Much still to do

The Indian solar sector is seeing strong activity, and cumulative installations have reached approximately 11.2 GW at the end of Q1 2017. Utility-scale projects account for about 10.4 GW and rooftop installations account for almost 800 MW. Mercom is forecasting 2017 installations to reach approximately 10 GW as India becomes one of the most important solar markets in the world after China and the U.S. The pipeline for utility-scale projects that are under development is currently at about 14 GW, and there are approximately 6.5 GW of tenders pending auction.

Large-scale projects under the National Solar Policy (NSM or JNNSM) lead in installations followed by states like Tamil Nadu, Gujarat, Telangana and Karnataka. In terms of pipeline, most of the under-development and tendered projects are coming up under an NSM program in various phases and batches, followed by state policies led by Telangana, Karnataka and Madhya Pradesh.

The government recently doubled the solar park capacity from 20 GW to 40 GW. Solar parks have land set aside exclusively for the development of large-scale projects with transmission infrastructure in place to reduce bottlenecks around land acquisition, transmission and evacuation issues, and other bureaucratic hurdles. There are currently 34 solar parks across 21 states aggregating 20 GW in various stages of development. Reverse auctions held in solar parks have resulted in lower bids as the parks take away some of the risks associated with large-scale project development in India.

While installation activity is robust, extremely competitive reverse auctions are continuing to lower bid prices to record levels. In the recently concluded 750 MW Rewa Solar Park auction in Madhya Pradesh, bids reached a new record low of Rs.3.30 (~$0.494)/kWh (levelized tariff over 25 years), which is more than a rupee lower than the previous low tariff of Rs.4.34 (~$0.065)/kWh, which was recorded in the state of Rajasthan in January 2016. At the REWA auction, the winning bid for the first year tariff came to Rs.2.97 (~$0.0444)/kWh and will escalate by Rs.0.05 (~$0.0007) over 15 years, bringing the levelized tariff to Rs.3.30 (~$0.494)/kWh over 25 years. With this auction, solar tariffs in India have now declined by approximately 73% since 2010.

Constantly declining Chinese module prices (~30% decline over the last year) played a big part in lowering the bids, but this auction had several new features that were also responsible for lower tariffs. The size and location of the projects, payment guarantees, a deemed generation benefit, and a longer construction timeline all helped developers be more competitive in the auction.

However, this auction has both positive and negative implications in the short-term. The big positive is that lower bids reduce the governments offtake bill and current policies are being modified to copy the best features of this auction to replicate it in the future. The auction results also demonstrate that if you remove some of the developer risks by offering payment guarantees and deemed generation benefits in a park with a solid infrastructure, tariffs have room to come down. On the negative side, tenders and auctions are coming to a grinding halt as every state now wants to revise their benchmark tariffs lower, and they want the developers to match the REWA tariff. This is going to be a challenge in the market for some time.

Further challenges
Other risks currently include the upcoming goods and services tax (GST), which is expected to be implemented around July. According to developers, the solar sector will be negatively affected due to the GST, and there may be a 10-12% increase in solar tariffs. That said, there is no clarity around this yet.

Payment delays by distribution companies (DISCOMs) continue to pose a challenge. Most Indian distributions companies struggle financially and payment delays have been reported in a number of states, including Tamil Nadu, Andhra Pradesh, Rajasthan, Madhya Pradesh, Telangana and Maharashtra.

The Renewable Purchase Obligation (RPO) may be the single most important policy to help India achieve its aggressive goal of installing 100 GW by 2022. Though India has made remarkable progress over the last seven years (since the inception of the Jawaharlal Nehru National Solar Mission (JNNSM) in 2010), the 10 GW of solar installations is not as impressive as it sounds. India needs to install 90 GW of solar in five years – a rate of 18 GW per year. Most states have specified RPO targets. However, due to the lack of enforcement of RPO regulations and the absence of penalties when obligations are not met, many of the state DISCOMs (distribution companies) are not fully complying with their RPO targets.

Rooftop installations in India have totaled just 780 MW so far. Although the government is targeting 40 GW by 2022 through rooftop installations, policy support is minimal. While more than 20 states have some net metering policy, very few have demonstrated functioning net metering programs. The poor financial health of DISCOMs has contributed to an unwillingness to actively subsidize rooftop installations, knowing that DISCOMs will lose their most important customers (commercial) and revenue, putting them into a deeper hole.

Accelerated depreciation (AD) rates will come down from the current 80% to 40% starting April 1, 2017, making things tougher. The 10-year income tax holiday under section 80-IA was not reinstated in the recent budget and ended on March 31, 2017. These were the most important incentives driving rooftop solar. With recent low tariffs in the REWA auction, rooftop tenders will also stall, expecting lower bids.

