Need of the hour: Solar Adoption, not Project Cancellation

Indian Solar industry has shown incredible growth, with an inspiring trajectory of increasing capacities from 5 GW in 2015 to 10 GW in 2016 to ~24 GW growth in 2018. Although there is growth, India still has to install more than 18 GW of solar capacity each year for the next 4 years to achieve its announced 100 GW target. Considering this scenario, we should expect an aggressive solar adoption rate. However, India’s current solar growth would not be able to realize the 2022 targets.

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Current Scenario

A myriad of projects have been cancelled in the calendar year 2018, which begs the question of whether India would be able to reach current targets. Data shows that between Jan-September 2018, ~35 GW of solar projects were tendered. However, only 13 GW of projects were auctioned. There was a 65% decline in tender activity in Q3 2018, in comparison with Q2 2018.

The results are clearly seen in project installation trajectory. Although, solar installations in Q1 2018 was higher than Q1 2017 and stood at 3.3 GW, however, in Q2 2018 Indian solar installation rate started declining and stood at 1.6 GW in and fell even lower to 1.5 GW in Q3. Although we would want the solar installation rate to rise each quarter of a year, it is normal to see a decline in a few quarters. For example, solar installation rate had fallen in 2017 as well, however, the decline in 2018 is much higher than ever before (30% Y-o-Y), which paints a threatening picture for Indian solar industry.

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Reasons behind the Decline

25% safeguard duty on SEZ based solar panel manufacturers, demands of setting up a manufacturing facility to bid in projects, differential GST rates have increased solar project cost by 12-18% and produced hesitant solar developers bringing forth the decline in projects.

SECI cancelled 2.4 GW out of a 3 GW Interstate Transmission System (ISTS) connected solar auction held in July 2018.

  • The Gujarat Urja Vikas Nigam Limited (GUVNL) also cancelled the auction for the development of 500 MW of grid-connected solar photovoltaic (PV) projects in March 2018.
  • The Uttar Pradesh New and Renewable Energy Development Agency (UPNEDA) also cancelled 1 GW auction for grid-connected solar projects across the state held in July 2018.

The primary reason behind these cancellations is Government of India’s insistence to bring down solar tariff event further. Also, recent demands like asking developers to set up a manufacturing plant to win solar projects (e.g- SECI’s 10 GW solar project) have negative effects and produced hesitant developers.

India spent $3.8 bn on solar module import in FY 17-18, and in FY 18-19 (Apr-Oct), the country has already spent $1.1 bn, while India’s export of solar for the same years stood at a meagre $141 mn in FY 17-18 and $80 mn in FY 18-19 (Apr-Oct).

Additionally, 25% safeguard duty imposition on imported solar equipment and SEZ based solar manufacturing units have raised the equipment cost, making projects expensive while introducing low quality (imported) module usage issue and little to no demand for domestically manufactured solar equipment.

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Way Forward

Indian solar industry still has incredible opportunity to turn around and lead the global solar revolution, while speeding up solarisation of the country. However, for that to happen, India needs to realize that maintaining investor interest in building solar projects is a must.

And although imported modules offer a cheaper option for countrywide solarisation- It is producing hesitant developers by allowing tariff fall, shrinking India’s opportunity of building solar manufacturing industry, which would have created jobs, improved industrial infrastructure, brought revenue through exports.

Additionally, India’s dependence on solar import is leading to huge forex outflows, introducing quality issues, and making projects unviable.

Therefore, focusing on manufacturing, stabilizing tariff, exempting domestic manufacturers from safeguard duty and differential taxes (GST), would be the right move to increase solar installation rate. Forecasts show that continued import, falling tariff and other policy deviations (safeguard duty, differential GST) will result in lower solar demand in Q1 2019 (approx. 3.5 GW). Therefore, it is the best time for India to make changes and solve core issues to speed up solar project installation.

Is Safeguard actually Safeguarding?

India has quickly built an aspiring green energy empire that promised to lead economic development through industrial capacity expansion and domestic manufacturing. And considering Hon’ble Prime minister Shri Narendra Modi’s announcement of ‘Make in India’ we can agree that the country had plans to support and utilize the manufacturing sector to drive growth. And as we hoped for, ‘Make in India’ worked well in welcoming foreign investment, encouraging technological growth, and reducing knowledge curve. This indicated a rapid solarisation of the country and showed potential to uplift India’s economy through industrial expansion. However, the initiative has failed to result into the growth trajectory it promised to showcase.

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Challenges in the Path to ‘Power for All’

Government of India’s commitment to provide ‘Power for All’ and its decision to support green energy transition, marked a new beginning for the country. With solar energy transition promising to save billions ($) in fossil fuel imports, create jobs, initiate technological growth, facilitate industrial growth, and offer the opportunity to claim the export market, developing countries like India need to quickly seize the opportunity and become a solar powered country. And factoring in India’s recent initiatives towards solar growth, we can fairly assume that the country has chosen the right path to social, economic, and industrial revolution, which will illuminate the future of more than 200 million people (who currently live without electricity). Like any industry, there are multiple challenges in countrywide solarisation in India. However, recent taxes and duties levied on growing solar industry must be considered as the biggest challenge in path to India’s most important and impactful transition.

