REPORT T. Developing Solar Power. Lessons from India s National Solar Mission A.MANNA / WWF-INDIA

Transcription

1 REPORT T 2012 A.MANNA / WWF-INDIA Developing Solar Power Lessons from India s National Solar Mission

2 AUTHOR Manisha Gulati ACKNOWLEDGEMENTS The author is grateful to Mr Jeffrey Robile and to Mr Saliem Fakir, WWF South Africa, for insights into the development of solar parks in South Africa. These discussions helped in identifying issues of interest for South Africa from India s National Solar Mission (NSM). The preparation of this report has greatly benefitted from the interactions with several experts in India who shared their knowledge of the Indian solar power sector and discussed the status of NSM. Those who can be named are Ms Anjali Garg, IFC; Mr Balawant Joshi, the owner and director of ABPS Infrastructure Advisory Services; Dr Harish Ahuja, president of strategy at Moser Baer; and Ms Namrata Mukherjee, manager at Mercados. There are several other experts, working in public sector organizations associated with renewable energy in India and closely associated with the NSM, who wish to remain anonymous. Some experts working with developers of solar projects and financial institutions also requested anonymity. Their insights have been valuable in the preparation of this report. Special thanks to Mr Abhishek Nath of WWF s India office for reviewing the report for its factual correctness and providing insights into up-to-date developments regarding the NSM. Finally, the author is grateful to colleagues from different WWF offices who reviewed this report and to Laura Tyrer of WWF South Africa and David le Page for editing it. This report is an initiative of WWF South Africa, based on information available to the author. It does not reflect the formal position of WWF South Africa. 2

3 TABLE OF CONTENTS 1 Introduction 2 Objectives of this report 3 The context for solar power in India 3.1 Impetus for solar power 3.2 Institutional context for solar power in India 4. Salient features of India s NSM 5. Overview of development and grid-connected solar power under India s NSM 6. Procurement of projects under NSM 6.1 Procurement method 6.2 Reason for adopting reverse bidding mechanism 6.3 The first round of bidding The outcome of bidding Current status of project Effectiveness of bidding mechanism and experience so far - Irrational bids - Award of contracts to inexperienced entities - Financial closure of projects - Project delays and quality - Financial gains for developers 6.4 Second round of bidding 7. Financing of projects 7.1 Government s payment security mechanism for NSM projects Features of GOI s payment security mechanism 7.2 Multilateral and international financing for NSM projects ADB s solar partial credit guarantee facility International Finance Corporation Ex-Im Bank of the US 8. Promotion of domestic industry 8.1 Outcome of domestic content policy 8.2 Concerns over policy 8.3 Supply side concerns from policy 9. Lessons and conclusions 9.1 General 9.2 Competition and private sector participation 9.3 Reverse auctios 9.4 Approach to technology 9.5 Project bankability 9.6 Promotion of domestic solar industry

4 Abbreviations ADB a-si CAGR CEA CERC crore CSP/T discom DNI DoT EBITDA EPC EU FIT GATT GBI GETCO GHI GoI GPCL GW IEC IFC IDFC INR IPP kwh lakh KV kwp MoU MNRE Mtoe MW NAPCC NSM NTPC NVVN Asian Development Bank Amorphous silicon Compound annual growth rate Central Electricity Authority Central Electricity Regulatory Commission Ten million (South Asian numbering, refers to rupees in this document) Concentrated solar power/thermal Distribution company Direct normal incidence (of solar radiation) Department of Telecommunications Earnings before interest, taxes, depreciation and amortization Export Promotion Council European Union Feed-in tariff General Agreement on Trade and Tariffs Generation-based incentives Gujarat Energy Transmission Corporation Global horizontal incidence Government of India Gujarat Power Corporation Limited Gigawatt International Electrotechnical Commission International Finance Corporation Infrastructure Development Finance Corporation Indian rupee Independent power producer Kilowatt-hour 100,000 (South Asian numbering) Kilo volt Kilowatt-peak Memorandum of understanding Ministry of New and Renewable Energy Million tonnes of oil equivalent Megawatt National Action Plan on Climate Change Jawaharlal Nehru National Solar Mission National Thermal Power Corporation NTPC Vidyut Vyapar Nigam, the agency designated by the Government of India for procuring the solar power by entering into a PPA with solar power generation project developers who will be setting up solar projects under the NSM before March 2013 and who are connected to the grid at a voltage level of 33 kv and above. 4

5 PCG PPA PSA PSM PSS PV R&D RE REFIT RETs RfS RPO RREC SEI SERC SPD SPSA SPV STC TRIMS UMPP WTO Partial credit guarantee Power purchase agreement Power sale agreements Payment security mechanism Payment security scheme (solar) photovoltaic Research and development Renewable energy Renewable energy feed-in tariff RE technologies Request for Selection Renewable (energy) purchase obligation Rajasthan Renewable Energy Corporation Solar Energy Initiative State electricity regulatory commission Solar power developer Solar Payment Security Account Special purpose vehicle Standard Test Conditions Trade-related investment measures Ultra Mega Power Projects World Trade Organisation 5

6 1. INTRODUCTION South Africa is setting up a 5 GW solar park to help provide the country with clean and secure energy and to meet its growing demand for electricity. A solar park is a concentrated zone of solar development that includes thousands of MWs of generation capacity delivering to the grid via a single connection. One or more pieces of land in close proximity are designated and pre-permitted as a solar park where multiple power producers are pre-permitted to develop solar plants in a clustered fashion and on a predictable timeline, sharing common transmission and infrastructure (Robile, 2011). Globally, it is believed that solar parks can streamline the development timeline for solar power projects, with government agencies undertaking land acquisition and obtaining necessary permits as well as providing common infrastructure needed to set up such plants. The latter also serves to reduce costs, particularly for the private sector, since it addresses issues faced by stand-alone projects. Further, solar parks can significantly reduce the cost of electricity from solar power due to economies of scale, use of domestically manufactured components and removal of regulatory hurdles. The first phase of development of the South African solar park involves 1 GW by 2016 when Eskom will be ready with the power evacuation facility. Having conducted a pre-feasibility study and an indicative master plan, the government and its agencies are now conducting a full feasibility study that is credible to the global solar industry and meets all Cabinet s criteria for approval of the concept if it is viable. In its endeavour to design an optimal policy and regulatory framework that helps achieve multiple objectives, such as making solar power more affordable, attracting private sector investment, and fulfilling social and economic objectives of the country, South Africa can draw lessons from other countries that have sought to develop solar power on a large scale. One such country is India. The first phase of India s 22 GW solar power development programme, known as the Jawaharlal Nehru National Solar Mission (NSM), spanning , aims to ramp up capacity of grid-connected solar power generation to 1 GW with private sector participation. During , gridconnected solar power projects of 800 MW were awarded to the private sector for implementation, of which 620 MW were new projects and 84 MW were existing projects allowed to move under the NSM policy framework. Of the 800 MW projects, 234were expected to be commissioned by January During , projects worth 350 MW were bid out. Projects were selected through a reverse bidding mechanism that required developers to bid discounts on the feed-in tariff (FIT) for solar power. At the same time, India is seeking to develop a solar industrial base through the NSM. Given the similarities of scale of development, reliance on the private sector for project development and management, as well as the pace of developments in India, India s experience offers lessons for South Africa. WWF is aware that it is still too early to draw definite conclusions from India s experience or to comment on the effectiveness or success of India s approach. But it is possible to look at the experience and trends that have emerged in India to provide some pointers to South Africa on how to structure its policy and regulatory framework for solar parks. 6

