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Rules To Hit Solar Sector: EPC Firms
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The Ministry of Power has recently issued the draft rules providing for the ‘Rights of Electricity Consumers’ for the very first time. However, one provision included in the draft rules has managed to roil up smaller solar EPC companies at a key proposal within the rules.
The power ministry stated that “having provided access to electricity to all citizens, it is now important to focus on consumer satisfaction. For this, it is imperative to identify the key services, prescribe minimum service levels and standards with respect to these services and recognise them as rights of consumers.”
While the rules claim to place the consumer in the middle of the power ecosystem as its most important stakeholders, small solar EPC players claim that the proposed rule fails on both measures, ie, being consumer-friendly, or being solar-friendly.
The provision in question is the 4th sub-clause under the 9th clause of the draft rules “Consumer as Prosumer.”
The sub-clause or point states that “the regulations on grid-interactive rooftop solar PV system and its related matters shall provide for net metering for loads up to 5 kW and for gross metering for loads above 5 kW.
To understand the impact this can have on solar EPC developers and consumers or prosumers, the difference between net metering and gross metering needs to be understood.
As explained by the Council on Energy, Environment and Water (CEEW), net metering is an arrangement in which electricity exports are adjusted against
imports, directly lowering the final electricity bills of the prosumers, such that, electricity produced is deducted from the total electricity consumed over a fixed period of time. The adjustment may be done either on a monthly, half-yearly or annual basis. Typically, a bidirectional ‘net meter’ accounts for both import and export of power. (If the exported electricity is higher than the imported electricity, a consumer may or may not be compensated for the excess electricity being fed into the grid – depending on a state’s net metering policy).
While on the other hand, gross metering is an arrangement in which a consumer is compensated at a fixed feed-in-tariff for the total number of units of solar energy generated and exported to the grid (accounted by a unidirectional ‘gross meter’) and has to pay the electricity distribution company (Discom) at retail supply tariff for the electricity consumed from the grid. The feed-in-tariff and retail supply tariff are typically different rates, with the retail supply tariffs always considerably higher. thus, in Delhi, for instance, a retail consumer at the top end of the consumption slap could be paying Rs 8 per unit for her consumption, and in gross metering, earning well under Rs 3 per unit.
Thus, under gross metering connections, the compensation or benefit of the installation of a rooftop solar system to the prosumer is drastically reduced. While at the very opposite end of the line, Discoms that provide the connection are benefited as gross metering can be seen as a revenue protection measure for them.
A revenue protection measure for Discoms provided in the ‘Rules providing Rights to Electricity Consumers’. Solar EPC developers have come up together against the move because net metering allowed them to sell the electricity they produced from their big rooftop projects for C&I customers to the grid and deduct its value from their bill for the power drawn from the Discom. A big revenue point for rooftop solar developers – their C&I customer projects – which are invariably of over 5 kW capacity will be moved to gross metering effectively slashing their profits to the bare minimum.
The rule to move all installations above 5 kW to gross metering “will hamper all of us small solar EPC companies that rely on solar rooftop net metering for our bread
and butter,” said a Sr. Engineer working at one of the many small to medium solar EPC companies that currently operate across India. “This draconian rule must be highlighted and sought to be cancelled by any individual who is concerned about renewable energy,” he added.
The view of the rest of the industry is also similar. A petition has been filed on change.org asking for the rule to get abolished in a move that will (as it claims will) save the solar industry!
The petition states that this clause: will completely demolish the solar industry as consumers above 5 kW will have no option but to opt for gross-metering which doesn’t seem lucrative for them to sell the power to
Discoms at even less than half the rate at which they are purchasing the power from Discoms. their payback period will get longer.
Consumers having a requirement of >5 kW will also try to install a minimum capacity solar project in this case.
MNRE Phase-II scheme for residential rooftop will completely fail since the major capacity of the projects are > 5 kW, but, if this clause applies consumer will either restrict the project size to 5 kW or will not at all go for solar.
