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by Raj Prabhu, Managing Partner at Mercom Capital Group and Alfonso Velosa III, Research Director at Gartner
India's Jawaharlal Nehru National Solar Mission (JNNSM), a major
initiative of the government of India, has set itself a goal of creating
an enabling policy framework for deploying 20GW of solar power by 2022.
India's objectives and intentions are commendable. Yet, as we have
seen globally, once governments announce their intentions to develop a
solar incentive program - a variety of interest groups, each with their
own agenda, get involved to put their stamp on the policy. The final
output of the recently released policy guidelines reflects both the
overarching objectives of developing clean solar power, addressing power
shortages and stakeholder concessions.
This is our preliminary perspective on the recently released guidelines
for new grid-connected solar power projects in India. In the future, we
will take further in-depth looks at specific policy aspects and India's
opportunities and challenges as the market develops.
PV & CSP Ratio
The JNNSM calls for a total aggregated capacity of 1 gigawatt of grid
connected solar projects to be developed under the bundling scheme in
Phase-I through 2013. Solar PV technology projects and CSP technology
projects are to be deployed at a ratio of 50:50, in MW terms. This
provision is scheduled to be reviewed again in one years time to
determine the need for modification.
The JNNSM is trying to encourage the development of both PV and CSP
technologies by giving each equal weight. However, by allotting
specific quotas for each technology, the JNNSM is dictating the ratio of
technology that can be built rather than allowing the market to select
the most efficient and cost effective technology for India. If CSP is
deemed an unviable option for most developers and there is a rush
towards PV technology, it could create a situation where PV applications
are rejected due to oversubscription while CSP quotas are not filled. A
scenario like this can slow down solar development progress
country-wide and cause unwanted delay as the markets wait for this
provision to be revisited. On a global scale, PV installations exceed
CSP installations by a ratio of over 20 times.
Phasing Allocation of Capacity
The JNNSM is allocating capacities for Phase 1, over two batches: batch1
in FY 2010-2011 and batch 2 in FY2011-2012. The total capacity of Solar
PV projects selected in Phase 1 is limited to 150 MW. Solar PV
projects selected for the remaining capacity (350MW) will be done in the
second phase for FY 2011-12. The selection of Solar Thermal Projects
for the entire capacity of 500 MW, less migrated projects, will be done
in FY2010-11.
Taking a lesson from other markets like Spain, JNNSM is trying to avoid a
"rush" by controlling the allocation of projects and phasing them in
over a period of time. 150MW for solar PV during the initial allocation
is already being perceived as a disappointment to the industry. When
you take into consideration the 50:50 ratio between PV and CSP, the
economies of scale will be too small to bring down costs and increase
efficiencies. These factors could cause investors to take a wait and
see approach before making large investments without knowing how big the
eventual market potential will be or when the market will develop to a
certain size.
Instead of looking at this market as 1GW by 2013, it is now perceived as
500MW due to the 50:50 split between PV and CSP. 500MW over 3 years
(approximately 165MW a year) for PV is not large by global standards.
Number of Applications (PV)
In order to have wider participation from Solar Power Developers, only
one application per company including its
parent, affiliate or any group company is limited to developing one
project of 5 MW (±5%) using Solar PV. We are assuming that this
limitation applies to each phase/batch and for the entire JNNSM.
This policy opens up opportunities for multiple developers to
participate, regardless of size. This is good for developers who might
not have growth aspirations beyond one or two projects, but are looking
for a long-term high-return investment vehicle rather than being a
serious solar developer with long-term growth intentions.
For serious solar project developers, it will be very difficult to have a
long term growth strategy to develop projects under the JNNSM, as their
market size will be limited due to the cap of 5MW per phase/batch.
This policy will also force project developers to look at individual
state programs and incentives as a viable alternative.
Raising capital for serious project developers may also get tougher as
the upside for investors and growth will be limited and there is
complete uncertainty as to how projects will be allocated in the next
phases/batches. Financial institutions will also have to amortize their
funding costs on just 5 MW, which may not justify the need to develop
expertise in PV projects.
Number of Applications (CSP)
The total capacity of Solar Thermal Projects to be allocated to a
company (inclusive of its parent, affiliate or group company) is limited
to 100 MW. The company can submit application for multiple projects at
different locations subject to a maximum of 100MW.
The 100MW limit provides better economies of scale for CSP systems,
making it more attractive for CSP project developers compared to PV.