7 2. OBJECTIVES OF THIS REPORT Several commentaries on India s NSM exist. Undertaking a simple review of the NSM or its experience would be repetitive and would not fulfil the precise objectives of drawing lessons in the context of South Africa s solar park programme. Therefore, to make this exercise more meaningful, WWF South Africa spoke to experts related to the solar park programme in South Africa and identified the main areas of interest in the South African context. These are (i) methods of procurement of solar projects, (ii) availability of finance and experience with financing of projects, and (iii) promotion of domestic industry. Consequently, this report deliberates on these three broad issues related to the grid-connected solar power projects under the first phase of India s NSM. The overall objective is to understand the extent to which the policy has been successful in attracting the desired investment in solar power, bringing down costs and promoting the domestic solar industry. Besides the NSM, experiences from the states of Gujarat and Rajasthan are discussed. Where possible, experiences from other countries have also been highlighted. 7

8 3. THE CONTEXT FOR SOLAR POWER IN INDIA 3.1. IMPETUS FOR SOLAR POWER Before discussing India s NSM, it would be useful to understand the context and objectives for the pursuit of solar power in India. The development of solar power in India began in the context of addressing climate change while sustaining economic growth under India s National Action Plan on Climate Change (NAPCC). The NAPCC seeks to guide India to a development path that simultaneously advances economic and environmental objectives. The underlying objective for the development of solar power in the context of environmentally sustainable growth was that since India gets lots of sunlight, solar technologies would provide for clean generation with practically no form of emissions at the point of generation (GOI, 2008). It was with this objective that the NSM was announced as an important plank under the NAPCC. At the same time, the NAPCC recognized that solar power could help address other energy challenges, such as energy security and electrification for the energy-poor (see Box 1). Thus, the fundamental impetus for solar power in India is addressing climate change. Energy security and 100% electrification are considered natural additional benefits that will accrue. Creating industrialization or jobs is neither a driver of solar power development nor a primary objective. But the NSM did make domestic manufacturing a focus of solar power development. A thriving domestic manufacturing base is seen as a key ingredient for making India a solar energy hub and creating the critical mass for a domestic solar industry. Choosing low-cost, high-quality domestic manufacturing rather than imported equipment and technology innovation is critical to driving down costs towards grid parity for solar. In terms of job creation, the deployment of solar systems in India being quite comparable to that in the rest of the world by 2022, the benefit of such large-scale deployment should manifest in the form of indigenous expertise, skill development and employment creation. 8

9 BOX 1 India s electricity challenges India consumed 600 Mtoe of primary energy in Coal represented the largest primary energy source, with a share of 40%. Despite a doubling of domestic coal production between 2000 and 2007, imports took an increasing share of total primary coal supply, from 9% in 2000 to 14% in The power sector in India was responsible for 36% of primary energy consumption in 2007, a share comparable to the world average of 35%. The power sector is highly dependent on coal, which accounts for 56% of the installed power capacity. The sector consumes more than 74% of the coal produced in India. However, the share of coal is much higher in the actual generation mix. During April December 2011, coal- and lignite-fired plants accounted for 79% of total power generation. Capacity addition has been slow, with actual capacity addition being an average of 61% of target between and While coal is an important indigenous energy resource, the coal quality is much lower than elsewhere. The country has started seeing coal shortages for a variety of reasons. Demand for coal grew at a compound annual growth rate (CAGR) of 7 8% between and , as against the production growth of 5% per annum during the same period. Coal imports by India for the power sector are expected to more than double between and This would be higher in future with the falling quality of domestic coal and planned future coal power capacity addition over 70% of the capacity addition planned between to is coalbased. Given that India s economy has been growing rapidly over the past decade, the above-mentioned problems on the supply side have led to demand consistently outstripping supply. As a result, India has seen substantial energy and peak power shortages. Between and , peak deficit was over 12% and energy deficit was over 8.5%. While peak deficit reduced to 8.5% in , energy deficit continued to be high at 10%. Some provinces saw shortages of over 20% during this period. Consequently, industries, farmers and households have invested in a substantial amount of equipment and capital in the form of captive power plants, generators, inverters, and voltage stabilizers to address issues of supply and its quality. The situation becomes worse if India s electrification conditions are taken into account. According to the 2001 census, only 43.52% of India s rural households were electrified. Only 60 million of the 138 million households in the country use electricity as the primary source of lighting. Source: Remme, Trudeau, Graczyk and Taylor 2011; Central Electricity Authority India; Author 9

10 3.2. INSTITUTIONAL CONTEXT FOR SOLAR POWER IN INDIA Electricity, in India, is under the jurisdiction of both the federal (national) and state (provincial) governments. This means that both federal and state governments have powers to legislate on the subject (except for nuclear power, which is in the domain of the federal government alone), with the federal government s legislations prevailing in the event of a conflict between the laws of the state and those of federal government. The federal government is responsible for overall policy making, planning and coordination of the sector, and joint management of the electricity sector. It exercises these functions through the Ministry of Power, as well as through central agencies like the Planning Commission and Central Electricity Authority (CEA). The state governments are responsible for power development plans within the province, including all policy decisions concerning power development within the state, as well as power tariffs at the retail end. However, state governments are under no obligation to develop or align their policies with those of the federal government, as long as they do not override the overall legislation ruling the electricity sector in the country. Regulatory aspects of the sector involving more than one state are addressed by the Central Electricity Regulatory Commission (CERC), while state electricity regulatory commissions (SERCs) take care of the same at the state level. Renewable energy (RE) is also governed by the same institutional structure. There is no overarching RE law in India. Policies, which are not legal requirements, have been issued as and when necessary to facilitate the growth of specific RE technologies (RETs) (Gulati and Tiwari, 2011). The governing legislation for the electricity sector the Electricity Act 2003 and the National Tariff Policy 2005 does establish the framework for development of RE. However, in the absence of an overarching RE law, there are separate initiatives by the federal and state governments. For instance, the NSM is an initiative of the federal government. State governments often have their own policies for different RETs or implement federal policies and guidelines for specific RETs to different degrees. They are under no obligation to co-ordinate their approaches, prices or even industrialization policies related to RE with the federal government. This is because they can fund the costs associated with their policies and incentives from their own revenue base, and are not dependent on the federal government for funds. However, the dual responsibility between the federal and state governments sometimes slows the development of RE 10

