Solar power: Some bright spots, many clouds

Plummeting tariffs in the solar market are encouraging states to renege on earlier contracts, even as increasing imports of solar panel are dimming the prospects for domestic manufacturers

For the solar power sector, 2017 was a year of sunshine and shadows – from new lows in tariffs to a novel set of market challenges.

In May 2017, solar tariff breached Rs 2.5 per unit and stooped to Rs 2.44 in the bidding for a 500 Mw solar park in Rajasthan. With that, solar tariffs felt 80 per cent in six years. At the same time, capacity grew to 14,750 Mw from a negligible 2 Mw during the same period.

This year also marked the entry of global players, the exit of some, projects changing hands and global funds lining up to invest in the Indian renewable energy story. But the funds crunch in the states also cast a dark shadow as many states reneged on power purchase contracts, citing the steep fall in tariffs which, in turn, impacted investment in the sector.

The capacity addition of solar power this year has been lower than the annual target — just 3,100 Mw against a 9,000 Mw target. There have also been delays in tendering and the project award process in some states.

Though the capacity addition was 83 per cent over FY2016, solar capacity is still some distance by the Bharatiya Janata Party’s revised solar power target by 100 Gw by 2022. To speed up the implementation, the government has planned for mega-size solar parks of over 500 Mw at a single location. Close to 30 such parks have been identified, of which five have been successfully tendered out. But most states — such as Bihar (350 Mw), Chhattisgarh (500 Mw), Tamil Nadu (550 Mw) and Jharkhand (1,000 Mw) — have extended the deadlines for solar power projects. Most of the states cited weak demand and falling tariffs as reasons for delaying the tenders.

Rapidly falling tariffs has shone a spotlight on the fact that power distribution companies (discoms) and states are going back on PPAs that were signed at higher prices some time ago.  For instance, Jharkhand is re-negotiating tariffs two years after awarding the projects at high rates of Rs 6-9 per unit. Uttar Pradesh has cancelled all the solar projects signed at Rs 7-9 per unit last year. At the same time, leaving Gujarat, no other state met its renewable purchase obligation for fourth straight year, raising questions over offtake of planned capacity addition.

The solar sector tracking agency Bridge to India set out the problems in its latest report. “The Indian solar market is being tested to its limits. GST has increased execution costs. Module prices have shot up when bidders were factoring in another 20 per cent price decline by the end of this year. Chinese module suppliers are even reluctant to supply to India. The government is considering anti-dumping duty petition to support domestic solar manufacturers. But perhaps, the biggest challenge facing the sector is slowing power demand. Lack of visibility over project pipeline is forcing developers to bid aggressive tariffs and reconsider strategic options including consolidation,” it said.

Even as some legal experts express concern over increased litigation, the solar market is looking at consolidation with more than 6,000 Mw of projects on sale.

Meanwhile, Moody’s in its latest analysis when it upgraded India’s sovereign rating, said India will see a change in its energy mix towards renewables as the country adds more capacity and moves towards its commitments under the Paris Agreement on climate change. Echoing similar sentiment, ICRA said, “given the strong pipeline of project awards in the last 18-24-month period, solar capacity addition of 7-7.5 GW is expected in FY2018.”

The silver lining is from the industry which is still betting on the potential growth of the sector. Both ReNew Power and ACME are planning IPOs in the coming year. Azure Power was listed on NYSE this year.  Hero Future Energies sourced $125 million from World Bank and is looking at Green Bond market actively. Key state owned financers, PFC and REC are increasing their share of renewable project portfolio.

 With rate of returns in solar projects stabilising at a healthy rate of 9-11 per cent, subject to solar module prices, key lenders from across the world are showing interest in funding renewable projects in India. The European Investment Bank has joined hands with YES Bank to fund $400 million in renewable projects. SoftBank has already committed $2 billion in Indian solar projects. CPDQ, Abu Dhabi Investment Bank, Canadian Pension Funds, IFC and ADB plan to build on an already strong presence in India. 

In 2018, a decision in an anti-dumping duty case on the imported solar modules, the price of Chinese solar panels, GST and any increase in the tariff in upcoming bids would decide the fortunes for the sector.