India s National Solar Mission: A Market Analysis of Phase 1

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1 RESEARCH NOTE India s National Solar Mission: A Market Analysis of Phase 1 The solar power market in India, supported in large part by the Jawaharlal Nehru National Solar Mission, is still taking shape but is growing rapidly. Installed solar capacity in the country has risen exponentially, from just 20 megawatts (MW) in 2009 to 980 MW by April Through the Solar Mission and other measures, policymakers have introduced market and cost- cutting innovations to attract solar equip- ment suppliers, manufacturers, project developers, and financial institutions. This research note analyzes key challenges and opportunities in the Indian solar power market. Market Challenges for Indian Solar Equipment Manufacturers Phase 1 of the Solar Mission, which extends through FY , aims to create an enabling environ- ment for solar energy developers and solar equipment manufacturers in India to help meet the country s goal of 20 gigawatts (GW) of installed solar capacity by Although promoting the production of solar equipment domestically is an explicit Phase 1 goal, India s regulators have yet to develop effective policies to bolster Indian solar equipment manufacturers in the face of inter- national competition. An ongoing debate in India s solar equipment manu- facturing sector (as well as that in the United States) is whether the government should create a barrier to entry for cheaper imports from abroad primarily from China by levying an anti- dumping duty. The U.S. Commerce Department already has imposed tariffs of percent on Chinese solar equipment imports, in response to the 50 percent decline in solar panel prices in the United States due to Chinese imports. 3 China, the world s largest pro- ducer of solar equipment with 60 percent of global solar panel production capacity, exports 95 percent of its solar modules. Indian solar manufacturers also face competition from Taiwan, Germany, Japan, and the United States. 4 (See Table 1.) Table 1. Share of Global Solar PV Cell Production, by Country, 2010 Country China Taiwan Germany Japan United States Rest of World Source: See Endnote 4. Share of Global Production percent At the same time, Indian solar manufacturers cur- rently have less technical capacity than most competitors. 5 (See Table 2.) Solar manufacturing in the country is relatively small scale and fragmented, often leading to higher production costs. Countries such as China and Taiwan, which have the econ- omies of scale to produce solar equipment at a lower cost, have a competitive edge over their Indian counterparts, which have not been able to build this capacity while competing with well- established foreign industries. 6 Globally, the aver- age annual production capacity of solar photovoltaic (PV) module manufacturing lines is 75 MW; in India, capacities are in the range of only MW. 7 Table 2. Solar Manufacturing Production and Capacity, Selected Countries, 2010 Country Production Capacity megawatts China 13,018 17,500 20,000 Taiwan 3,449 27,200 Germany 2,656 3,050 United States 1,253 1,333 India 470 2,000 Source: See Endnote 5. 1

2 Indian manufacturers can build up their capacity over time only with the help of government sub- sidies and other financial support. Although many governments have been supporting solar energy for years Taiwan since before 2001, Germany since 1999, and China since 2005 Indian planners fram- ed the country s first comprehensive solar strategy, the Jawaharlal Nehru National Solar Mission, only in Indosolar, India s leading solar equipment manu- facturer, posted a loss of Rs 200 crore (US$37 mil- lion) in FY , on top of its Rs 130 crore (US$24 million) loss the previous financial year. 9 Moser Baer, which recently made the shift to solar cell manufacturing, now faces Rs 3,800 crore (more than US$700 million) of debt. 10 Tata BP Solar, Lanco Solar, HHV Solar Technologies, Jupiter Solar, WebSol Energy Systems, and other companies are all facing similar financial challenges. Most of them have cut back on production, utilizing only percent of their installed production capacity. 11 India faces the dilemma that the same low- cost imported equipment that can improve access to solar energy, especially in rural areas, also under- mines the viability of a domestic solar manu- facturing industry in the short term. Until India develops as a manufacturing hub for solar equip- ment, Indian solar developers will import equip- ment because of the price advantage. Many industry experts point out that a preferential tariff in the form of tax discounts or waivers extended to domestic manufacturers of solar equip- ment could help tremendously in putting Indian manufacturers back in competition with other countries such as China. Establishing a domestic content requirement (DCR) is another policy under serious consideration for promoting Indian solar manufacturing. Currently, Phase 1 of India s Solar Mission includes some stipulations for domestic sourcing; however, these are limited to crystalline silicon PV panels: Batch I guidelines require PV projects using crystalline silicon technology to use modules manufactured in India. A minimum of 30 per- cent domestic content is also mandatory for solar thermal projects in Phase I. Batch II guidelines expand the scope of the DCR for solar PV projects incorporating crystalline silicon technology, requiring that both the cells and modules be manufactured in India. 