11 BOX 2 Impact of dual responsibility of federal and provincial governments on development of RE in India The development of RE in India is complicated by the fact that RE falls under the purview of both the federal and state governments. First, plans or targets laid down by the federal government do not always materialize, because provincial governments are under no obligation to develop or align their policies for RE with those of the federal government. Second, progress on the ground depends mainly on state-level policies and regulatory frameworks on FITs and renewable (energy) purchase obligations (RPOs), evacuation, clearances, open access, and facilitation from state nodal agencies. Different approaches on these fronts either provide investors with specific pockets of growth by way of the provinces with better policy, regulatory and administrative frameworks, thereby limiting the market for development, or create instability and uncertainty for long-term investment in RE. Further, the lack of co-ordination and co-operation between the federal government, federal government agencies, provincial governments, and provincial nodal agencies entrusted with the development of RE delays and restricts the progress of RE development. To illustrate, the regulatory framework for RE at the provincial level is determined by the SERCs, which are loosely bound by the national policies and the guidelines of the CERC. This has led to several inadequacies in the development framework for RE across states. A review of the RPOs and related regulations issued over the years by different SERCs indicates significant differences in applicability and detail. A 2010 review indicated that 17 out of 28 states had enacted RPO regulations. In 2011, the number reached 20. As far as the applicability of RPOs is concerned, a few states have mandated RPOs on open-access consumers as well as for captive consumers. But the large majority restricts RPOs only to the electricity distribution companies (discoms). In terms of details, RPO regulations issued by different SERCs vary from specifying only the RPO targets to clearly spelling out implementation procedures and the compliance framework. Some SERCs even specified a maximum cap for RE-based procurement. Only two SERCs specified explicit penalties for noncompliance of RPOs. On the FIT front, the variation in FITs determined by SERCs is substantial. Not only are there differences in the manner and norms for FIT determination among SERCs, but also in the extent to which these norms are explained. In some cases, these norms are not specified at all while in others, the tariff of other RE sources in the state has been adopted as a reference point. Further, many SERCs have determined FITs for limited periods without indicating the regulatory framework beyond such periods. This not only causes confusion among developers but also gives rise to regulatory uncertainty, affecting the bankability of projects. The CERC s regulations are expected to serve as benchmarks and reference tariffs for SERCs, and the model regulations and approaches determined by the Forum of Regulators (a body set up under the Electricity Act to harmonize the regulation of the electricity sector in India) are expected to bring about uniformity in the approach adopted by SERCs for the development of RE. But in practice, the SERCs are not bound by these guidelines or regulations. The dichotomy of approaches at the federal and provincial levels and between provinces may continue. Source: Garg, Gulati and Tiwari (2010) and Gulati and Tiwari (2011), Author 11

12 The case for solar power development is similar; there are different approaches for promoting solar power at the federal and state levels. Several state governments, such as those in Gujarat and Rajasthan, created solar power policies even before the NSM was announced. Post NSM, these and some other provinces have continued their own solar power-promoting policies, which are updated from time to time. The FITs determined by the SERCs and offered under these policies are very different from the FITs determined by CERC for the NSM. In some states, the approach adopted for solar power development is completely different from that adopted under the NSM. In others, the policies provide a mix of approaches and have incorporated some aspects of the NSM (see Box 3). Even with their different approaches, the NSM and state policies are functioning in parallel and independently, without any interference from either the federal or state authorities. BOX 3 Approaches for solar power development in the states of Gujarat and Rajasthan Gujarat announced its solar power policy in 2009, a year before the NSM. The policy ends in March It targets a total of 500 MW of capacity, with the minimum capacity of a plant being 5 MW. The FIT provided under this policy is presented in Table 1. The policy provides two routes for setting up a solar project: (i) developers identify the location for setting up the project, and (ii) developers set up projects with the solar parks planned by the provincial government. These parks would involve power generation as well as manufacturing of solar components and would be set up on government wastelands. Table 1: FIT under the solar power policy of the state of Gujarat, India (in INR/kWh) Projects commissioned before December 2010 Projects commissioned before March 2014 Note: INR = Indian rupee; kwh = kilowatt-hour; PV = photovoltaic PV Years 1 12: 13 Years 13 25: 3 Years 1 12: 12 Years 13 25: 3 Solar Thermal Years 1 12: 10 Years 13 25: 3 Years 1 12: 9 Years 13 25: 3 Allotment of projects under both routes is on a firstcome, first-served basis, though developers are required to meet certain minimum financial and technical criteria. In the case of solar parks, the provincial governmentowned agency, Gujarat Power Corporation Limited (GPCL), has been made responsible for developing solar parks and leasing land therein to the developers. The provincial government-owned transmission utility, Gujarat Energy Transmission Corporation (GETCO), has the mandate to develop the transmission evacuation infrastructure from the identified interconnection points with the developers. The developers are required to fund the connection from the plant to the interconnection point. The first development under way at the solar park is intended to be developed in two phases. Phase 1 comprises 590 MW of solar power generation facility and phase 2 has 500 MW of solar power generation, research and development (R&D) and manufacturing facilities. In the first round of project allotments in the state, no timelines or guarantees were required from developers to sign power purchase agreements (PPAs) after allotment of projects. As a result, many developers who had been allotted projects waited for the finalization of the NSM before signing PPAs to see the FITs determined therein. Later, several developers moved to the NSM under the 12

13 migration scheme. Only 55% of the total projects allotted by the state in the first round eventually signed PPAs. With bidding for new projects under the NSM leading to low tariffs and the Gujarat policy offering higher front end FIT, the latter became more attractive from the point of debt servicing. This, coupled with policy amendments requiring developers to give a deposit that would be encashed in the event of failure to sign PPAs, resulted in 98% of all projects signing PPAs in the second phase of allotment of solar projects in Gujarat. As far as project execution is concerned, land has been allotted for 176 MW so far. However, the land has not actually been leased or handed over to developers. It has only been earmarked. Most of the area remains undeveloped. The laying down of underground transmission lines in the solar park is also facing delays as GETCO does not have the expertise for this. Given these execution challenges from the state government s end, some developers have obtained guarantees from the state government against possible penalties due to delays in project execution. Bankability of projects remains a concern even in Gujarat, given the inadequate track record of developers and lack of performance data. Further, there is a huge resale market for PPAs awarded in the first round, with developers trying to sell projects at higher prices to international investors and developers. Besides slowing down project development, this is increasing the cost of project development and threatening to make projects unviable. In the second round, the state policy was amended to disallow changes in shareholding patterns for up to five years (except for listed companies) and to allow technical partners with equity contributions up to 49% with prior state government approval. Finally, the allotment of projects in Gujarat without a competitive bidding process has been met with criticism. Given the low tariffs that have emerged from the bids under the NSM, there has been criticism that Gujarat is paying higher tariffs and consequently high subsidies for solar power (Panchbuta, 2011). Rajasthan is another province endowed with large-scale solar power potential that has put in place a framework for solar power development. The policy has identified several routes for the development of solar power. The main ones are discussed below. Bundling of solar power akin to NSM The province proposes to develop 50 MW of PV and 50 MW of solar thermal capacity through a tariff-based competitive bidding process based on the concept of bundling solar power with equivalent capacity of conventional power. The successful bidders would set up solar plants in the province and supply equivalent amounts of power from conventional power plants located anywhere in India. The total power supplied would be purchased by the discoms in the province. The policy does not lay down the details of the competitive bidding process to be adopted for this purpose and it is understood that this policy has yet to be developed. Setting up plants for direct sale of power to discoms in the province The policy provides for setting up solar projects for direct sale to the discoms in the province. The maximum capacity planned under this route is 200 MW up to 2013 and 400 MW between The capacity is proposed to be distributed equally between PV and solar thermal. Projects will be selected through the tariff-based competitive bidding process. Promotion of manufacturing facilities Rajasthan is giving special treatment to solar power developers (SPDs) who also wish to set up solar PV manufacturing units in the state. It has set aside a specific target of 200 MW up to 2013 for such developers. To qualify under this scheme, project developers must establish solar PV manufacturing plants (thin film technology modules or crystalline technology modules involving processing from wafers stage) of minimum 25 MW per annum capacity. Further, the developers are required to source PV modules for their plants from these very manufacturing units. The selection of developers under this scheme would be through tariff-based competitive bidding. Projects for captive use/third party sales The province would support solar projects of unlimited capacity for captive use, third party sale or sale to other provinces for promotion of investment in the province. Solar parks Rajasthan proposes to develop solar parks of more than 1,000 MW capacity in specific areas. These parks would consist of various zones: solar power plants, manufacturing zones, R&D, and training centres. The state government agency, Rajasthan Renewable Energy Corporation (RREC), has been appointed as the nodal agency for this purpose. RREC will form a special purpose vehicle (SPV) in the form of a subsidiary company for the development of infrastructure and the management of the solar park. The SPV will formulate the rules for land allotment and sharing of development costs by power producers and manufacturers. It will also develop the initial infrastructure from funds allocated by RREC, which will be subsequently recouped from the solar power producers located in the solar parks by levying development charges. RREC is currently developing an interim master plan for the first phase. The provincial government will evolve a separate special package of additional fiscal incentives for solar industries in the solar park. Source: Government of Gujarat 2009 and 2010, Government of Rajasthan 2011, Patel 2011, Anand