However, it is unclear if there are other important policies in place,
particularly policy pertaining to critical water resources, to support
CSP development. The company proposing a CSP project is fully
responsible for acquiring water rights for the life of the project and
needs to document this as part of its application. Another concern is
that CSP projects may take more time than the policy has allowed
depending on the availability of local materials and construction
requirements.
Technical Criteria for PV
PV modules used in grid-connected solar power projects must qualify to
the latest edition of any of the following IEC PV module qualification
test or equivalent BIS standards. (Crystalline Silicon Modules IEC
61215; Thin Film Modules IEC 61646; CPV Modules IEC 62108) Each PV
module used in any solar power project must use a RF identification tag.
Since the government is only paying for the electricity generated, it is
up to the solar developer to determine the modules they will use in
their PV system, so they can generate the most power and thus get the
best return for their projects. RFID tags, which are internationally
accepted, will be used to enforce the standards, however RFID tags and
checks can create additional layers of bureaucracy.
The nameplate standard test conditions are just a basic criteria for
specifying the power capacity of a PV system. It is important to
remember that each system will have different electric power outputs,
and this will vary by State, due to local temperature, humidity, wind
and other variables. For example, a 5MW system in Gujarat will perform
differently than the same system in Karnataka.
Technical Requirements for eligibility of a PV plant
As there are no eligibility requirements put in place for Solar PV
developers this opens up the market for anyone who wants to develop a
PV project. By not having any eligibility requirements, project
developers with the lowest bid regardless of experience, can end up with
project approvals. This can cause similar problems as seen in Spain
where a lot of projects did not get developed or when they were
developed, were of poor quality. While there is a performance guarantee,
it would be approximately less than 3.5% of the project cost.
Technical Criteria for CSP
Any of the Concentrated Solar Power (CSP) technologies, Parabolic Trough Collectors, Solar Dish Stirling
(or any other prime mover), Linear Fresnel Reflector, Central Tower with heliostats, or a combination of any can be used.
This is a significant improvement from the draft policy as it opens up
projects to new technologies. An attempt has been made to ensure
qualifications of CSP developers, unlike the case for PV developers. CSP
developers must fulfill eligibility requirements that require them to
be an EPC provider/technology provider or have a tie-up with one.
Experience of developing at least a 1MW CSP (100MW in the case of
conventional thermal experience) project is also required.
Connectivity with the Grid
The policy calls for plants to be designed for interconnection with the
State Transmission Utility (STU) at a voltage level of 33 kV or above.
Further, the interconnections should be at the substation (substation
should be 33kV/132 kV or higher voltage levels) and not the distribution
substation. The project developer should indicate to the TRANSCO the
location (Tehsil, Village and District as applicable) of its proposed
project. The policy ensures that the PV system owner gets connected to
the grid based on their local conditions.
The impact of a large amount of electricity from an intermittent power
source, such as PV or CSP, on the overall electricity grid still needs
to be factored in. Although the risk of this is low for PV, since the
systems are small and dispersed and should not have the same weather
induced load fluctuations, there may be a bigger issue for the larger
CSP projects. This could potentially lead to problems during peak usage
periods. Power fluctuations and brown outs need to be addressed as
inverters can shut down, shutting the power production during the time
of most need and leading to significant revenue losses.
An additional factor relates to the frequency of power-out periods
unique to the Indian electricity grid. On an average day, there are
often several periods with brown-outs or black-outs - that may add up to
hours during critical hours of performance for solar systems. For a
solar system to generate its return, it needs transmission capabilities
or storage. Either of these situations increases the risk and cost for a
PV system and lowers the return for system developers and system
investors. It will also raise a concern of accuracy of measurement for
solar system output in order to qualify for the government
Feed-in-tariff payment. This may require the services of 3rd party
monitoring solutions.
Domestic Content (PV)
Solar PV Projects using crystalline silicon technology selected in the
first batch during FY2010-11 will be mandated to use modules
manufactured in India. For Solar PV Projects selected in the second
batch during FY2011-12, they will be required to use cells and modules
manufactured in India.
The domestic content policy is intended to create incentives to develop domestic manufacturing, investments and jobs.
Thin film and CPV can still be procured from any vendor in the world and
equipment shortage should not be a problem as the allocation is so
small compared to manufacturing capacities. However, since the PV
allocation is so small (150 MW in 2010-11, and remaining in 2011-2012),
it is not enough to realize gains from economies of scale. Domestic
content rules create unwanted attention from the WTO and trading
partners. This puts Indian manufacturers in a delicate situation as they
still have to export to European countries as the Indian manufacturing
capacity per year might be more than the 500MW allocated for PV over 3
years, not to mention that capacity could be cut even further if half
the project developers choose to use thin film. Ontario has enacted a
similar policy and has been threatened by the EU and Japan of possible
legal challenge in the WTO due to the protectionist policy. Thus, the
domestic content policy has the potential to hurt the Indian solar
export industry as an unintended consequence.