Interestingly, Discoms have been pushing to move rooftop solar generation to gross metering for a while now, having given up on the idea of resisting it altogether earlier. In states like Maharashtra, a strong pushback against similar ideas prevented such a shift.
The draft rules have been circulated by the Ministry of Power for comments/ views/ suggestions from consumers latest by September 30, 2020. After this, the suggestions will be evaluated and the final rules issued.
Our view on this is that the issue of net metering is an established option to drive rooftop solar growth worldwide. Setting such a low benchmark for net metering of 5 KW certainly doesn’t serve the consumer cause or the solar sector even, it only serves the Discom cause. In a draft titled “Rights of Electricity Consumers”, there is no place for such a provision. Access To Capital Markets Becoming a Glaring Gap For Indian Solar Firms
This week, Suzhou, China-based accordingly. A financial analyst at a leading GoodWe inverters celebrated its bank-owned brokerage e spoke to says that listing on the Shanghai stock market, even the limited experience with the ‘pure coincidentally on its 10th anniversary. For play’ firms has not been very encouraging. the well-known inverter firm, the pubic “Adani Green and Sterling and Wilson Solar, listing is an obvious matter of pride, besides with their wildly contrasting performances the huge new opportunities it opens up for it. since listing, will not exactly inspire “The IPO marks the beginning of a new confidence.” While Adani Green has chapter,” said Daniel Huang, Chief Executive flummoxed all watchers to become one of the Officer of GoodWe. best performing shares in the past year,
That’s true in more ways than one, as the Sterling and Wilson, after an IPO at Rs 780 in firm now sets its sights on expanding its August last year, has been dogged by multiple focus on storage, more international governance issues that have dragged down expansion, and a higher thrust on utility- the share price. scale projects too. Another wealth management head opines
GoodWe follows many other Chinese that “Even well-regarded firms like Renew firms that are listed and have ready access to Power have had to drop IPO plans, because public capital. These include Solis Ginlong, the market has simply struggled to Sungrow (both inverter majors listed on the understand valuations for the sector. Adani Shenzhen Stock Exchange). Module majors Green has the pedigree of a very strong like Longi Solar (Shanghai Stock Exchange), promoter background with proven project Jinko Solar at NYSE(New York Stock execution abilities. Others will have to wait Exchange) and Tongwei (Shanghai Stock longer.” The shift in the sector to auctions Exchange) are also publicly listed. Even driven mechanism has also not enthused polysilicon manufacturer Daqo New Energy analysts as many believe, with good reason, Corp is listed in the US. Hong Kong-listed that the low bids have been irrational at Xinyi Solar, which makes glass for solar times, and simply do not leave much on the panels is the leading solar company table for firms to make money. A pressure worldwide in the category based on market that is passed on down the supply chain. capitalization, at close to $7.99 billion. At the ISA organised First World Solar
By contrast, in India, finding listed solar Technology Summit, this week, Uday Kotak, firms is too easy, or tough, depending on your Chairman of Kotak Mahindra Bank pointed perspective. There is just Adani Green to the same anomaly, in terms of the far (Approx $13 billion market cap) , and global higher rates Indian firms need to pay for EPC leader, Sterling and Wilson Solar ($600 loans. Or even the asset-liability mismatch million market cap). Azure Power is of between tenure of bank deposits and solar course listed at NYSE. The complete absence projects, that makes banks not the ideal of manufacturing firms is a testament to the avenue for funding. He even pitched for a size of the manufacturing sector here, as well priority sector inclusion for solar, besides a a the challenges small solar manufacturers possible lending institution on the lines of a have faced in scaling up. Readers will argue development financing institution for the that major developers and aspiring sector. It is no secret that being publicly manufacturers like NTPC, TATA Power, listed adds a lot of dynamism, transparency BHEL, etc are also listed. But in all these to a sector. Pubic scrutiny ensures a better legacy firms, renewable is still a small part of understanding of the risks, competitiveness, their portfolio. And the focus remains on and for the best performers, a very strong developers, demonstrating just how far incentive in the form of ready access to manufacturing has to go yet. capital for growth or even acquisitions.