14 4. SALIENT FEATURES OF INDIA S NSM The NSM, formally launched in January 2010, sets a target of 22 GW of solar power capacity by 2022, with individual targets for grid-connected and off-grid solar electricity generation, solar lighting systems and solar thermal collectors. More specifically, the NSM envisages (i) 20 GW of grid-connected installed solar capacity, comprising large PV and solar thermal power plants and smaller rooftop PV systems, (ii) 2 GW of off-grid distributed solar plants, (iii) 20 million square metres of solar collectors for low temperature applications, and (iv) 20 million solar lighting systems for rural areas. The NSM has two additional goals: (i) to promote R&D and develop trained human resources for the solar industry, and (ii) expand the scope and coverage of earlier incentives for industries to set up PV manufacturing in India. The NSM has been divided into three phases and the Government of India (GoI) has sanctioned targets for the first phase (see Table 2). The targets for the other two phases are indicative to be fixed based on the achievements of Phase I, reduction in solar energy prices and availability of international finance. Table 2: Target s of India s NSM Phase Phase Phase Total Grid-connected solar (MW) Off-grid solar Solar thermal collectors (million m 2 ) Solar lighting systems (million) No three part targets 20 Source: GoI 2010a One of the key features of the NSM is that it is technology neutral. The stated reason for this approach to technology is that market conditions should be allowed to determine technology winners. Further, a technology-neutral approach would allow benefits of technological innovations to accrue. Finally, India is also keen to develop solar thermal for uses other than power generation. The experience with concentrated solar power (CSP) projects getting operationalized under the NSM would be useful from this perspective. While the above reasons are valid and cannot be disputed, given that India had no substantial experience in solar projects when NSM was announced, the fact remains that policy makers had no capability to decide the technology that would be best suited to India. No established studies were undertaken to determine which technology could work in the Indian conditions. The country had only annual information of reasonable accuracy on solar radiation. Seasonal and monthly data on direct normal incidence (DNI) of solar radiation, with accurately established monthly, daily and hourly variations a prerequisite for project feasibility, design and even technology choice were not available. Given this uncertainty, the government thought it best to let the developer decide the technology and assume the associated risks. Another factor that, to some extent, prompted the technology-neutral approach of the NSM was the prevailing political economy in India. When the NSM was formulated and announced, India was coming to grips with issues of corruption in the allotment of 2G spectrum in the telecom sector. The 2G spectrum 14

15 corruption scandal involved GoI officials illegally undercharging mobile telephony companies for frequency allocation licences, which they used to create 2G subscriptions for cell phones. Licences were awarded on a first-come, first-served basis, which involved procedural irregularities. It was alleged that the undercharging of spectrum by eliminating market determination of prices through competitive prices had resulted in severe losses to the federal exchequer. The Central Vigilance Commission and the Central Bureau of Investigation were involved in the investigation, with the charges being filed against unknown officers of the Department of Telecommunications (DoT), GoI and unknown private persons/companies. The offices of DoT were also raided. With these events unfolding, the underlying idea in the NSM was to avoid bias and prevent any future charges of favouritism towards any technology or business lobby. In India, there is a strong lobby for solar PV technology, since PV manufacturing had a base in India well before the NSM. At the same time, given the market potential in India, international players in the solar thermal segment were trying to build a base in India. Therefore, by adopting a technology-neutral approach, the GoI tried to maintain a non-partisan and non-political approach to solar power development. The pros and cons of this approach are discussed in Box 4. 15

16 BOX 4 Is India right in choosing a technology-neutral approach for solar power under the NSM? India s NSM is intended to be technology neutral, allowing technological innovation and market conditions to determine technology winners in solar power. In theory, the case for technology neutrality is strongest in the presence of information asymmetry (between the regulator and the regulated) and when there is potential for technology lock-in. The danger is that governments will pick technologies that lock the economy into a trajectory which is unnecessarily costly. In practice, these reasons make technology neutrality the right approach in the Indian context. First, at the time of formulation of the NSM, the solar power segment in India was characterized by information asymmetry, with policy makers having no way to decide the technology that would be best suited to India. Second, the outcome of the first phase of the NSM would decide the approach for the next two phases. In the event that policy makers made the wrong technology choices, India would be locked in with those technologies for several years. Therefore, the technology-neutral approach allows India to minimize the risk of lock-in for technologies which ultimately prove to be more costly or less efficient than alternatives would have been. It allows the country to know which technologies really have the capacity to deliver and which do not. More specifically, leaving the choice of technologies to developers, subject to performance requirements and legal constraints, can provide valuable information on which technologies are most cost-effective and appropriate in India s context, given natural endowments, load profile and risk profile. The approach also offers flexibility in terms of technology deployment, enabling rapid response to changing market trends. However, the technology-neutral approach also has drawbacks. The biggest risk with such an approach is that it may result in the adoption of technologies that are obsolete or breaking down. Further, given the trade-off in cost and efficiency (see Table 4) of different solar technologies, it is possible that developers will opt for technologies with low efficiency in order to be cost-competitive. A specific drawback in the case of India is that in the absence of adequate information of solar resources on regional and site-specific locations for monthly, daily and hourly variations, treating all technologies alike may lead to the selection of wrong technologies Source: Author 16

