Cloud cover on the solar story with signs of a slowdown in the sector

The high-profile dedication of the Rewa solar park eclipses the reality of a slowdown in this sector

Prime Minister Narendra Modi’s digital dedication to the nation of the 750 Mw Rewa Ultra Mega Solar park in Madhya Pradesh on July 10 was accompanied by visuals of large tracts of land covered with long rows of solar panels. But despite such imagery, there are strong signs of a slowdown in the sector.

In January-March 2020, large-scale solar projects accounted for 82 per cent of new installations (886 Mw), and rooftop solar the remaining 18 per cent (194 Mw). At 1,080 Mw, however, this capacity addition was the lowest since the last quarter of 2016, according to a Mercom Capital report. It was down 39 per cent compared with 1,761 Mw added in the same period in 2019.

This slowdown reflects both the global deceleration of renewable energy investment and significant execution risks in India. Another Mercom report says global corporate funding for solar in the first half of 2020 dropped 25 per cent to $4.5 billion against $6 billion last year.

In India, tariffs remain one issue. Some industry insiders believe that the first-year tariff of Rs 2.97 per unit and a levelised tariff of Rs 3.30 for 25 years without viability gap funding that emerged from the bidding for Rewa has made competition cut throat. 

Subsequently, tariffs fell further — for the Bhadla solar park in Rajasthan, it was Rs 2.44 in 2018. Last month, Solar Energy Corporation of India (SECI) threw in another low of Rs 2.36 from the Spanish renewable company Solarpack Corporation for a 300 Mw unit.

Rewa’s success was underpinned by project modelling and execution. But as Manu Srivastava, former chairman of Rewa Ultra Mega Solar Ltd, who was involved with the project from conception to commissioning, points out, two important components — energy contracts and payment security fund — have not been replicated since. “The implementation of ‘energy contracts’ would allow supply of solar energy to other institutional customers, such as ports, refineries and so on, while a payment security fund would de-risk projects without being a burden on the government budget,” he says.

Under the contract, 24 per cent of the energy is to be supplied to Delhi Metro Rail Corporation (DMRC) and the remaining 76 per cent to Madhya Pradesh distribution companies (discoms). A power contract would have meant the same proportion being followed at all times. Under Rewa’s energy contract, however, the entire power produced in the morning hours is supplied to DMRC till its requirement is met and the additional production is then supplied to state discoms. It also lowers transmission cost to DMRC from Rs 1.70 under the “usual” power contract” to Rs 1.03 under Rewa’s contract.

Srivastava says this principle of energy contracts has become useful now that Covid-19 has reduced DMRC’s demand to just 5 per cent of the norm. “Neither are solar developers being forced to curtail production, nor is DMRC being forced to pay for power without using it. The principle of energy contracts stands the test of time even in unexpected situations, besides leading to overall cost efficiency.”

The other learning is a three-tier payment security mechanism which includes a letter of credit from discoms, resembling what was ordered by the Union power ministry for all power purchases last year. The second tier is a payment security fund and then there is a state government guarantee to developers against discom payments.

It is not that Rewa and Bhadla did not have their share of issues. The introduction of the goods and services tax and safeguard duty on imports created a “change of law” condition for the contracts which meant that the developers had to seek a pass-through of their increased cost due to higher taxation. For Bhadla, the Covid-19 outbreak caused supply chain disruption leading to the developer, ACME, seeking to cancel the contract.

The new low tariff in the SECI tender is considered a blip. An ICRA note says the lower tariff is driven by a fall in the global solar module prices owing to a lull in demand. The viability of tariffs is critically dependent on photo-voltaic module prices, the rupee-dollar exchange rate and the availability of competitively priced long-tenure debt

Crisil Research, however, attributes the low tariff to a surge in interest from foreign companies. Six out of seven winners under the SECI tender are global companies. These bidders have a portfolio of 1-1.5 Gw in India, and would be keen to expand, especially given the environment of lower returns globally after the Covid-19 pandemic. Crisil says the timing of the auction offered a window of opportunity.

The safeguard duty imposed on imported modules, currently at 15 per cent, expires in July 2020 and a basic customs duty from August 1, 2020 is likely to replace it. Hetal Gandhi, director, Crisil Research, says, “The imposition of the 25 per cent duty rate in July 2018 had raised capital cost by 10 per cent. However, as the auctions have occurred before the formal notification of the tax, it provides the developers the option of pass-through of costs, under the change in law provision.”

For the Indian solar sector, which has been dependent on China for solar modules, sourcing for under-construction projects and accessing raw materials for domestic module manufacturing could be a challenge given recent tensions with Beijing. “The possibility of trade restrictions with China could impact module availability at competitive prices, so a timely pass-through of project cost increases due to any imposition of basic customs duty on imported modules remains critical,” says Sabyasachi Majumdar, group head and senior vice-president, ICRA Ltd.

Geo-political risks have added to usual execution risks — delays in land acquisition, regulatory delays and obtaining financial closure in a tight financing environment. ICRA estimates solar capacity addition in 2020-21 will fall 15 per cent to 5,500 Mw.

Nonetheless, Girishkumar Kadam, sector head and vice-president, ICRA, says the backlog of the awarded projects of more than 15,000 Mw over the next two years offers some visibility about the future. At 34.9 Gw as on May 30, 2020, India’s solar power capacity is almost 10 per cent of total installed generation capacity, and 40 per cent more than 24.5 Gw of the total renewable capacity in 2012. But maintaining that momentum could be tough.