The policy also creates uncertainty in the mind of investors as they are
told to buy from manufacturers mandated by the JNNSM instead of
allowing developers to select panels based on the best prices and
efficiencies available anywhere in the world. This could be another
cause for foreign investors to take a "wait and see" approach as the
market in the first 3 years may not be attractive enough to warrant
large investments.
This also causes a high level of uncertainty and confusion due to the
patchwork of domestic policy (2010-11 - crystalline silicon modules -
domestic only, thin film and CPV can be imported, CSP - 30% of
components other than land has to be domestic); 2011-12 - crystalline
silicon modules and cells - domestic only). It appears that this
provision is an attempt to please "all parties" and has made the policy
unnecessarily complicated to be implemented.
Domestic Content (CSP)
It is mandatory for project developers to ensure 30% of local content in
all their plants/installations for Solar thermal technology. Land is
excluded.
This gives developers the advantage of procuring the main components of
CSP from anywhere in the world, while also creating a boost to domestic
BOS vendors. That said, there is an uncertainty factor relating to BOS
vendor products and quality as CSP has been non-existent in India.
Selection of projects based on Tariff (Bidding)
The short-listed projects are required by NVVN to submit an Request for
Proposal (RfP) bid indicating the discount in Rs/kWh on CERC Approved
Applicable Tariff.
This will achieve discounted pricing by creating a bidding process
particularly in the case of solar PV projects, while CSP projects may
not have to go through bidding process if there is a shortage of
applications. Since the PV projects applied for exceeds the allocation,
bidding is inevitable, making the feed-in tariff immaterial except as a
starting price to bid.
There is a stiff bid bond implemented to curb aggressive
bidding. In the case of PV, since there are no qualifications or
eligibility requirements for project developers, the lowest bid still
wins.
As evidenced in Spain and other countries, lack of expertise and
qualifications among project developers can lead to poorly executed
projects, producing at much lower capacities. The other side of the
argument is that project owners get paid for only what they produce.
However, with India’s unique power situation and severe power
shortages, the goal should be to maximize production.
After a 15% discount or more, state feed-in tariffs will start to look
very attractive. State project requirements might also be less onerous.
Most states have feed-in tariffs set for 5-10 years, if these can be
extended to 20-25 years, states will gain significant investments and
jobs while generating their own clean solar power.
Role of States
Land Acquisition
Land in India is a scarce commodity and land acquisition and
permitting can take considerable time. With CSP projects getting the
same allocation as PV (500MW) there will be a larger requirement for
land. Land requirements for CSP projects are often double that of PV.
How states handle land allotments will be an important issue.
Water Allocation for CSP projects
It is again surprising that the solar mission decided to allot CSP
500MW in the first phase instead of letting the markets select the most
cost effective and efficient technology.
India has a severe shortage of water. Water intensive CSP projects may
not be a sustainable source of power in many parts of the country. The
most conducive areas for CSP is the northwestern part of India
especially in the Rajasthan desert. Water availability in these areas is
scarce. CSP developers will need to secure water rights and ensure
continuous water availability for 25 years. Water requirements for
parabolic trough and Fresnel can be about 3000L/Mwh and central towers
consume about 2000L/Mwh of water. Alternatives to water-intensive CSP
technologies include dry cooling systems, which are less efficient and
increase costs; and dish stirling systems which are commercially
unproven for large scale projects.
Role of Carbon Financing
The policy starts to introduce market forces around solar. For
example, the use of solar renewable energy certificates (REC) has the
potential to lower states' costs for this Feed-in-tariff . However,
solar REC markets are young and immature. While they have driven some
renewable energy markets, it has been due to the government creating a
clear market and a set of buyers for solar RECs and other forms of
carbon financing. Otherwise, solar RECs have very little value and may
not help India achieve its energy objectives.
All though there are some challenges with the guidelines, it should be
noted that the Indian solar industry was virtually non-existent 12
months ago and the JNNSM is a commendable, forward looking policy and it
is in all stakeholders' interest to make solar power a viable
alternative energy in India to meet the tremendous capacity growth that
will be experienced in the near future.
Click here for a factsheet on the JNNSM Guidelines.
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