17 5. OVERVIEW OF DEVELOPMENT OF GRID-CONNECTED SOLAR POWER UNDER INDIA S NSM In the first phase of the NSM, India adopted a mechanism of bundling solar power with thermal power to improve the affordability of solar power. Under this mechanism, SPDs would enter into PPAs with National Thermal Power Corporation (NTPC) Vidyut Vyapar Nigam (NVVN), a wholly owned power trading subsidiary of NTPC. For each MW of solar power procured by NVVN under a PPA, it would be allocated an equivalent amount of capacity from the unallocated thermal power produced by the NTPC (see Figure 1). Thus, NVVN would procure power from solar projects set up under the NSM by entering into a PPA with them and selling bundled power to distribution utilities. This bundled power would be procured by and sold to discoms at tariffs determined by the CERC. Besides the tariff for power procurement, discoms would have to pay a facilitation charge to NVVN. Since the price of bundled solar and thermal power would be competitive with the price of electricity purchased through the power market, discoms would be willing to buy this bundled power (see Figure 2). On the face of it, this seems to be a good solution. By purchasing this bundled power, discoms would get thermal power to meet some of the power shortage they faced. Solar plants participating under the scheme would have to be connected to transmission substations at 33 kilo volt (kv) and above. Figure 1: Bundling mechanism for sale of solar power under India s NSM Solar Power Developer NTPC Unallocated Power PV: USD 0.338/unit CSP: USD 0.289/unit USD 0.047/unit X kwh ax kwh NVVN Price of bundled power or weighted price PV: (0.338X X)/5X= USD 0.096/unit CSP: (0.289X X)/5X= USD 0.105/unit Sale price off power given ratio of PV to CSP is 50:50 = USD 0.100/unit UTILITY Note: Figure for illustrative purposes only Source: Gulati

18 In keeping with the technology-neutral approach of the NSM, projects under this scheme are selected in a manner that provides for the equal deployment of both PV and thermal projects in MW terms. Within these two broad technology groups, the selection of projects would be technology neutral. Existing grid-connected projects (i.e. developers who had already initiated the process of setting up solar power plants and had made arrangements for sale of power to discoms) were also allowed to move under the NSM, subject to fulfilment of the following key criteria: - Clear title and possession of land at the benchmark laid down by the government - Approval from state transmission utilities for evacuating power to the grid at 33 kv and above - Confirmation from concerned provinces/discoms for purchase of all the power from the solar power plant through NVVN - Necessary water linkage from the concerned state authorities (for CSP plants) - Letters of comfort for funding the project - Bank guarantee at INR 50 lakh (US$94k) per MW to NVVN, out of which INR 25 lakh (or US$47k) per MW was to be given at the time of signing of memorandum of understanding (MoU) and the balance of INR 25 lakh (or US$47) per MW to be given at the time of signing of a PPA - No change in equity holding permitted from signing of MoU till PPA execution - The PPAs signed by the SPDs with the discoms would remain valid under the NSM. Figure 2: Comparative costs of solar power in India and unbundled power under NSM (in US$ per kwh) Source: Gulati 2011, author analysis 18

19 The allocation of solar PV capacity has been phased, with the allocation being done in two batches over the two financial years of Phase 1, FY and FY The main reason for this phased capacity allocation is to avoid bunching of large capacities and any difficulties in achieving financial closure, since a large number of projects would be looking for funding in an area new to financial institutions in India. Given their longer gestation period, solar thermal projects covering the entire capacity of 500 MW allowed under the first phase were awarded contracts (see Table 3). The capacity of PV projects was restricted to 5 MW while the capacity of solar thermal projects was set at a minimum of 5 MW and a maximum of 100 MW. The size restriction of 5 MW was determined because of the requirement to connect projects to the transmission substations at 33 kv and above. Table 3: Stage-wise allocation of grid-connected projects under Phase I of NSM (in MW) Solar PV Solar thermal Existing projects allowed to migrate to NSM FY FY New projects awarded Total Existing projects allowed to migrate to NSM New projects awarded 470 Total 500 Source: Government of India 2011, NTPC Vidyut Vyapar Nigam Limited a and b,author 19

20 6. PROCUREMENT OF PROJECTS UNDER NSM South Africa proposes to develop the solar park with private sector investment. Key areas of interest for South Africa, therefore, are the method or procedure for award of contracts to private players under the NSM in India, and the outcome and effectiveness of this procurement method PROCUREMENT METHOD RE projects in India are typically set up under the FIT route, wherein utilities enter into PPAs with RE projects at FITs determined by the concerned SERC. The FIT is typically a generic cost plus levelized fixed tariff determ ined by the SERCs. While RETs such as wind and small hydro have seen significant development under this route, solar power did not see similar development given its high capital costs. In 2008, the GoI took up the promotion of solar power by offering production subsidies in the form of generation-based incentives (GBI) on the FIT to a total of 50 MW of solar power during the remaining period of the 11th five-year plan ( ). A GBI of US$0.226 per kwh was offered for PV projects and US$0.189 per kwh for solar thermal for 10 years to SPDs with a maximum aggregate capacity of 5 MW. Under the NSM, the GoI initially intended to use a FIT-based approach wherein it would offer a fixed FIT over 25 years, set by the CERC. However, seeing the large response from the industry, it decided to adopt the competitive bidding route for the selection of projects. Competitive bidding is the preferred mode for development of conventional power projects in India (see Annexure 1). Another factor that played a part in the move towards a competitive approach for selection of solar projects under the NSM was developments in the 2G spectrum corruption scandal. Since the first-come, first-served approach for the award of 2G licences resulted in undervaluation of spectrum resources and loss to the government exchequer, the policy makers associated with the NSM found it prudent to opt for a competitive bidding approach for solar power development. This approach would allow for transparency and would withstand public scrutiny, particularly in view of the subsidy being proposed to make solar power affordable when compared to cheap coal power. Typically, the competitive bidding approach to development of power projects in India involves award of projects on the basis of lowest bid tariff. In the case of the NSM, instead of relying purely on the lowest tariffs, the GoI adopted the reverse bidding or reverse auction mechanism, an approach that is completely new to the electric power sector in India. Reverse auction is a method whereby private firms are required to submit bids that stipulate the minimum price or incentive level they would accept for an eligible output. The entity tasked with managing the reverse auction typically a governmental agency then reviews all bids and accepts the lowest ones. The appeal of the reverse auction concept is that it is designed to maximize the returns from a given expenditure of scarce public resources, and that it provides continuous incentives for further technology innovation and cost reductions. As far as the electric power sector is concerned, this internationally common competitive bidding mechanism requires bidders to compete on the basis of price per kwh, with the ceiling price announced in advance. Each winning bidder gets the off-take price at the level that was bid. Accordingly, India s reverse 20