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Safeguard Duty on Solar to cause 30% Decline in Demand

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As one of the fastest growing economies, India decisively opted for solar development, understanding its potential to lift the country out of financial, social, and industrial darkness. The announcement of targeting 100 GW solar energy by 2022 evidently created an environment of urgency and brought forth a plethora of opportunities for industrial development. As a result, our country quickly became the second most attractive renewable energy market in the world. However, Government of India’s decision to impose Safeguard Duty on solar imports stands to undo the growth India accomplished through enhancing domestic solar manufacturing capacities. Many in the industry argue that the new policy is completely opposite of what our Solar mission and Make in India initially stood for.

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Indian Solar Sector Needs to Focus on Sustaining Funding for Progress

Indian solar sector has shown incredible progress in the recent years. And have become INR 30,000 crore industry. The Government support has led India’s solar growth to take over the position of World’s third biggest solar market, overthrowing Japan in 2017, and increased investor interest in the industry. However, is the current fund generation status capable enough to support renewable energy goals? The question begs in-depth assessment.

Current Scenario

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It is important to note that India will need at least $125 billion to fund 175 GW renewable mission, out of which 100 GW supposed to be coming from solar. Foreign private equity investors like Goldman Sachs, Morgan Stanley, JPMorgan, European utilities EDF have shown interest in investing into Indian solar sector, while development banks like World Bank are offering financial support. Foreign direct investment in India has increased up to 17 per cent to over $25 billion, with the country focusing on industrial reforms and strengthening lucrative sectors (such as solar) recently.

However, it is important to highlight that most of the financing for renewable energy development in the country comes from domestic banks. And recent surveys indicating 65% fall in corporate funding within solar industry from Q4 2017 to Q1 2018, threatens to put constraints on solar growth in India. Currently there is quite confusion in the domestic industry regarding Anti-dumping duties, fall of solar tariff, and delays in tender auctioning; now adding lack of proper funding to the situation might reduce solar capacity addition by 40 per cent in the current financial year, which would definitely deal a severe blow to the growing industry.

With consistent growth, India is estimated to become fifth largest manufacturing country in the world by the end of 2020. And since solar has proven to be the most lucrative sector now, it is easy to understand that manufacturing solar would help India improve its industrial infrastructure, solve its energy crisis, create jobs and bring on socio-economic reform.

 

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And recent project planning of 20 GW being announced in instalments, Ministry of New and Renewable Energy (MNRE) also planning to award new project contracts in 2018. Additionally, plans for 5-10 GW of floating solar power projects auctioning in 2018, indicates India’s intension towards solarizing the country.

However, without enough funding, the growth prediction will not result into reality.

Issues with funding

We must point out here that India’s first renewable energy conference was held in 2015, where private companies committed to invest nearly $200 billion into green energy. Government of India has accepted and upheld 100% foreign direct investment under the automatic route and 74% foreign equity participation in a joint venture (without any approval). This has created the path to bring investment in Indian solar sector. India’s position in International Solar Alliance (ISA) has also made the country’s access to $1 trillion in low-cost financing for solar energy projects by 2030 possible.

Currently, around 293 global and domestic companies have committed to invest approximately US$ 310–350 billion to set up a cumulative capacity of 266 GW in (solar, wind, mini-hydel and biomass-based power) within 5–10 years. And between April 2000 and September 2017, the industry attracted US$ 12.3 billion in Foreign Direct Investment (FDI). So, it is easy to glean that Indian solar industry has become a lucrative enough market to attract funding.

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However, what is lacking is a sustainable funding mechanism that can continue to invoke interest in foreign investors.

Currently, the confusion within the industry regarding delays in anti-dumping duty imposition on foreign modules, GST, falling solar tariff, failure in meeting Renewable purchase obligation (RPO) in most states, instances of PPA renegotiations etc are scaring off investors. Blanket Safeguard Duty (recently withdrawn) had also stirred the domestic industry by imposing duties on SEZ based domestic modules manufacturers as well. It was a decisive decision by Government of India to remove the blanket safeguard duty.

However, Government of India still needs to take care of above discussed issues as they are delaying projects, and in some cases making them unviable, carving out investor’s interest. Indian solar sector has the opportunity and attention of the world to become an investment magnet by prioritizing solar industry and solving its issues that increase investor confidence.

Way Forward

Not only increasing foreign investor confidence, India needs to increase its domestic funding for solar as well. Recent news of National Clean Energy Fund being turned into GST compensation fund showcases totally opposite step than those that reflect building and supporting green energy reliance.

Although, Government of India is now actively focusing on shrinking delays in acquiring permits for construction, simplifying taxation process, and increasing skill development infrastructure, to support solar growth, more focus on raising funds is needed and would certainly help.

This Article was published in ET Energy World on 30th May 2018

Bibliography:

https://www.ibef.org/industry/power-sector-india.aspx

http://www.eai.in/ref/ae/sol/cs/spi/kc/key_challenges_in_the_growth_of_solar_pv_technology_in_india.html

https://www.thequint.com/news/environment/indian-solar-sector-funding-fell-65-last-quarter