For manufacturing in India to take off, we We believe it is axiomatic that without an need to see manufacturers feel confident increase in the number of solar firms from about and aiming for a public listing. Only India in the public markets, the odds of that will provide validation on quality, their celebrating India mad success stories are processes, strategy, and expansion capital much lower.
How World Record Low Solar Prices Moved Out of India
Back in 2016, when Acme Solar surprised, nay, shocked everyone with a bid of Rs 2.44 per KwH at the newly launched solar auctions, everyone celebrated. It was believed that much like telecom, the era of lowest cost solar in India had also arrived. A long, sustained boom was duly predicted, and many of todays survivors still look back at that bid ruefully. Because, somewhat like telecom, the promised boom duly arrived, without quite bringing the sort of robust health and financial rewards for the sector. Thankfully, investor interest still remains, thanks to frenetic efforts by the MNRE to somehow keep the momentum going, but its not quite panned out as predicted.
Thus, the news, even if somehow expected, was shocking when it finally came two months back. ACME solar, the firm that had made the audacious Rs 2.44 per KWh bid for a solar project in Rajasthan back in 2016, was cancelling the project. While that cancellation will go through the familiar legal and bureaucratic hoops now, the fact is, India’s solar boom has been stalling for a while now. Corona hit 2020 might still see small wins, like solar overtaking wind in India, but the big picture remains hazy.
While fresh capacity has been added since then, the rate of addition has certainly slowed down after hitting a peak in 2017. Ironically, the Rs 2.44 record, when it was finally broken this year in June, by Spanish major Solarpack , it hardly drew any such hopes of a coming boom. When we last checked, PPA’s for these bids were still pending, due to lack of demand. That’s just one of the reasons low prices are no longer going to cut it.
What is really interesting is how, in the past 18 months, bids in the middle east and now, Portugal, have comprehensively broken those records. First, we had Abu Dhabi’s AI Dhafra 2GW project, promoted as the world’s largest single solar PV project where the winning bid came in at 1.35 US cents, a record at the time. Even before work had started here though, came news of a stunning bid at Portugal’s solar auctions, with the lowest bid of USD 0.132, or 98 paise in rupee terms. So just how did these projects manage such low bids?
In Portugal, these auctions come with an interesting 15 year PPA structure, at the end of which developers can sell the power produced at merchant rates for the remaining 15 year life of the project. It is this second half of the project where calculations have been based, on getting an ‘in’ to the grid at these low prices, to
presumably recoup profits in the second half of the project life cycles. That is one reason many analysts have called some of these bids ‘speculative’, although the government of Portugal is hardly complaining, as long as the projects come up.
In the Al Dhafra project, the conditions in the RFP document were really investor friendly. These included:
The request for proposal provided for reimbursement of development costs to the bidders.
The development cost includes, costs of internal and external advisory services, independent due diligence costs, costs associated with registration, recordation and/or perfection of financing documents, lenders’ security interests, direct agreements and/or leases, travel, accommodation and other out-of-pocket expenses incurred by bidder up to and including financial closing.
Bidders were provided with option of take out debt facility costs. Per the RfS, if the bidder includes short-term finance facilities in its proposal, they must also include certain transaction costs in relation to the take-out debt facility. Bidder can also avail development fee of up to $25 million. Payments will be made in Dirhams. Bidder will propose a percentage of each of the relevant components of the Electrical Energy Payment to be designated as foreign portion or local portion. These percentages will remain
constant throughout the term of the PPA. If bidder proposes a higher local portion of the charge rates it will be given more credit as part of the non-price criteria, provided that it correctly reflects the expected ongoing costs.