21 bidding mechanism involved a two-stage open competitive process where prospective power producers were asked to give discounts on the solar power tariffs set by CERC. The power producers who gave the highest discounts, thereby committing to provide power at the cheapest rates, were selected. The main features of this reverse bidding mechanism are listed in Annexure REASON FOR ADOPTING REVERSE BIDDING MECHANISM Conventional economic theory holds that competitive processes such as tendering and reverse auctions should yield the most efficient outcome. Such processes foster price discovery, leading to more accurate and reasonable prices. In the case of RE, they have proven to be a viable alternative to the traditional, administratively fixed FIT used by most developed countries. Actions foster competition and push prices down, thereby reducing tariffs for end-users and making the whole process more sustainable (The World Bank, 2010). While the above benefits are well known and often implicit when a competitive process is adopted, in the case of India s NSM there was unfortunately no discussion of alternative processes and why this specific reverse bidding approach was preferred. In the absence of a public debate to understand how and why reverse bidding was chosen, it is difficult to know the GoI s objectives in using this process. But the assumed purpose of the reverse bidding has been to increase competition, lower the costs of solar power and move towards achievement of grid parity of solar power one of the stated goals of the NSM. Another assumed purpose is the avoidance of financial pressures that might have risen if capital or tariff subsidies had been adopted THE FIRST ROUND OF BIDDING THE OUTCOME OF BIDDING The first round of reverse auction held in FY received a very high response. Applications were received for capacity of 5,126 MW, which was eight times more than the target proposed to be allocated through the auction (Government of India, 2011). The range of discounts offered by bidders on CERCdetermined tariffs is indicated in Figures 3 and 4. The weighted average of quoted tariffs for the selected PV projects was US$0.229 per unit, while that for the selected CSP projects was US$0.215 per unit. Figures 5 and 6 show the range of the tariffs for the selected projects in comparison to the CERC-determined tariffs. In terms of the profile of players who were awarded projects, careful examination of the complete list of projects selected shows the absence of established players in the power and large infrastructure sectors in India. While some established players did not participate in the bidding, others were unable to win projects. New entrants without any experience in power projects dominated the list of successful candidates. In terms of technology, a significant feature of the projects is that most PV projects are based on polycrystalline silicon technology. Polycrystalline PV modules are the most used PV modules globally. 21

22 Figure 3: Analysis of bids received for solar PV projects in FY under NSM Source: Author analysis based on bid details available Figure 4: Analysis of bids received for solar thermal projects in FY under NSM Discounts offered on CERC tariffs (in US$/kWh) Discounts offered on CERC tariffs (in US$/kWh) Source: Author analysis based on bid details available 22

23 Figure 5: Comparison of tariffs for PV projects selected in FY under NSM with ceiling tariffs (in US$/kWh) CERC-determined tariff = Figure 6: Comparison of tariffs for solar thermal projects selected in FY under NSM with ceiling tariffs (in US$/kWh) CERC-determined tariff = Source: Author analysis based on bid details available CURRENT STATUS OF PROJECTS No comprehensive status is available on the projects that were bid out in the first round of the NSM. This is surprising for two reasons. First, given that the NSM is a government showcase programme and aims to make India a solar energy hub, a regular progress update from the government would help instil more 23

24 confidence in the programme. Second, comprehensive monthly progress reports are already available on thermal and hydro power projects (including those that are being developed by the private sector and have crossed a minimum threshold of project development and award) from the CEA. The absence of a regular update or progress report on solar projects led to speculation that projects were not on track. There was further speculation that the government had intervened on various issues, such as financial closure, to ensure that projects met their commissioning deadlines. Discussions with experts in India provide a mixed picture. While some maintain that projects are not on track, others are of the opinion that most projects are on track and projects that are delayed account for only 25 30% of the total capacity that was bid out in FY Further updates suggest that the GoI encashed the bank guarantee worth nearly INR 2 crore (or US$377,000) each from 14 project developers in January 2012 for failing to meet the commissioning deadline EFFECTIVENESS OF BIDDING MECHANISM AND EXPERIENCE SO FAR Irrational bids The general opinion is that the tariffs that emerged through the bidding process in FY are unrealistic. Three factors are believed to be largely responsible for this: (i) the bid mechanism and bid parameter, (ii) the qualification criteria adopted for the selection of developers under the reverse bidding process, and (iii) quality of equipment. As far as the choice of bid parameter goes, it is argued that competitive bidding is relatively untested in India in the power generation segment. Tariff-based auctions were first initiated in 2006, but only for thermal power projects. Attempts to use a similar approach for hydro projects have thrown up several challenges. The use of a variant, such as reverse auctions using the bid parameter of offering discounts on initial tariff and selecting developers offering the highest discount, is untested in the development of power projects. While there is merit to the above arguments, the choice of bid mechanism and bid parameter is not particularly wrong given the twin objectives of providing cheaper power as well as achieving grid parity for solar power. The ultimate objective of the NSM, as first indicated in India s NAPCC, is to develop a solar industry that is capable of delivering solar energy competitively against fossil options within the next years. Further, the history of reverse auctions suggests that they work to lower costs. The bid mechanism adopted by India therefore aims to facilitate the provision of competitively priced solar power. Moreover, the bid parameter was appropriate given the high response received in the first stage of the open competitive bid. Project selection based on a first-come, first-served basis or random lots would not have ensured fair play. The approach of reverse bidding using discounts offered on a maximum or predetermined tariff also gives the advantage of lower tariffs, and eliminates some of the disadvantages of a FIT-based approach that involves a generic levelized tariff instead of taking into account the actual cost structure and project parameters for each developer. What seems to have gone wrong with this approach in India is that the reverse bidding mechanism is new to the power sector there and has been used in a new area. In the absence of experience with either the mechanism or the solar power sector, the risks were not known and 24

25 therefore not dealt with. At this stage, it may be interesting to note that international experience with the use of auctions for development of RE indicates similar problems of unviable bids (see Box 5). It has been argued by some that the NSM involved bid bonds and performance bank guarantees (see Annexure 2) that were high enough to curb aggressive bidding as well as penal provisions for noncommissioning of projects within the stipulated time (12 months for PV and 28 months for CSP). However, many believe that the total financial implication involved in these bonds is not a significant deterrent. Further, local developers could potentially drag their heels for years before paying these penalties. More importantly, there is little precedence in India for the enforcement and effectiveness of penal provisions under government-tendered projects. BOX 5 Experience with reverse auctions for RE in Brazil and China Brazil first held technology-specific reverse auctions for RE in In 2009, reverse auctions were held to contract wind power for delivery in In keeping with the structure of energy auctions in Brazil, contracts were awarded to projects that could supply power at the least cost. The auction saw participation from about 11,000 MW worth of projects. The initial auction price was US$105/Mega Watt Hour (MWh) and the prices of the winning bidders ranged from US$85 72/MWh. A diverse mix of investors (local and foreign private generators, manufacturers, and government-owned companies) won the contracts, and three new wind turbine factories are to be installed in the country. Given the low winning tariffs and apparent cut-throat competition, some concerns were expressed regarding the winning bidders ability to bring these projects to fruition. These concerns heightened after the 2011 reverse auctions that involved wind power contracts for about 1.9 GW. The auctions saw an average contract price of US$62/ MWh. These are the lowest tariffs being offered to wind generators on a market wide basis globally, and below wholesale electricity prices in Latin American markets. However, the viability of these prices and, hence, of the projects has been questioned on several counts. Further, it is expected that a significant proportion of these projects are likely to experience severe delay or even cancellation, for reasons outlined below. First, it has been estimated that to achieve adequate returns, nearly half of these new projects would have to operate at considerably higher efficiency or lower cost than has been seen in other parts of the world. Up to 40% of this new capacity would result in equity returns of below 10%. This raises the possibility of such capacity not being financed or built. Second, it is estimated that for these projects to become viable by current standards, turbine costs must fall by 15% in Brazil, or 10% below the current global average. Third, it would take exceptional wind turbine performance for the projects to be successful. The winning bidders have assumed unusually high capacity factors, with 28 out of 78 projects assuming they will reach a capacity factor of 50 61%. There is no single wind project operating at those levels in Brazil. This has also raised doubts over the bankability of projects, as debt servicing will become difficult if actual energy output is lower than expected. Overall, it is expected that projects would need to exhibit exceptional performance, dramatically lower prices for equipment, access to lower-cost capital, or a combination of these factors to be successful. In China, the government introduced competitive bidding for wind farm development in 2003 to steadily ramp up new wind power capacity at the lowest possible costs. The objective of this approach was to drive down wind electricity tariffs and provide better cost estimates of wind farms in China. Accordingly, under the Wind Power Concession programme, the National Development and Reform Commission invited international and domestic investors to develop 100 MW wind farms on a potential wind site. Winning bidders were granted approval to develop the selected project site, a PPA for the first 30,000 hours of the project operation, guaranteed grid interconnection, financial support for grid extension and access roads, and preferential tax and loan conditions by the central government. 25