12 There are no import restrictions on thin film PV panels, which are favored by Indian solar project developers despite the global shortage of available equipment only 10 percent of installed solar power capacity worldwide uses thin film. 13 India s implementation of a DCR has stirred contro- versy. A World Trade Organization (WTO) decision pending in could put an end to this trade barrier. 14 Similarly, DCR provisions in Canada s feed- in- tariff program are currently being chal- lenged at the WTO by the United States, Japan, and the European Union. 15 A WTO ruling in favor of the complaining parties could end DCR as a policy to boost domestic industry in a given country. Financial Viability Barriers for Solar Projects Foreign financing presents further complications to India s domestic solar industry. Indian solar panel manufacturers, environmental think tanks (such as the Delhi- based Centre for Science and Environ- ment), and certain media outlets have criticized the U.S. Export- Import Bank and Overseas Private Investment Corporation (OPIC) for offering low- interest loans with long repayment periods to Indian solar developers under the mandatory con- dition that they purchase the panels from U.S. manufacturers. 16 On the other hand, Indian solar developers argue that cheaper electricity, supported by the cheaper cost of capital and equipment through such programs, will help solar energy reach grid parity a reduction in cost that would enable it to be competitive with current grid electricity prices ahead of stated goals. 2

3 Increasing Focus on Concentrating Solar Power (CSP) In addition to solar PV, the Solar Mission promotes the expansion of utility- scale, grid- connected con- centrating solar thermal power, or CSP. CSP currently has advantages over PV in terms of lower costs and more- viable electricity storage options to offset the intermittency of solar generation. Barriers to expanding CSP include time- consuming con- struction and water requirements for cooling that could affect project viability in areas with strong solar potential but scarce water resources. A 2012 report by the Natural Resources Defense Council (NRDC) and the Delhi- based nonprofit the Council on Energy, Environment, and Water (CEEW) concluded that India s Ministry of New and Renew- able Energy (MNRE) could explore three options for Phase 2 of the Solar Mission, with various impli- cations for CSP s role: 1. Continue promoting equal capacities of PV and CSP technologies, as in Phase 1; 2. Divide the technology allocation into three parts, with one- third each for PV and CSP and the remaining one- third unallocated and tech- nology- neutral for any solar technology; or 3. Allocate 1,500 MW initially in Phase 2 rather than the entire 3,000 MW target, thereby mitigating some of the risk associated with supporting CSP technologies and offering more information for a mid- term review of Phase Facilitating access to project finance will be essen- tial to attract CSP developers in India. The Asian Development Bank estimates that Rs 17,000 crore (approx. US$3.2 billion) in debt financing would be needed over the next three years to complete all projects that have been announced already. 18 Expected Timeline for Grid Parity of Solar Power According to one estimate, solar power is most likely to reach grid parity in India between 2017 and The timing for solar grid parity depends on the rate of increase in conventional power prices and the rate of decrease in solar power prices. Conventional electricity prices for Indian consumers are expected to increase by percent annually over the coming years. 20 Meanwhile, domestic solar power prices are expected to fall by 5 7 percent annually due to increasing economies of scale in equipment manufacturing, advancements in pro- duct technology that improve the solar- to- electricity conversion efficiency, and the emergence of low- cost manufacturing facilities. 21 Solar Market Mechanisms: The Solar Mission and Renewable Purchase Obligations (RPOs) India s Solar Mission designates the National Ther- mal Power Corporation s (NTPC) Vidyut Vyapar Nigam Ltd (NVVNL) as the Nodal Agency for pro- curing solar power through March NVVNL enters into power purchase agreements (PPAs) with project developers and connects them to the grid. 22 In Phase 1 of the Solar Mission, project prices are set through a reverse auction system. In this approach, the federal agency charged with pro- curing solar projects invites project developers to bid on contracts to develop solar power projects. The developers with the lowest bids are granted concessions to develop new solar capacity. The federal government is also attempting to encourage smaller entrepreneurs to take part in the bidding process by keeping the size of the projects small. The eligibility criteria require bidders to have a minimum net worth of US$3 million. 23 Reverse auction has been a key driver in approaching grid parity for solar power faster than was initially assumed. The lowest winning bid to date, by the French company SolaireDirect, was US$0.15 per kilowatt- hour (kwh) for a 5 MW plant, lower than expert predictions. 24 Current Indian grid power prices in the top electricity- consuming states range from approximately US$0.08/kWh in Andhra Pradesh to US$0.12/kWh in Rajasthan, with a nationwide average of US$0.09/kWh. 25 3

