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What the union budget (2017-18) means for Renewable Energy?

Approaching the half-way mark of the 2021-22 targets for Renewable Energy (RE), there was huge expectation from the 2017-18 budget and after an above average budget the last time around (Read more) it was going to be a tough act to follow. The expenditure in the energy sector is slated to increase from 30,065Cr (INR Crore) in the current Financial Year(FY) to 36,718Cr. As there was no big bang announcements in the sector, the focus is shifted towards the financial outlays across projects where the subtle details are described.

Access to electricity

“Well on our way to achieving 100% village electrification by 1st May 2018”

The Deen Dayal Upadhaya Gram Jyoti Yojana (DDUGJY), the flagship scheme under rural electrification will see an increase in budget allocation from 3,350Cr (Estimate FY17) to 4,814Cr (FY18).  The allocation along with Integrated Power Development Schemes will be crucial in to achieve the 100% electrification target by 1st May 2018. The Integrated Power Development Scheme which envisages 24×7 power and efficient grid has a total budget  of 5821Cr for the coming fiscal.

Solar Power

solar

Interestingly the announcement of having 7000 railway stations powered through solar gained traction although the overall plan under the railway ministry is to achieve a cumulative target of 1GW. Second phase of solar park development to be taken up for 20GW capacity, which in likelihood is just going to be a preliminary selection in the coming year. Budget allocation of 5,497Cr up from 5,036Cr (although revised estimates for FY 17 peg at 4,360Cr) to Ministry of New & Renewable Energy (MNRE).

The ministry has proposed to add 10GW capacity in the FY with 4.5GW coming from financial aid like VGF (50Lakh/MW assumed) and the balance 5.5GW coming from other state policies.

Wind Power

windThe outlay for wind is capped at 400Cr down from 488Cr in the previous year although this is justified considering the Generation Based Incentive (GBI) ceases from 1st April 2017. The target for wind power is 4GW in the coming year.

In spite of  needing a significant development in RE, the budget has reduced the Research & Development (R&D) outlay from 446Cr to 144Cr with no technology specific announcements which is a big drawback.

Power Evacuationtx

In what could be cited as big plus in the budget is the financial commitment towards power evacuation especially the green corridors. It has seen a marked increase with MNRE and Ministry of Power together getting an allotment of 575Cr for the Green Energy Corridors. The target is to reach 8553CKMs (Circuit Kilometers) in the medium term with 350CKMs targeted in the coming fiscal.

Taxation

The Accelerated Depreciation (AD) as announced in the previous budget will be reduced to 40%. MAT credit is allowed to be carry forwarded up to a period of 15 years from the present 10 years.

The reduction in customs duty on solar module glasses was around in the media but what went unnoticed is the increase in excise duty.Solar tempered glass for solar modules see a nil Basic Custom Duty (BCD) while parts for manufacturing of solar tempered glass has a 50% reduction of Countervailing Duty(CVD) from 12.5% to 6%. All items of machinery required for fuel cell based power generating systems to be set up in the country or for demonstration purposes  and Balance of System (Bos) for bio-gas plants see a reduction in BCD  and CVD to 5% and 6% respectively (down from 10%,12.5%).

The excise duty rate for solar tempered glass has increased from 0% to 6% while the excise duty on the raw materials for manufacturing of solar module glass is reduced from 12.5% to 6%. Likewise the materials for fuel cell based power systems has also seen an excise duty reduction from 12.5% to 6%.

Although there is a significant onus on Make In India, the announced tax benefits are unlikely to benefit in the long run which hints at changes during Goods & Services Tax (GST) roll-out.

The tax on income from trading/transfer of carbon credits has been reduced to 10% from the existing 30%.

evOn the other side considering the active interest between RE companies and Electric Vehicles (EV) it is important to observe the outlay towards EV. The Faster Adoption and Manufacturing of Hybrid and Electric vehicle scheme (FAME)  has been extended with an outlay of 175Cr. The medium term goal being 2-3 million Electric/Hybrid vehicles. Specifically for this year the outlay is focused on establishing 200 charging stations, introduction of 1.5 Lakh vehicles including 200 electric buses.

In summary, the budget does promise an increase in funding across all programmes of the power and renewable energy ministry. The key question is, will the increased outlay translate to physical progress considering the massive RE targets.

bidim

Solar bids: No more Outliers!