26 The first round of bidding saw the award of 200 MW of capacity to two projects. The winning bid prices were significantly lower than any previous wind farm price in China as well as below the long-run marginal costs. The projects had difficulty obtaining financing, and project construction was delayed. The subsequent round of bidding from 2004 to 2006 awarded an additional 2 GW of capacity. The prices for the winning projects ranged between US cents/kwh as against the current average cost of US cents/kwh in China. Consequently, there was concern in the wind power industry that the bidding process had resulted in prices that were too low to be financially viable. As a result, there were reduced incentives for developers to invest in the industry, which was at a nascent stage. Further, the number of companies participating in the bids fell from the first to the second round, contrary to expectations that the number of participants would grow with the programme s increased visibility and the success of the first two concessions. Source: Bloomberg New Energy Finance (2011), Maurer and Barroso (2011), Early (2011) The issue of qualification criteria adopted for the selection of developers is discussed in more detail in the next section. The point here is that the entities that have procured PPAs are new entrants without experience in this sector. It is largely believed that these new entrants have underestimated or even overlooked the costs, risks and complexities involved in setting up solar power projects in order to provide high discounts on the CERC tariff and so procure projects, consequently resulting in unsustainable tariffs. In terms of the quality of equipment, it is believed that in order to get projects under the NSM, developers particularly those that are new entrants in the PV segment and those using the polycrystalline silicon technology have resorted to contracting inferior quality equipment, in many cases without assurances or guarantees, at lower prices as compared to standardized equipment. These low prices have enabled them to offer higher discounts on the ceiling tariff. Though quality requirements and warranties have been specified for PV modules in the bid conditions, sub-standard variants of certified modules are being sold under the same certification. Further, there is scope for using other sub-standard components and poor installation practices. Award of contracts to inexperienced entities The qualification criteria for developers were such that inexperienced entities procured projects in the first round of reverse bidding. This problem is more pronounced with PV. As may be seen from Annexure 2, the eligibility criteria were more or less net worth, bank guarantee or bid bond based without emphasis on experience. In the case of PV, there were no qualifications of eligibility requirements. The technical eligibility criteria pertain more to the project than to the prospective developer. This opened up the market for anyone who wanted to participate in the bidding process. Consequently, the new entrants included knitwear firms, animation companies, and water pump manufacturers. In the case of some of these entities, no website or contact details could be found (Pearson 2010). It is understood that many of these inexperienced entities that have procured PPAs do not even have reliable irradiation data or proper feasibility studies. 26

27 Financial closure of projects A direct consequence of the combination of unreasonable tariffs and inexperienced developers was the delay in financial closure of projects. There were reports to suggest that many projects actually did not achieve financial closure by the deadline of July 9, 2011 as required under the PPA. The information available from different reports pertains to different periods of time, and differs. But what is clear is that projects have faced difficulties and delays in achieving financial closure. Some reports suggest that only 17 out of 30 PV projects and two out of seven CSP projects achieved financial closure by the end of June 2011 (Economic Times, 2011). A report in July 2011 suggested that roughly half the projects had failed to secure funds (pv magazine, 2011). According to Ex-Im Bank (2011), about US$3.2 billion of Indian projects found it difficult to get loans from commercial banks. However, there also were reports quoting the GoI that all projects had achieved financial closure. Some experts in India maintain that the GoI was not forthcoming in disclosing information on the status of financial closure of projects prior to or near the deadline of July 9, This led to widespread belief that the majority of projects did not achieve financial closure by the deadline. Besides unrealistic tariffs and the absence of a track record for developers, there are issues of nonavailability of proper pre-feasibility reports and reliable irradiation data on the part of developers. In the absence of reliable irradiation data, it is difficult to calculate the generated output and, therefore, the return on investment. These factors, coupled with the fact that solar power is a new area for India and that the risks associated with the technology or project development are not known, deterred financial institutions from funding solar projects. Project delays and quality A major concern emerging from the developers lack of experience and the use of low-cost, inferior quality equipment is that developers may have overemphasized project cost and hence price (by offering low bids to procure projects) over other essential elements of safety and quality. This may lead to poorly executed projects, low efficiency and, finally, low project performance. Financial gains for developers There are believed to be instances when promoters of the projects sold off their majority shares to another entity after signing PPAs with NVVN. There is speculation that developers acquired projects with the objective of making quick returns and were not serious bidders. Hence, they also did not emphasise project quality and workmanship in their bids. Under the bid conditions, the promoter was required to retain only 26% equity in the project. Drawing lessons from this experience, the GoI increased the requirement for equity by the promoter to 51% for at least a year after the plant is commissioned in the case of the second batch of projects being awarded. If after a year the developer feels that it is not profitable, the project can be sold off. 27

28 6.4. SECOND ROUND OF BIDDING The second round of projects were awarded in FY amidst the above criticisms of the first round of bidding for projects in FY and the overall scepticism around these projects. Given that the entire capacity of thermal projects had been awarded in FY , only PV projects were awarded in FY (see Table 3). The capacity restriction of 5 MW from the first round of bidding was increased to 20 MW and bidders were allowed to bid for a total of three projects with a total capacity of 50 MW (see Annexure 2 for details of bid conditions for this round). The bidding took place in November and December in 2011 and since few details are available, the objective here is to look at the outcome of biddings and, to the extent that it is possible, understand tariff trends. Despite criticisms that tariffs from the first round of bidding were unsustainable, the second round of reverse bidding yielded tariffs lower than those seen in the first round (see Figure 7). Moreover, the lowest bid tariff in this round is 50% lower than the benchmark tariff of US$0.29/kWh fixed by the CERC. The main reasons for these low tariffs are the choice of technology and availability of concessional finance, both of which are interlinked. Unlike the first round where projects were mostly based on polycrystalline silicon technology, the technology choice in the second round was largely amorphous silicon (a-si). This choice is the outcome of factors such as the absence of indigenization requirements for panels made from thin films (discussed later in the paper), lower costs of a-si panels as compared to the crystalline silicon panels (see Table 4) (primarily due to the lower efficiency of a-si) and availability of concessional finance in the form of suppliers credit for a-si panels. Figure 7: Comparison of tariffs for PV projects selected in FY under NSM (in US$/kWh) Source: Author analysis based on bid details available 28