4 Reverse auction is sometimes criticized for driving prices too low through pressure on companies to post the lowest bids, with the result that some project concessions are financially unviable. This also explains to some extent the delays in project execution. Another major criticism of reverse auction under the Solar Mission is that inadequate eligibility criteria for bidding companies allowed many inexperienced project developers to be suc- cessful in the bidding process. As a result, project developers have ended up subcontracting the bulk of their work to engineering/procurement/con- struction contractors, creating administrative comp- lications and delays. 26 As the Indian solar market matures, experts expect that more market consolidation between major project developers will take place. This market con- solidation already can be observed from the fact that there are fewer bidders in Phase 2 compared to Phase Consolidating solar project developers would bring down project costs, while adding to project expertise and timely execution of the pro- jects. Aside from market consolidation, interlinkages between the National Solar Mission and State Solar Projects through the participation of the same project developers in both schemes have ensured scalability, cost control, fast learning, and increased experience in this emerging market. In addition to reverse auctions, other innovative cost- reduction methods exist to address the largest financing challenge for solar power development: high upfront capital and installation costs, which are typically incompatible with the timeframe and interest rates available for energy financing. Even prior to the Solar Mission, the Indian government provided subsidies for solar development. Another mechanism that has been successful globally in increasing installed solar capacity is instituting preferential feed- in tariffs, which guarantee that solar developers will receive a set price per kwh. Another innovative way to finance solar projects in India is to bundle solar power with thermal power to reduce costs in initial phases of the Solar Mission. 28 For each MW of installed capacity of solar power, the Ministry of Power can allocate an equiv- alent amount of capacity from the unallocated quota of NTPC coal power plants to NVVNL, which in turn supplies this bundled power to electric util- ities. For instance, of the 3,960 MW capacity of the Barethi supercritical coal power project planned in the Bundelkhand region of Madhya Pradesh, 50 percent is allocated to Madhya Pradesh and 35 percent to Uttar Pradesh, and 15 percent is unallocated power that could be bundled with solar capacity. 29 To create demand for solar power, the government of India has introduced Renewable Purchase Obliga- tions (RPOs). Solar RPOs are the minimum amount of solar energy that utilities and customers have to deliver or consume as a share of their total available electricity. RPO levels vary by state and currently average about 0.25 percent of the total state utility consumption. Most states fall far short of meeting their RPO requirements (not including capacity installed under the Solar Mission, which totaled 304 MW by the end of FY ). 30 (See Table 3.) Table 3. Solar RPO Requirements Compared to Installed Solar Capacity, Indian States, Solar RPO Capacity Requirement Installed Solar Capacity Under State Policies State megawatts Gujarat Rajasthan Karnataka 42 9 All others Total 1, Source: See Endnote 30. State utilities can meet RPO requirements by pur- chasing the required quantity of solar power directly from producers. Alternatively, they can buy solar Renewable Energy Certificates (RECs) to fulfill RPOs. 31 Under the RPO scheme, every megawatt- hour of solar energy produced generates one REC. If solar generation costs for a particular electricity producer are too high, that producer can instead purchase RECs from a solar power generator that has lower solar generation costs. 4

5 In order to provide a minimum of price certainty, the Central Electricity Regulatory Commission has fixed a price floor and ceiling for RECs sold between 2012 and Nevertheless, uncertainty regarding solar REC prices in the Indian markets remains one of the major reasons why solar projects in India lack financial viability. 32 In April 2012, M&B Switchgear became India s first solar developer to be registered by the National Load Dispatch Centre for solar RECs for its 1.5 MW solar plant. 