Even with all these challenges, Mercom Capital Group expects India to install in the 9-10 GW range over the next three years. The Modi government is pro-solar and we expect the current administration to continue policy support while in office.

Solar policies announced in Q1 2017

• The Ministry of New and Renewable Energy (MNRE) has announced financial assistance in the form of grants to DISCOMs of up to Rs.3.75 million (~$55,000)/MW for rooftop solar installations. The MNRE also proposed a financial award that will identify best practices of DISCOMs and state nodal agencies, and award the best performance at DISCOM, division and zonal levels.
• The Gujarat Electricity Regulatory Commission (GERC) issued draft regulations for solar and wind power for 2017 to facilitate large-scale grid integration of solar and wind generating stations while maintaining grid stability and security, through forecasting, scheduling, and implementing a commercial mechanism for deviation settlement of the generators. These regulations will apply to all wind and solar generators connected to the state grid, including those connected via pooling stations and selling generated power within or outside the state, or consuming power generated for self-consumption.
• The Government of Karnataka has announced amendments to the Karnataka State Solar Policy 2014-2021. The estimated solar energy potential of the state has been updated from 20 GW to 24.7 GW and the targeted solar capacity has been increased to 6,000 MW by March of 2021.
• The solar park capacity in India has been increased from 20 GW to 40 GW. This has been approved by the Modi administration as well as the cabinet. The Government of India will provide central financial assistance (CFA) of ₹81 billion (~$1.23 billion) for development of these solar parks.
• The state cabinet of Jammu & Kashmir has approved the 2016 draft policy for grid-connected rooftop power projects with net-metering. The policy will be in force for 10 years and rooftop solar projects aggregating 450 MW are to be constructed across Jammu & Kashmir by 2022 under the policy.
• The Central Electricity Regulatory Commission (CERC) released their draft tariff regulations for 2017 to 2020. All renewable energy projects (small hydro, solar, wind) with a minimum of 10 MW capacity will be provided must-run status. CERC has also regulated against delays in payment. If the payment of any bill for charges payable under these regulations is more than 60 days past due, a late payment surcharge at the rate of 1.25% per month will be levied by the generating company.
• The Ministry of New and Renewable Energy (MNRE) has proposed amendments to the guidelines for implementation of the Viability Gap Funding (VGF) program, reducing the minimum project size of special category states and union territories to 5 MW.
• The Tamil Nadu Electricity Regulatory Commission (TNERC) proposed a new benchmark solar tariff of ₹4.50 (~$0.0673)/kWh with accelerated depreciation and a tariff of ₹4.41 (~$0.0659)/kWh without accelerated depreciation for FY2017-18.
• The Ministry of New and Renewable Energy (MNRE) proposed amendments to guidelines for the implementation of Defense Viability Gap Funding (VGF) Program, reducing the fixed tariff for these projects to ₹4.50 (~$0.06735)/kWh from the previous ₹5.50 (~$0.8232)/kWh.
• New benchmark costs have been set for small-scale and rooftop solar projects in India.
• The Government of India is formulating a solar energy program for decentralized power loom units in the country by providing financial assistance and capital subsidies for the installation of solar. Under the program, solar can be implemented as either an off-grid project or an on-grid project. Financial assistance will be provided at 50 percent, 75 percent, and 90 percent of the basic cost of the project (cost of solar panel + inverter + batteries).
• The state government of Delhi released the Delhi Solar Policy 2016, which is applicable for the four-year period, 2016-2020. The policy focuses on promoting an investment climate that enables multiple financial models, from self-owned (CAPEX) to third-party owned (RESCO) models and applies to any solar energy generating system with a capacity of 1 kW or more.
• The Karnataka Electricity Regulatory Commission (KERC) proposed a new benchmark tariff of ₹4.51 (~$0.066)/kWh for solar PV projects starting April 1, 2017.
• The state government of Telangana is planning an Equated Monthly Installment (EMI)-based rooftop installation program for individual consumers.
• After the low tariffs recorded in the Rewa auction, the MNRE released new guidelines for competitive bidding to develop solar projects.
• To increase trade in renewable energy certificates (RECs), the CERC has changed the forbearance price of solar RECs to ₹2,400 (~$37.41)/MWh and the floor price to ₹1,000 (~$14.962)/MWh. The forbearance price for non-solar RECs have been set to ₹2,900 (~$43.39)/MWh and the floor price to ₹1,000 (~$14.962)/MWh.

Raj Prabhu