29 Table 4: Advantages and disadvantages of different solar PV technologies Monocrystalline Polycrystalline Thin Film Amorphous silicon Thin Film CdTe Thin Film CIGS Status More than 25 years of historical operating data More than 25 years of historical operating data Proven rollto-roll high throughput More than 10 years of historical operating data Efficiency* 12 19% under Standard Test 10 14% under STC manufacturing 9 11% under STC 8 12% under STC Conditions (STC) Cost of manufacture (2010) 2.4 US$/Watt 2.15 US$/Watt 5 8.5% under 1.15 US$/Watt 1.75 US$/Watt STC Balance of systems cost Low Low 1.35 US$/Watt High; due to low efficiency High; due to low efficiency Land requirement Requires less land/ kilowattpeak Requires less land/kwp High; due to low efficiency (kwp) Impact due to shade High High Requires more land/kwp Low, reliable output even under low light conditions Low, reliable output even under low light conditions Impact of high temperature environment High; less output in high temperature environment High; less output in high temperature environment Low, reliable output even under low light conditions Low; better performance in high temperature environment Low; better performance in high temperature environment Materials usage NA High Low; better performance in high temperature environment Low Low Others NA Low Glass on glass frames; chances for breakage higher Notes: * The efficiency of different technologies as stated by different organizations/institutions/researchers may vary. NA Not available Source: AES Solar Energy Pvt. Ltd., India (2010); Indian Semi-Conductor Association (2008); Temple and Tao

30 The requirements for indigenous content in projects under the NSM are discussed later in this report. To provide a quick overview of the issue here, the second round of bidding mandates that the cells and modules for crystalline silicon technology have to be domestically manufactured. But no such rule exists for panels made from thin films. This has prompted developers to choose a-si technology, which allows them the choice of suppliers as well as lower costs. With the leading a-si manufacturers in the world being US-based, and the US Ex-Im Bank supporting these manufacturers through concessional finance (see the discussion on financing later in this report), the developers in India using a-si technology also have access to concessional financing. Besides the aforementioned factors, the lower tariffs in the second round of bids is also being attributed to the drop in solar module prices owing to the global market supply scenario. Economies of scale, coupled with the global recession in 2008 that saw a significant slowdown in the European solar power market and resulted in the oversupply of modules, have triggered a sharp decline in module prices. China s expansion of its solar manufacturing space has also contributed to the lowering of costs. Further, international SPDs are using low tariffs as a market entry strategy for India because most developed countries are curtailing incentives offered for solar power, thereby offering few opportunities for solar projects. While these reasons are valid, they also prevailed during the first round of bidding. Therefore, the predominant factor behind the lower tariffs realized in the second round of bidding seems to be the choice of technology and the accompanying concessional finance. What is interesting to note is that a-si technology is a subject of much debate and speculation internationally, given that one of the largest manufacturers of this technology globally, Applied Materials, stopped its production line for this technology in The winning developers are those who are relatively experienced and established in the development and operation of solar projects from participating in state government schemes, or who have projects from the first round of bidding. Some even have prior experience in the area of conventional or RE power projects. It is widely believed that the increase in project size allowed in this round provided for economies of scale, thereby attracting these established players. The general belief is that given that, tariffs reflect the low costs associated with a-si technology and the availability of concessional finance, as well as the experience of winning bidders, projects awarded in this round are likely to be more successful than those awarded in the first round. 30

31 7. FINANCING OF PROJECTS Solar technologies are characterized by high capital costs, thereby necessitating large amounts of equity and debt funding. This raises concerns about the availability of finance for solar projects. While a few projects may be easy to finance, domestic financial institutions in emerging markets often find it difficult to finance large-scale development of solar power projects. Further, given that solar power is a relatively new technology, commercial financial institutions are not willing to invest in these projects given the risks and uncertainties. Public funds have competing uses and therefore cannot always be used to subsidize large-scale solar power development. The costs on the public exchequer of large-scale subsidies can also be quite substantial. Given the above issues with financing of solar power, it would be of interest to examine the experience in India with regard to financing of the NSM projects. The major areas of interest here are the extent and form of government support made available for projects, innovations in financing solar projects, and the availability of multilateral and international finance for such projects GOVERNMENT S PAYMENT SECURITY MECHANISM FOR NSM PROJECTS The GoI has put in place a payment security scheme (PSS) for solar projects under the first phase of the NSM. The scheme, which takes the form of a fund known as the Solar Payment Security Account (SPSA), will serve as a guarantee and risk mitigation strategy for solar projects, helping financial closure of the projects. The motivations for the creation of this payment security mechanism (PSM) are (i) to address the payment-related risks arising from the cash-strapped financial position of discoms and the inability of NVVN to absorb these risks, (ii) the inadequate payment security mechanism provided for in the PPAs, and (iii) to cover the risks emanating from new technologies. One of the main concerns for the power sector in India since the early 1990s is the alarming deterioration of the financial health of discoms. The increase in losses of discoms between and led to several reforms for improving their commercial viability. However, the situation once again started worsening between and (see Figures 8 and 9). It has been reported that losses would have reached US$12.8 billion at the end of FY

32 Figure 8: Losses without subsidy for power distribution utilities in India (US$ billion) Figure 9: Cash losses of power distribution utilities in India before subsidies received from concerned state governments (US$ billion) Source: Gulati (2011) Source: Gulati (2011) The weak financial position of discoms created heightened concerns about their ability to make payments to NVVN and, in turn, to solar power producers. These concerns were also raised during the stakeholder discussions and consultations held by the GoI while formulating the guidelines for development of gridconnected solar power projects under NSM. Given that debt servicing by generation project developers is dependent on payments from utilities, and that solar power is much more expensive than either the average tariff or the cost of short-term power procured by utilities (see Figure 2), financial institutions also expressed concerns about lending to these projects. Another pressing fact was that though NVVN has a reasonably strong credit profile, its balance sheet is too small to absorb payment risks from solar projects. Balance sheet support from NTPC, its parent company, is also not envisaged. A report by the World Bank (2010) that examined the barriers to solar power development in India supports these concerns. It says that all developers interviewed by the World Bank for that report were of the opinion that if NVVN fails to pay the tariff amount, there should be another mechanism, such as the creation of a special fund, to pay the developers on time for electricity delivered. The PSMs provided for in the PPAs were also considered inadequate security against defaults by utilities. The PSM provides for a 6-month letter of credit backed by an escrow mechanism in the power sale agreements (PSAs) signed between NVVN and utilities. Further, NVVN s payment liability under the PPA is limited to payments realized from utilities after exhausting these payment security measures. In other words, NVVN has no obligation to make payments to a developer if a utility fails to make payments to NVVN under their agreements with NVVN. Thus, the entire payment risk is passed on to the developer, with NVVN only acting as a go-between. This places the project cash flow under risk. Another point to note is that there is no take or pay obligation on NVVN under the PPA. This means that NVVN is under no obligation to make payments to the developer, irrespective of whether the buyer actually purchases the power. 32