BRIDGE to INDIA India Solar Compass April 2014 Edition

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INDIASOLAR

COMPASSApril 2014

Quarterly update on the Indian solar market

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GlossaryAD Accelerated DepreciationAPPC Average Pooled Purchase Cost CAPEX Capital ExpenditureCSP Concentrated Solar PowerDCR Domestic Content RequirementEPC Engineering, Procurement and ConstructionGBI Generation Based IncentiveIPP Independent Power Producer LOI Letter of Intent NSM Jawaharlal Nehru National Solar MissionNTPC National Thermal Power Corporation OPEX Operational expenditurePPA Power Purchase AgreementPV Photovoltaic REC Renewable Energy CertificateRPO Renewable Purchase ObligationSECI Solar Energy Corporation of IndiaTANGEDCO Tamil Nadu Generation and Distribution CorporationTNERC Tamil Nadu Electricity Regulatory CommissionVGF Viability Gap Funding

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1 Executive Summary – a tepid start to 2014 The Indian solar market continues to rely heavily on policy driven projects to meet capacity targets. Distributed generation market, constituting more than 50% of total solar capacity in most countries around the world, has not yet taken off in India primarily because of complex/ unviable open access regulations, resistance from utilities and direct/indirect subsidies provided to conventional power supply. Policy initiatives are (slowly) moving in the right direction but to turn solar power into a true game changer, we need an urgent overhaul of policy framework and transparent pricing of grid power.

Project Allocations

The highlight of the last quarter (January 2014 – March 2014) was allocation of solar PV projects under batch one, phase two of National Solar Mission (NSM). ACME, Azure Power and SunEdison emerged as the big winners with 100 MW each. Prominent players who missed out included Green Infra, Tata Power, Mahindra Solar, Welspun (except for 5 MW), Renew Power and First Solar amongst others. The bid levels were broadly as expected although quite aggressive in our view. Our key takeaways and observations are as follows:• Domestic Content Requirement (DCR) has been a failure costing in

excess of M10 million/MW as local manufacturing has not gained anything meaningful for the long-term. For the manufacturing sector to thrive, we need investment in infrastructure, R&D, tax/labor reform and bigger volumes.

• Extremely competitive bidding means there will be too much pressure on costs ie poor project quality. Although the Viability Gap Funding (VGF) mechanism has been a relative success, a more performance focused regime such as Generation Based Incentive (GBI) is far more favorable in our view.

• Considerable interest shown by foreign project developers and Independent Power Producers (IPPs) is very welcome as it brings more credibility to the market and hopefully, will result in much needed international expertise in project execution and deliverability.

On the state policy front, 482 MW of new power purchase agreements (PPAs) have been signed across four states in the last quarter - 42 MW in Andhra Pradesh (against a target of 150 MW), 80 MW in Karnataka (after a delay of six months), 110 MW in Uttar Pradesh (towards the tail end of the preceding quarter) and 250 MW in Punjab. These projects are evenly split between experienced and first time developers. A significant number of these experienced players have in-house EPC capabilities, leaving lesser room for pure-play EPC companies, which continue to struggle.

Another 300 MW of projects are expected to be allocated in UP after the general elections in May. Madhya Pradesh expects to sign PPAs for 100 MW solar PV projects in the ensuing quarter.

482 MW of PPAs have been signed across

state policies and 750 MW under the NSM in the

last quarter

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Capacity Addition

In the first quarter of 2014, India added just 89 MW of new capacity - the lowest since Q3 2012. Out of this, 55 MW has come from three state level projects with the balance 34 MW being primarily driven by captive or third party sale projects relying on accelerated depreciation (AD) and Renewable Energy Certificate (REC) incentives. • Rajasthan: 20 MW project by Essel Mining (commissioned on time) • Madhya Pradesh: 25 MW project by EDF backed ACME • Andhra Pradesh: 10 MW renewable purchase obligation (RPO) project

by NTPC

As the REC market has failed to take off (around 6% of RECs managed to find buyers on the Indian Energy Exchange in the first quarter of 2014), project developers have moved away from selling power to local utilities at APPC (typically M2.50-3.00/ kWh, $0.04-0.05/kWh) to finding private consumers with tariffs in the range of M6 – 9/ kWh ($0.1-0.15/kWh). As an example, a 6 MW project has been set up by a textile company for captive use and SunEdison has set up an 18 MW solar park in Tamil Nadu. We expect this market to grow rapidly as election fever subsides (reducing political pressure to keep tariff increases low) and grid parity is attained across more states.