33 In sum, obligated entities have four options to fulfill their RPO quotas: 1. Generate enough of their own solar power to meet the quota; 2. Purchase solar power from the market; 3. Buy RECs from solar plant owners who sell their power to the grid (and do not receive prefer- ential feed- in tariffs); or 4. Avoid fulfilling their obligations and face finan- cial penalties. Private financial institutions should also build capacity for investing in solar projects. This can be facilitated through a partial risk guarantee mech- anism to reduce banks financial risk in the early stages of solar lending. Special manufacturing and investment zones could also be focused on bolstering the solar sector. Regulatory and Institutional Barriers to Solar Development Solar development in India is suffering from extensive project delays. According to MNRE, 13 of the 20 currently proposed solar projects in India are delayed. The Asian Development Bank estimates that the losses incurred from the delays in these 13 projects total some Rs 446 million (US$8 million). 34 Solar project developers incur serious penalties for these delays under the Solar Mission regulatory regime. Solar developers that won contracts under the Solar Mission in 2010 are forced to forfeit the bank guarantees under those contracts if they are delayed beyond the first three months of project development. A daily fine of Rs 100,000 (US$1,850) is levied for delays during the subsequent three months. If a project is delayed by more than six months, it is canceled and the company loses its contract. 35 While adherence to project timelines is important for meeting Solar Mission targets and keeping pace with expanding solar energy access, there are several institutional and bureaucratic reasons for delays. One major cause for delay in these solar projects is the often time- consuming process of getting local authorities to convert land use designations from agricultural to non- agricultural. Lack of grid proximity to the project location, which creates difficulties for grid connectivity, is another reason for project delays. Establishing solar parks (large areas where solar generation equipment is installed) and transmission substations provide possible grid connectivity solutions, and should be included in project planning to avoid unscheduled delays. Financing Solar Energy under the Solar Mission According to National Solar Mission plans, 4 GW of solar capacity installed under the Solar Mission will be financed with internal (domestic) funds, and the remaining 16 GW will be financed through inter- national financing and technology transfer. The Indian government established the Solar Energy Corporation of India, a regulatory body that serves to channel funds from multilateral financial bodies to viable solar projects. 36 Harnessing this financing remains a major challenge for Indian solar develop- ers, however. Although the Indian solar industry is perceived as a market with great potential, it is still an emerging market, and most banking institutions are taking a wait- and- watch approach before committing long- term finance to solar projects in the country. Although some development banks, such as the Asian Development Bank, have come forward to offer credits for both project development and solar 5

6 developer training, banks and financial institutions are still largely shying away from financing Indian solar project developers for a variety of reasons, including the lack of reliable data on irradiation, which makes calculating an interest rate difficult, and successful bids by inexperienced and financially weak project developers. 37 A consolidated market could help put financial institutions at ease. Other sources for international borrowing, such as the World Bank Clean Technology Fund, can provide the Indian solar industry with additional finance. Solar Power in the Broader Context Aside from market challenges, the Solar Mission has faced difficulties due to lack of integration in its goals and implementation plans with the remaining seven missions under India s National Action Plan on Climate Change. This lack of coordination misses out on key synergies between the missions that could achieve greater results if addressed in tandem. For example, integrating Solar Mission goals with the National Mission for Sustainable Agriculture would allow planners to better promote innovations such as solar- powered drip irrigation systems, which harness solar energy to provide a more sustainable method of irrigation. Such an integrated approach not only would save costs by coordinating imple- mentation, but also would help highlight the social development benefits of solar power. Another area where the Solar Mission has been criticized for failing to adequately prioritize social equity is its targets for off- grid solar energy capacity through Critics charge that the low off- grid capacity target in comparison to grid- connected solar power targets does not adequately address rural electrification, which remains a high priority in India. Some solar developers are nevertheless moving forward with solar rural electrification programs. SunEdison, one of the world s largest solar dev- elopers, which recently began operating in India, announced its rural electrification program, Eradica- tion of Darkness, in May One of its largest Indian projects is in the village of Meerwada in the state of Madhya Pradesh, which was designed in 2011 as a pilot project for rural electrification. Additional planned projects in 29 villages in the Guna district are expected to be funded through a combination of government grants and private funds from other investors and corporations. The project intends to test and develop a successful business model that will enable the electrification of even more villages around the world. 