Post trade restriction with China, what are the challenges facing the solar sector in India?
Majority of the solar PV modules installed domestically continue to be sourced especially from China, given the high cost competitiveness in sourcing of such modules. While safeguard duty has been in place since July 2018 which has been recently further extended for another one year till July 2021, it has also not helped in a big way to encourage/improve competitiveness of the domestic manufacturing of PV modules so far. In the backdrop of the ongoing geo-political tensions prevailing between India and China in recent periods, sourcing / availability of PV modules for the developers has, however, not been adversely affected. Nonetheless, any tightening on the trade restrictions with China will be a potential risk which will have a negative impact especially for the developers who have won the PV projects in bidding process, basis the expected availability of such imported modules at competitive pricing.
How is ‘Aatmanirbhar Bharat” for the renewable energy sector shaping up?
Policy push by Government of India (GoI) for local manufacturing under its “Aatmanirbhar Bharat” programme is strong which is certainly a positive for domestic PV module/cell manufacturers. This is also evident from the recent introduction of production linked incentive (PLI) scheme announced by Ministry of Finance, GoI as well as extension of safeguard duty at 15% for 1 year till July 2021. However, policy clarity on details of the PLI scheme as well as other measures such as basic customs duty on sourcing of PV modules including a long term trajectory is still awaited. Further, there has been a greater push by GoI on mandatory use of domestically manufactured modules through announcement of various schemes over the past 2 year period by MNRE such as CPSU scheme, domestic manufacturing linked solar projects and KUSUM scheme; which is also expected to benefit in improving the order book for domestic solar OEMs.
The Solar Power tariffs have plunged to a low of Rs. 2/kWh. How do you view this development?
The sharp decline in the solar power tariff to Rs. 2/ unit in latest bid is positive from the off-takers’ perspective, given the further improved tariff competitiveness of solar energy. This decline is mainly driven by a mix of factors including the expectation of a further decline in module price, lower cost of debt and expectations on higher energy yield aided (by the use of high-efficiency modules and/or trackers as well as relatively better radiation levels in Rajasthan). Moreover, the availability of power sale arrangement with Rajasthan discoms under this bid (based on industry sources) provided the developers an assurance of a timely signing of power purchase agreements (PPAs) with the SECI.The viability of the competitively bid-based solar tariffs would however remain critically dependent upon the capital cost, the availability of long tenure debt at cost competitive rates and the PLF level. At the prevailing module price level of 18-19 cents per watt (for high efficiency modules) and USD-INR exchange rate of 75, the developers would have to secure debt funding at less than 9.0% and achieve AC PLFs of 27.8% (assuming DC PLF of 18.5-19.0% & AC-DC ratio of 1.5 time) for reasonable returns. The Government is proposing to impose BCD on imported PV modules. While clarity is awaited on the timing and quantum of the BCD, the winning developers would have to claim the same through additional tariff under change in law in case of any imposition of BCD. Similarly, the extension of SGD beyond July 2021, say at 15%, would increase the levellised tariff by about 14-15 paise per unit at the prevailing module prices.
Will India hit the target to produce 175 gigawatts of renewable energy by 2022. Your views
Given the relatively higher execution headwinds in wind sector as well as slow progress in capacity addition in roof-top solar sector, cumulative target of 175 GW is unlikely to be met by Dec 2022. As per ICRA’s estimates, overall RE capacity is expected to touch about 120-125 GW till Dec 2022, based on the progress so far and expected capacity addition in RE at about 11-12 GW a year. Out of 175 GW, 40 GW has been earmarked for roof-top segment, in which a major shortfall is expected due to several regulatory challenges as well as passive resistance shown by the discoms in promotion of such segment.
What has been the impact of Covid-19 on the renewable energy sector, especially the solar industry?
With lockdown restrictions amid Covid 19 during the current FY, under-construction solar projects were affected witnessing execution delays between 4 to 6 month period. This delay has however been covered under timeline extension of 5 month period under force majeure clause, as also notified by MNRE providing a relief to such affected projects. However, the operational solar projects remain unaffected due to must-run status applicability. MNRE also acted swiftly in April 2020 directing the utilities to honor the must run status, as few distribution utilities opted for forced curtailment of such power, under the force majeure clause. Given the execution delays witnessed in the first half of the current FY, overall capacity addition in renewable segment is likely to remain lower by about 15-20% as against that of 6.5 GW seen in the previous FY.
What is your assessment for the next financial year 2021-22?
Given the strong project pipeline as reflected from the under-construction / awarded project capacity of about 50 GW, we expect the capacity addition in renewable segment to improve in next FY (FY 2021-22) to about 11-12 GW, as against about 7.5 GW in the current FY. Policy push towards renewables coupled with improved tariff competitiveness both for solar PV and wind energy, remain fundamental drivers which will continue to drive the capacity addition in renewable segment domestically.
India's gigantic ambition to increase its renewable energy target to 450 GW by 2030 requires huge investment, which is not forthcoming. How can India overcome its financial constraint to achieve its renewable obligation?
While the demand drivers for the renewable energy sector remain solid and in-tact, the sector continues to face challenges arising from the concerns on the financial health of the state discoms (which are the ultimate off-takers) as well as regulatory challenges arising out of instances of forced curtailment, tariff renegotiation attempts seen (issue still pending since July 2019, in state of Andhra Pradesh) as well as in-consistent /varying norms for RPO across the states. Further, the timebound signing of PPAs and PSA with the distribution utilities, coupled with tariff adoption of the same by the respective regulatory commission entities is required. More importantly, availability of land & evacuation network also remain critical factors for expected growth in the capacity addition. With respect to financial health of discoms, there is a serious need for them to improve their operational in-efficiencies (ie, to curtail aggregate technical & commercial losses in line with regulatory targets). This apart, tariff adequacy as well adequate subsidy release from the State Governments remains extremely crucial from the discoms’ cash flow perspective, given the delays in tariff determination process as well as build-up of subsidy dues for discoms in many states.