Distributed Generation

The rooftop market is slowly gaining momentum1 with Delhi and Kerala (following on from Andhra Pradesh, Tamil Nadu) announcing net metering policies in the last quarter (Delhi policy is still in draft stage). Kerala’s plan of setting up 10,000 off-grid rooftop solar power plants by December 2014 appears to be well on track with around 6,000 sites already commissioned2.

At the central level, SECI continues to provide capital subsidies for rooftop projects - it has allocated 25 MW till date and aims for a further 50 MW during the year.

The policy support to the rooftop segment needs to be much bolder, especially considering its future potential. Based on a study carried out by BRIDGE TO INDIA for Greenpeace, Delhi alone has a rooftop solar potential for 2 GW3.

----------1 BRIDGE TO INDIA, along with Prayas, is working on a report on grid-connectivity issues for distributed generation projects. This report is likely to be released in April 2014.2 BRIDGE TO INDIA blog on the Kerala rooftop scheme, http://bit.ly/OzhHoS3 Read our report: Rooftop Revolution: Unleashing Delhi’s Solar Potential

In the first quarter of 2014, India added just

89 MW of new capacity

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2 Trends

2.1 Module Prices

In the last quarter (January 2014 – March 2014), module prices have increased 2-3% in India (c-Si, Chinese). This increase has been driven by a rise in global demand (especially in China). This development follows a 7-9% increase in module prices in the last year that was driven mostly by the depreciation in the Indian rupee. Since the second quarter of 2013, prices for thin film modules have remained constant in dollar terms but have risen in Indian rupee terms.

Figure 2.1: Chinese C-Si and thin film module prices over the last four quarters4

2.2 Inverter Prices

In 2013, the initial decline in the inverter market was triggered by the strategic pricing by international players such as Hitachi. This decline in central inverter prices continued in the first quarter of 2014 as well. Many companies, which were previously holding on to their higher prices, have joined the bandwagon and have reduced their prices to compete in the market. Going forward, the prices are not expected to go down further significantly until and unless the size of the order exceeds 100 MW. With orders of this size, industry players believe that the prices can go down to levels as low as M3.0/Wp ($0.05/ Wp).

----------4 Source: BRIDGE TO INDIA analysis and industry interviews, PVinsights.com

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Figure 2.2: PV central inverter prices over the last four quarters5

2.3 Tariffs

The only new additions in tariffs bid for were under the Madhya Pradesh state policy and the NSM. The tariffs in the Madhya Pradesh policy, although on the lower side, are higher compared to the Karnataka phase II bidding even though Madhya Pradesh has a better irradiation compared to Karnataka. The average VGF bid for in the NSM, if seen in terms of tariff increase, translates to an additional M1.05/kWh ($0.018/kWh) and M2.05/kWh ($0.034/kWh) under the open and DCR categories respectively6.

Figure 2.3: Average tariffs across state policies in the last four quarters7 8

----------5 Source: BRIDGE TO INDIA analysis and industry interviews6 Assumptions: Cost of power plant under open category – INR 65 million/MW (USD 1.1 million/MW) Cost of power plant under DCR category – INR 75 million/MW (USD 1.3 million/MW) Analysis done for projects not availing AD benefit7 Source: State policies8 Levelized tariff offered in Tamil Nadu has been calculated considering 5% escalation for 10 years. Discount rate of 15% has been assumed. Average tariff offered under various policies are not weighted averages

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2.4 Capacity Addition

The capacity addition has been quite dismal, with just 89 MW added in the previous quarter. Cumulative, India added 586 MW in the last four quarters. In comparison, for the financial year of 2012-13 (April 2012 to March 2013), India had installed a cumulative 994 MW. This was largely fuelled by the capacity addition of 500 MW in Gujarat. However, what is encouraging is that the non-policy market accounted for more than one third of the capacity added in the last four quarters. It is commendable that a capacity of 214 MW has been commissioned without any policy support. As the fundamentals for this segment continue to improve, this segment cannot go anywhere but up.

Figure 2.4: Quarterly installations in the last four quarters9

----------9 Source: BRIDGE TO INDIA project database

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2.5 Installed Capacity In IndiaFigure 2.5

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3 Policy Outlook

Table 3.1: Projects delayed beyond original deadlines

Policy name Karnataka Phase I Madhya Pradesh Rajasthan SECI phase I

Allocation date Apr-12 May-12 Mar-13 Apr-13

Allocated capacity 60 MW 225 MW 75 MW 5.5 MW

Delayed projects 42 MW 25 MW 55 MW ~1 MW

Scheduled date of commissioning

Oct-13 Jun-13 Mar-14 Apr-14

Expected commissioning date

Q2 and Q3 of 2014 Q2 of 2014 Q3 of 2014 Q3 of 2014

Remarks No penalties are being levied on delayed projects

No projects have been commissioned in the Q1 of 2014

Projects are delayed by upto a year

Penalties to be levied only in cases where the developer is not able to justify the time extension