38 Many states in India have woken up to the signifi- cance of electrifying their villages through renew- able sources. Odisha, which unlike Gujarat, Kar- nataka, Rajasthan, and other states does not yet have a formal Solar Energy Policy, has nevertheless committed to electrifying over 3,000 villages with solar power by An NRDC survey report reveals that in 2010, the year of the Solar Mission s launch, over 40 percent of villages in Odisha had yet to be electrified. 39 Under the Remote Village Electrifi- cation Programme, Odisha Renewable Energy Development Agency has identified 3,000 villages to receive solar electricity, all of which were identified as not feasible or cost effective to be electrified via conventional grid extension. 40 Other states, including Uttar Pradesh and Kashmir, have also ramped up solar rural electrification programs. Final Thoughts The Indian government s commitment to solar energy and the recent rapid growth of the Indian solar market are promising signs for a sustainable energy transition. Nevertheless, challenges remain to ensuring that solar energy development delivers the greatest benefits to those who need it most. These include determining how to bolster Indian solar manufacturers without prohibitively increasing the costs of solar power, achieving greater stability in the solar energy market, and ensuring access to clean energy to those who need it most. If India can rise to these challenges, it will serve as an example to other countries seeking a path for sustainable energy development. Prepared by Suparna Dutta and Shakuntala Makhijani, Worldwatch Institute. 6

7 Endnotes 1 Amrita Batra, India Environmental News Compilation, July 17 23, 2012, Switchboard (Natural Resources Defense Council (NRDC) blog), 24 July Government of India, Ministry of New and Renewable Energy (MNRE), Jawaharlal Nehru National Solar Mission: Towards Building Solar India (Delhi: 2010) p. 3, at mission/jnnsm/mission- document Brian Wingfield and William McQuillen, US imposes Anti- Dumping Duties on Chinese Solar Imports, Bloomberg.com, 17 May Keith Bradsher and Matthew L. Wald, A Measured Rebuttal to China Over Solar Panels, New York Times, 20 March Table 1 from The Global Market for Solar Cells, Washington Post, 16 December Table 2 from Council on Energy, Environment and Water (CEEW) and NRDC, Laying the Foundation for a Bright Future: Assessing Progress Under Phase 1 of India s National Solar Mission (Mumbai: April 2012), p The Global Market for Solar Cells, op. cit. note 4. 7 CEEW and NRDC, op. cit. note 5. 8 Ibid, p Anand J., Sunburn: Why solar panel manufacturers are finding it tough to stay on in the business, Business Today, 22 July Ibid. 11 Ibid. 12 MNRE, gridconnected pdf, viewed September Michaela D. Platzar, U.S. Solar Photovoltaic Manufacturing: Industry Trends, Global Competition, Federal Support (Washington, DC: Congressional Research Service, 13 June 2012), p Sven Walker, Dale and Lessmann LLP, Canadian Legal Counsel, Canada: The End of Domestic Content Requirement May Be Near WTO Decision Expected in November, 25 September 2012, at 15 Ibid. 16 Centre for Science and Environment, CSE responds to United States OPIC and Exim Bank on the use of climate finance to kill the Indian solar panel industry, viewed 14 ; Dipannita Das, The US is using climate finance to kill the Indian solar panel industry: CSE, Times of India, 19 August CEEW and NRDC, Concentrated Solar Power: Heating Up India s Solar Thermal Market under the National Solar Mission (Mumbai: September 2012). 18 Ibid., p KPMG, The Rising Sun A Point of View on the Solar Energy Sector in India (Mumbai: May 2011). 20 Power Engineering International, India catching up on solar energy development, 11 April 2012, at KPMG, op. cit. note 19, p KPMG, op. cit. note 19, p Ibid. 23 CEEW and NRDC, op. cit. note 5, pp Ibid., pp Ibid., pp Ibid., p Ibid., pp Abhishek Shah, Solar Mission of India Explained Objectives, Targets, R and D, Manufacturing, Three Phases of JNNSM, Off Grid Solar, Green World Investor, 7 April 2011, at 29 More power allocation from NTPC home states, EM News Bureau, 12 February 2012, at 30 Markets and Trends, What is the RPO opportunity in India? PV Magazine, August 2011, p Table 3 from ibid. 32 Ibid. 33 Goodpal, Promoting Renewable Energy in India through Renewable Energy Certificates, 29 April 2012, at 34 Natalie Obliko Pearson, India Banks Face Solar Setbacks as Projects Delayed, Fined, Bloomberg.com, 12 June Ibid. 36 CEEW and NRDC, op. cit. note 5, pp Becky Stuart, Indian Solar Industry Off to a Successful 2011 But Bankability Issues Exist, PV Magazine, 20 April SunEdison, SunEdison Announces Eradication of Darkness Program Using Solar Power to Bring Electricity to Villages in India, press release (New Delhi: 30 May 2012). 39 Amrita Batra, Survey of State Solar Projects Reveals Immense Opportunity for Solar Energy in Rural India, Switchboard (NRDC blog), 11 July Ibid. The Worldwatch Institute For more information, smakhijani@worldwatch.org or call (+1) Further details about Worldwatch work in India can be found at sustainable- energy- initiatives- india and through frequent updates on Worldwatch s ReVolt blog, 7