A swift resolution to India's solar sector problem is unlikely, as the year 2019 is likely to be politically dominated and motivated, as per a report by Bridge to India.
To the Indian RE sector, 2018 was a mediocre year. One silver lining was thesurge in auctions as 20,436 MW of projects were awarded (+174 per cent y-o-y), notwithstanding multiple tender cancellations. Most of the pain wasself-inflicted.
Relatively minor issues such as GST, safeguard duty, and BIS standards caused major frustration. Solar park development stalled and transmission capacity struggled to keep pace with the needs of the sector.Market confidence was further eroded by under-subscription and cancellation of tenders, and the government's failure to implement much-heralded schemes like SRISTI and KUSUM.
The big event in 2019 is obviously the general elections. A policy purdah is imminent. Politics is likely to dominate over reforms and concrete action formost of the year. It means that swift resolution of sector problems is unlikely. On the positive side, Bridge to India (BTI) does not expect any retreat in its push for RE, irrespective of whocomes to power.
So what can we look forward to in 2019? Here is BTI's key predictions for the year:
a.There should be good news on the project implementation front. Dictated purely by tender timetables, capacity addition should jump from 10,560 MW last year to 15,860 MW this year. Most of the uplift will come from utility scalesolar, although rooftop solar is also expected to register another year of fantastic growth.
b.Open access would have a subdued year with capacity addition of about 600 MW, down 63 per cent over last year.
c.Module prices are expected to stay firm at about USD 0.22/W.
d.Floating solar is expected to make major strides. Recent tender results indicate sharp dip in tariff premium over ground-mounted plants. Falling costs and constraints in land and transmission capacity would force policy makers to prioritise floating solar. BTI expects a surge in floating solar tenders with an aggregate issuance of up to 5 GW.
It is expected that there will be a total RE capacity addition of 15,860 MW in 2019 - a sharp jump of 50 per cent over 2018. Registering an all-time high, more than 69 per cent of capacity addition is expected to come from utility-scale solar projects, crossing the 10,000 MW mark. Based on the timetable of various projects under execution and currently being implemented, BTI expects capacity addition to be low in the first half of theyear (2,635 MW) and speed up in the second half (8,267 MW). More than 75 per cent ofthis capacity is expected to come up in Rajasthan (over 2,000 MW), AndhraPradesh (1,950 MW), Tamil Nadu (1,872 MW), and Karnataka (1,555 MW).
The estimates include 83 MW of floating solar capacity addition (33 MW, NTPC Kerala and 50 MW, SECI Uttar Pradesh tenders). BTI also expects India'sfirst utility-scale storage project - 3 MW by SECI to be commissioned in Leh and Jammu and Kashmir during the year.Open access solar capacity addition is expected to fall significantly from 1,630MW last year to just around 600-650 MW in 2019. Maharashtra, AndhraPradesh, Uttar Pradesh, and Haryana are expected to lead the market.About 32 developers are expected to commission utility-scale solar projects in 2019. Azure, Acme, and NLC are expected to be the leading developers. Ayana Renewable, Raasi Green Earth, Asian Fab Tec, Think Energy Partners (TEP), andTechnique Solar are expected to commission their first ever projects in India in2019.
Rooftop solar capacity addition in 2019 is expected at 2,368 GW - 49 per cent higherthan in 2018. The market is expected to be dominated by C&I consumers again, as activities in other segments stay slow. About 290 MW of aggregate capacity, mostly from solar pump installations, is also expected to be added in 2019 to off-grid solar projects.
About 2,300 MW capacity addition of wind power is expected in 2019 - up 18 per cent over the previous year. Almost all of this new capacity are expected from Tamil Nadu and Gujarat. Projects are expected to be commissioned under SECI tranche I, II, and IIItenders, and Gujarat and Maharashtra's 500 MW tenders. Projects are expected to be commissioned by Adani, Orange Renewable, Engie, Sembcorp, and Torrent Power.
MNRE announced in December 2018 that it plans to issue 80 GW (60 GW solar and 20 GW wind) of tenders by March 2020. We believe that such large issuanceis implausible and not consistent with overall power demand-supply situation or actual land transmission infrastructure available. A pressure to issue more tenders would see a recurrence of problems witnessed last year - lack of planning, poor tender design, arbitrary tariff ceilings - resulting in under subscription and cancellations.Successful implementation of the SAUBHAGYA scheme and cyclical power demand uplift before general elections may force some DISCOMs to fast-trackRE tenders.
BTI expects to see a strong emphasis on domestic manufacturing tenders. MNRE may issue more integrated tenders offering a mix of project development and manufacturing capacity. Large tenders are also expected with domestic supply restrictions for supplying power to public sector consumers.
With general elections due in May 2019, we expect little development on policy front in the year. RE has already been falling behind in this government's policy priorities. If a coalition-based government is formed, as widely expected, the sector is likely to be pushed back further in the new government's policy agenda.
Some critical amendments have been proposed by the Modi government to the Electricity Act, 2003. But we expect no progress of the bill in the winter session of the Parliament. Time is also running out for announcement of a concrete plan on SRISTI or KUSUM schemes. However, as the government is under mounting pressure to help farmers before elections, it may yet allocate some budgetary allocation to KUSUM scheme.
Despite Central Electricity Regulation Commission's (CERC's) recent decision sgranting relief to developers from GST and safeguard duty, BTI expects uncertainty to persist through the year. The DISCOMs do not have the financial capacity to compensate developers upfront and are in any case going to wait for direction from the respective state regulators.
Equipment prices and tariffs
It is widely believed that module prices will continue to soften through the newyear due to oversupply in the global market. There are many estimates of prices falling below USD 0.18/ W during the year. BTI believes that the scope for any significant decline is limited as demand from Europe and US is likely to be strong. With some surprises expected from the Chinese market, the prices are expected to remain stable for most of the year. We expect an average price of about USD0.22/W in the year although there may be some marginal decline at the end ofthe year.
Consequently, solar EPC costs are expected to decline only marginally from the current levels. BTI estimate for utility-scale solar EPC cost by year end is Rs 26/Wp and see almost no room for bid tariffs to fall in 2019. Tariffs are likely to stay within Rs 2.50-3/kWh range, depending on project location and off-take risk profile.No major change is expected in EPC cost or tariffs for wind power plants.
RE projects have been facing debt financing challenges due to increasing cost of debt and tight liquidity in the financial markets. The liquidity situation would probably ease off by Q2, although financing cost is expected to stay stable throughout the year. Also, if no clear way out is found for GST and safe guard duty pass-through, lenders would continue to be highly selective in the sector. Many companies including ReNew, Acme, Sembcorp, and Sterling and Wilson have announced their IPO plans. Successful IPOs would boost confidence in the overall sector, but prospects are unclear due to political uncertainty and stock market volatility.
The sector has seen gradual consolidation through both organic and inorganicactivity. Project pipelines of leading developers are in the range of 1,000-2,000 MW, suggesting significant capital raising activity in 2019. Most of the new capital is expected to come from large international pension funds and sovereign wealth funds. But capital raising may face challenges due to squeezed returns and unfavourable risk profile. Mergers and acquisition activity is also likely to besubdued due to mismatch in valuation expectations.
Except for rooftop solar, Indian RE is getting stuck in the slow lane. The sector needs fresh thinking and concrete, decisive policy action to go up a gear. But that seems unlikely in an election year. Besides, problems associated with GST, safeguard duty, BIS quality standards, and land and transmission constraints look likely to linger for some time.