RfS also specified that EPC Contractor will receive periodic fees during the Initial O&M period to cover the cost of performing the O&M works. This will be in addition to the contract price.
RfS also specified that in order to execute the project; bidder will own 40% of the project and local holding companies will own 60%. In this project, Masdar and
TAQA would own 60%; consortium of Jinko Power and
EDF (The eventual winners) own remaining 40%.
Speaking to a market expert for the Portugal bids, we heard this. More Precision. Bidders assumed very negligible O&M / repair costs for the 15 year PPA period to just about break even. Then, 30 year useful asset life was assumed and merchant sales for the remaining 15 years with assumed market price at between 50 to 60 euros/MWH, which seems inflated to many watchers. Thus, the real value is post PPA. IRR expectation in these are also lower at 4 to 5%, due to much cheaper financing. Finally, Portugal as a young market (like India in 2016?) and this is a volume acquisition/market share game.
On the Abu Dhabi bid, a local expert from one of the bidders points out that the Abu Dhabi procurement of solar PV projects (Dhafra IPP) – has some unique features (different from other Middle Eastern procurements).
For instance, the RFP itself stipulates a series of “time of day” and “time of year” concepts which builds in a multiplication factor on the base tariff which is publicly read out (essentially it adjusts the actual generation with the multiplication factor). The RFP also asks for BESS (Battery and Energy Storage Service) option but that is not built into the LEC.
The multiplication factors as below:
Summer Peak Summer Off-Peak Winter Peak Winter Off-Peak-10 AM to 10 PM 10 PM to 10 AM 10 AM to 10 PM 10 PM to 10 AM
Multiplication Factor 2.30 1.60 1.30 1.00
So generation is multiplied to arrive at the adjusted generation – in effect LEC is c. 1.6 times the public read out.
The other factor is that the RFP allows a hard mini perm financing – which essentially implies a refinancing risk at the maturity date. The difference in this case is that the procurer takes the risk and based on the refinancing terms adjusts the tariff – so in effect (at a high level) the LEC as publicly declared now – can change up or down based on the refinancing terms.
Add to these the certainty in terms of land availability, equipment pricing, power evacuation infrastructure, and assurance of timely payments, all issues plaguing the solar sector massively now in India, and you know that the world has moved on, at least when it comes to the best solar prices now.
India can Reduce Carbon Emissions by 35% in Next
10 Years: Javadekar
Union Minister of Environment, Climate Change, and Heavy Industries Prakash Javadekar has said that he is hopeful that India would be able to achieve its goal of reducing its carbon emissions by 35 percent in the next ten years. Addressing a session on Action Agenda for Sustainable and Self Reliant India during the 15th Sustainability Summit 2020, the minister said India was committed to reducing carbon emissions and was confident about upscaling solar power capacity from 175 gigawatts to 220 gigawatts by 2022.
“The share of non-fossil sources in the installed capacity stands at 37 percent today. Prime Minister Narendra Modi declared and upscaled the target from 175 GW of solar power to 220 GW by 2022 and we are confident we will achieve this,” he said.
He also said that it is important to achieve a green Earth with clean air and blue skies post COVID – 19 despite the odds and that it is possible to do so alongside industrial activity. He pitched for promoting sustainability as only it could “save humankind from nature’s worst fury.”
Highlighting the country’s achievement towards a greener growth in the past few years the minister said, “India is walking the talk on climate change. Our work on Ujjwala, electric vehicles, BS-VI engines, biofuels, clean air, and disaster resilience pave the way for a sustainable and resilient India. Targeting 35 percent emission reduction, we have reached 21 percent already and in 10 years, we will achieve the target.”
He further elaborated that the energy mix in the installed capacity now includes 37 percent of renewable energy sources. Adding that the country’s solar power capacity has been increasing rapidly and noted that 68 countries have ratified the International Solar Alliance Agreement.
