissioned around a year from it being selected for a particular implementation phase of a policy. For example, projects under batch two of phase one of the NSM will be commissioned late 2012, with most projects being commissioned early 2013.
The FiT market will likely decrease in relevance post 2016. However other drivers will push growth of the solar industry like the enforcement of the RPO mechanism and solar reaching parity with commercial grid electricity and that based on direct consumption.
For in-depth analysis on the future growth of the market in the on-grid and off-grid segments, please contact firstname.lastname@example.org
On 29 February 2012 Solarplaza will be organising 'The Solar Future: India II', a high-level market-oriented conference focused on the growing Indian solar PV market.
For more information about The Solar Future: India II, please visit: www.thesolarfuture.in