The Indian solar sector is finally emerging from hibernation, with solar installations doubling in 2015 after three years of flat growth. Solar installations totaled 2,133 MW in 2015, up from 883 MW installed in 2014, reflecting a y-o-y growth of 142%. Cumulative installations have crossed the 5 GW mark with 5.6 GW as of February 2016. There are currently over 10 GW of solar projects in various stages of development. Mercom is forecasting 2016 installations to reach approximately 4 GW, almost a 100% y-o-y growth.
Auctions are being announced at a brisk pace even though delays and extensions are fairly common. The government, after a slow start, is demonstrating its commitment towards achieving the ambitious installation target of 100 GW by 2022. Currently, about 10 GW of solar projects are under development with about 8.4 GW more to be auctioned over the next few months. With 5.6 GW installed as of February 2016, about 95 GW of solar will need to be installed in seven years at a pace of 13.5 GW a year, to reach 100 GW by 2022.
After years of slow growth the Indian solar industry should be ecstatic with all the activity and forecasted growth, but developers and manufacturers are cautiously optimistic. Their major concern continues to be aggressive bidding with the latest auctions hitting new lows at Rs4.34 ($0.064)/kWh, a drop of about 6% in the last three months. Projects with tariffs below Rs5 (~$0.0735)/kWh, unless they are built at a cost of Rs5 crores (~$0.7 million) or below, are being considered extremely risky and difficult to finance by lenders as well as by a majority of developers. Currently, most domestic banks are unwilling to fund projects below Rs5 (~$0.0735)/kWh as they fear failed projects that could end up on their books as non-performing assets. Some companies that have bid below Rs5 (~$0.0735)/kWh are now in trouble and there could be more such cases in the future unless developers pull back and some sanity is restored.
Failed projects could freeze investments and slow down installations. The government looks very committed to solar and the market is going to be very large; there is no reason for this race to the bottom.
But most projects with bids below Rs5 (~$0.0735)/kWh are, however, expected to be commissioned in 2017 and developers are hoping that module and Balance of System (BOS) costs will continue to drop along with interest rates to make these projects feasible.
The Indian government’s recently announced Budget did not include much for the solar sector. Accelerated depreciation will be reduced from 80% to 40% starting in FY 2017, and will mostly affect the rooftop solar, some large-scale solar and wind sectors. Investment into IREDA has been increased which will boost lending. The ‘Clean Energy Cess,’ now called the ‘Clean Environment Cess’ (or coal tax), has been raised from Rs200 (~$3)/tonne to Rs400 (~$6)/tonne which will increase the cost of coal while making solar more cost-competitive. But as we have highlighted before, almost half of the coal tax collected has been going towards river cleaning projects. Based on the figures so far, we cannot assume that doubling the coal cess will result in all of the funds going to renewables. While Budget maneuverings happen, taxing the coal industry for CO2 emissions and diverting half of those funds to cleaning rivers is not the right way to do it. The increased costs will eventually be passed on to the consumer in the form of higher electricity bills.
A revised power tariff policy that guides government agencies was recently approved by the Union Cabinet. An important highlight was the increase in the renewable purchase obligation (RPO) for solar to 8% by 2022. This is a significant step towards achieving the 100 GW goal, but the RPO will remain just a number unless there is strict enforcement. The Ujwal DISCOM Assurance Yojana (UDAY), a programme to improve the financial condition of DISCOMs, has so far attracted 16 states which have agreed in principle to join the voluntary programme; seven of these states have signed an MoU. A lot rides on the success of UDAY as DISCOMs currently are sitting on about Rs4.3 lakh crore (~$63 billion) in debt as of September, 2015. The poor financial condition of DISCOMs has resulted in low offtake of power and delayed payments, increasing borrowing costs for developers.
The World Trade Organisation (WTO) ruled against the domestic content policy of India regarding solar cells and modules. The ruling was expected and will, in the short term, affect local manufacturers that were heavily dependent on domestic content rules. Domestic Content Requirement (DCR) projects made up a small portion of the projects auctioned and recently have had difficulty attracting developers. In the long term, the ruling should be a positive as it opens up more non-DCR projects. Restricting the use of non-domestic cheaper components while expecting solar power at the lowest possible price has never made sense. The Indian government is expected to appeal the WTO ruling.