A 25 MW project by Moserbaer is still pending completion

A 25 MW project by MK solar energy has been cancelled

Most of the projects are behind schedule

Only a 20 MW project by ESSEL Mining has been commissioned in time

While 1 MW projects have been commissioned, 3.5 MW are expected to be commissioned by April 2014

Project developers are finding it increasingly difficult to procure projects under the OPEX model

* All details are based on information received from state authorities or project developers.

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Table 3.2: Ongoing Allocations

Policy name Tamil Nadu Andhra Pradesh Madhya Pradesh phase II

NSM

Allocation date Jun 2013 Jun 2013 Feb 2014 Feb 2014

LOIs signed 708 MW 600 MW 100 MW 750 MW

PPAs signed as on March 2014

0 180 MW(138 MW in Q4 2013 and 42 MW in Q1 2014)

0 750 MW

PPAs expected to be signed in the next quarter

No clarity 100 MW 100 MW 0

Remarks 226 MW PPAs are awaiting approval

Quarter over quarter there is no clarity on what is happening under the Tamil Nadu solar policy

PPAs were signed at a tariff of M6.48/kWh ($0.11/kWh)

The Tamil Nadu Electricity Regulatory Commission (TNERC) has proposed a tariff revision to M5.78/kWh ($0.1/kWh)

Tamil Nadu Generation and Distribution Corporation (TANGEDCO) is still awaiting the approval for the tariff of M6.48/kWh ($0.11.kWh) by the TNERC

The PPA signing process has been quite slow compared to what the officials had earlier forecasted for Q1 2014 (42 MW as against 150 MW)

19 companies had participated in the bid

Himgiri Energy Ventures quoted the lowest tariff of M6.475/kWh ($0.11/kWh), followed by Today homes and infrastructure M6.48/kWh($0.11/kWh)

Renew Power managed to secure a 30 MW project at a tariff of M6.97/kWh ($0.12/kWh)

Leading project developers that did not win any projects include Azure, Acme, IL&FS, Sunedison, Essel infraprojects, Welspun and Solairedirect

A total of 122 bids totaling 2,170 MW were received

Prominent developers which were allotted projects include Acme (100 MW), Welspun (5 MW), Azure (100 MW), Sunedison (100 MW), Solairedirect(20 MW), IL&FS (40 MW)

More than half of the projects chose their location as Rajasthan (~360 MW). Surprisingly the second most preferred location was Madhya Pradesh ( ~200 MW) instead of Gujarat (~50 MW)

The average bid under the open category was M10.1 million/MW ($0.17 million/MW) and DCR category was M20.1 million /MW ($0.33 million/MW)

TATA power rejected a partial allocation under the DCR category (had bid for 40 MW but was offered part allocation of 25 MW)

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Table 3.3: Projects under scheduled deployment (utility scale)

Policy name Punjab Uttar Pradesh Karnataka Andhra Pradesh

Allocation date Jun-13 Jun-13 Jul-13 Jun-13

PPAs signed as on March 2014

250 MW 110 MW 80 MW 180 MW

Expected date of procurement for projects

Q4 of 2014 and Q1 of 2015

Q4 of 2014 and Q1 of 2015

Q1 of 2015 Q4 of 2014 and Q1 of 2015

Expected date of procurement for projects

April – September 2014

March - August 2014 April – September 2014

Ongoing

Remarks In case of delays there are penalties in place

There are two types of grace periods:

1st grace period -December 2015 (Bank guarantees will not be returned by Punjab Energy Development Agency); 2nd grace - March 2015 (Liquidation damages taken by the state utility)

Most of the projects are owned by project developers that do their own EPC. This might lead to earlier commissioning of projects and relatively better returns.

100 MW project by National Hydro Power Corporation is in the concluding stages of finalizing shareholder agreements

Out of the 130 MW allocation, PPAs have only been signed for 80 MW.

There was a delay in PPA signing due to confusion in the lowest bids received (please refer to India Solar Compass October 2013 edition)10

42 MW PPAs signed in the current quarter. Out of the 180 MW, a 70 MW project is by a JV between Premier Solar and New Generation Power (USA)

----------10 India Solar Compass October 2013 edition http://bit.ly/1hLVfRD

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Table 3.4: Projects under scheduled deployment (rooftop)

Policy name SECI phase II SECI phase III

Allocation date Jul-13 Dec-13

PPAs signed as on March 2014

11.3 MW 8.75 MW

Expected date of procurement for projects

Q3 and Q4 of 2014 Q1 of 2015

Expected date of procurement for projects

Ongoing April– October 2014

Remarks As several projects under SECI phase I have been delayed, timely completion of the phase II is also unlikely

Allocations in new cities such as Noida, Bhubhaneshwarand Raipur.

Projects located in Coimbatore, Chennai and Delhi

New project developers include Ravano Green Energy, Waaree Energies, Mahindra EPC and Enrich Energies

First deadline to submit DPRs was March 11th, this deadline has been missed by most of the project developers. An extension of one month has been given by SECI.

Table 3.5: Expected Future Allocations

Policy name Uttar Pradesh Karnataka phase III

SECI phase IV Haryana Uttarakhand

Expected allocation date

Q3 of 2014 Q3 of 2014 2014 2014 2014

Expected allocation capacity

300 MW 50 MW 50 MW 50 MW 50 MW

Expected PPA signing date

Q1 of 2015 Q1 of 2015 Not known Not known Not known

Expected commissioning date

Q2 of 2016 Q2 and Q3 of 2016 Not known Not known Not known

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4 Projects OutlookProjected quarterly PV installations in India (in MW)

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5 Things we got wrong in the last four quarters

5.1 Our projections across previous editions of Solar Compass compared to actual market performance over the last four quarters

Despite our best efforts, the solar PV landscape in India is usually difficult to forecast due to policy uncertainties. In the figure, we have depicted our quarterly projections over various editions benchmarked against actual capacity additions. In certain quarters our projections have been close, while on certain occasions, we have been wrong with significant margins. The rationale behind the misjudged predictions has been mentioned in the table. Having learnt from our misjudgments in the past, our endeavor is to do better in the future.

Historically, we have found that projects for parity with or without REC benefits tend to exceed our expectations, projects under the NSM are usually on target and projects under various state policies are inevitably behind schedule even though we have been fairly pessimistic about them to begin with.

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Policy Rationale for variation

Parity based projects with or without REC benefits

In the preceding quarters, we witnessed renewed interest in these projects and forecast another 60 MW capacity to come through. Typically, revenue from such projects is combined with AD benefits and/or REC’s. Over the past quarter, around 29 MW of such projects were commissioned, lower than the 60 MW we forecast in the previous edition of the solar compass. Projects for about 100 MW continue to be under deployment.

RPO projects In the previous edition of the solar compass, we had forecast that 40 MW of RPO projects will come up in the first quarter. This was based on the presumption that the NTPC would at least partially commission its 50 MW project in Madhya Pradesh (EPC contracted to TATA Power Solar) which was due to be commissioned by the end of March 2014. Only 10 MW of NTPCs project in Andhra Pradesh has been commissioned.

State Policies No projects were commissioned under the state policy in Karnataka where we expected 12 MW to come up during the quarter.

As mentioned previously, under the Karnataka state policy, deadlines were extended without penalties. Until and unless the delayed projects are fined with strict time bound penalties, the delays can be expected to be a regular phenomenon.

© BRIDGE TO INDIA, 2014

Our Blogs From The Last Quarter

National-level solar initiatives• Acme, Azure Power and SunEdison get the biggest share of the NSM• How will financing of NSM projects work?• India’s subsidy scheme for de-centralized solar to stay subdued in 2014

as well• National Solar Mission to miss capacity targets for the year by

a significant margin

State-level solar initiatives• Kerala’s rooftop programs - Lessons for other states• Kerala announces a draft net-metering policy• Is solar in Tamil Nadu back?• Tamil Nadu solar market in peril• Jammu & Kashmir signs an agreement for a 7,500 MW solar power plant

Market analysis• As international solar manufacturing companies boom, India gets

left behind• Solar Power Developers’ Association meets Dr. Farooq Abdullah• Should Indian developers be worried about rising solar costs in 2014?• Restricting open access power purchase- a regressive move?

Thought leadership• India’s energy future – BP’s thoughts and ours• What are India’s strategic energy options? Part 1: The energy demand• What are India’s strategic energy options? Part 2: Comparisons with the

US, Germany and China• What are India’s strategic energy options? Part 3: Cost trajectories of fossil

and renewable energy• What are India’s strategic energy options? Part 4: A game changing shift

to solar

Build Your BrandBRIDGE TO INDIA is a key knowledge disseminator on the Indian solar market. Having tracked the market since 2010, our regularly published analysis reaches more than 10,000 readers from various segments of the global solar industry.

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