Solar tariffs reaching grid parity was considered the holy grail of Indian Renewable Energy (RE) sector. Starting out in 2010 at ₹ 12.76 for a unit of solar energy when the grid prices were around ₹ 3.5/kWh (although Pooled Cost of Power Purchase or APPC was around ₹ 2.5/kWh which in a way is not the best measure for grid parity). Industry experts at that point predicted the tariff would breach grid parity in all probability by 2019. Come 2017, the bid for Rewa solar park in Madhya Pradesh reached a record low of ₹ 2.97/kWh which is expected to be operational by end of 2018. The average APPC on the other side is already around of ₹ 3.5/kWh  in 2017.

The bid results were expected to be low, but the final price has come as a shocker even to industry experts. The trend however predicted such a result. A closer look at bids from 2014 when a significant number of large scale projects (>500MW) were tendered the winning bid range has continuously narrowed. The gap between the highest and the least winning bids have been dwindling.

bidkeytrends

So, the argument that one company out-bid the rest is a blind one. It was of course true prior to 2014 or even for the matter in 2011 when SolaireDirect won a bid for ₹ 7.49/kWh when the highest successful bidder was at ₹ 9.39/kWh.  The next wave of scepticism came about when Sun Edison won the bid  at a flat-out ₹ 4.63/kWh in Nov’15. Their bankruptcy never helped the reasoning later.  The next low bid of ₹ 4.34/kWh again raised eyebrows but then again the highest winning bid was ₹ 4.36/kWh which demonstrated that companies have a similar strategy in submitting winning bids.

So is the Rewa solar bid sustainable?

The Rewa solar bid is unique in its propositions and cannot be compared to the recent past or the immediate future because of varied reasons. In addition to the standard claims that it has a ₹ 0.05/kWh escalation for the first 15 years, payment guarantees from the government and economies of scale it has a little more reasoning. The project completion timeline is 18 months from signing of Power Purchase Agreement (PPA) which could see the project being commissioned in Q3 of 2018. The module prices in 2015 were around 43$cents and with the decline set to continue price forecast for 2018 could be well below 30$cents (although few experts claim it unsustainable at the manufacturer’s end).

The second key part is the cost of funding; the power minister in his tweet attributed this bid result to the low cost of funding. Although it is speculative on what the actual cost of fund to the developer is and if the developer takes the hedging risk, we can certainly say the cost of capital is well below the CERC benchmark of 12.76% for 2016. Why is this significant? Because the levelised cost of tariff for the project duration of 25 years is estimated on this number.

The Rewa bid is widely claimed to have a levelised cost of ₹ 3.3/kWh which assumes the cost of capital at 12.76%. Is that real?

levelised

Although, I still believe the CERC calculation of levelised tariff for solar PV is not the ideal way but even this approach clearly shows the actual levelised cost is well above the projected ₹ 3.3/kWh depending on the cost of capital.

Overall, the Rewa solar bid and the previous low bids have demonstrated one key trend; there are no outliers in the industry anymore. The industry is in it together with similar strategy (and similar risk appetite?). Sun Edison, Fortum or a Skypower never offered a record low tariff again; there are other companies who are doing the honours. In fact, no one would have predicted an Indian company, Mahindra or Acme to breach the record this time.

All said and done, as an industry professional I would be more interested to see the quality of procurement; installation and performance down the years rather than having the plant just build at a record price!

bp

India energy outlook

BP released its annual energy outlook and this year’s projections look into the energy markets up to 2035. As expected, there are key projections for oil demand and a significant part of this year’s projections revolve around the impact of Electric Vehicles (EV) on the oil demand which has been portrayed using different scenarios. A significant insight on India’s energy scenario between 2015 and 2035 has been presented.

India highlights

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  • India’s energy consumption to grow by 4.2% every year, faster than all major economies in the world
  • India’s consumption growth of fossil fuels to be the largest in the world.
  • India’s projected energy consumption demand growth of +129% to exceed OECD (52%) and China (47%)
  • India’s share of global energy demand in 2035 to be 9% while China to account for 26%
  • India’s energy production capacity to grow by +122% in 2035 compared to 2015 accounting for 5% of global energy production in 2035
  • Gas demand to expand by 162% compared to 2015.

    Clearly, this figure needs more explanation which is not available. But, just from the power sector perspective, gas based power plants are already operating at 20% PLF on an average due to shortage of gas and this demand for gas is highly unlikely.

  • Coal in the fuel mix to fall from 58% to 52% by 2035 while renewables in the fuel mix to increase from 2% to 8%.

    The projection is a gross neglect of India’s RE plans and INDC which projects a 40% of non-fossil fuel power in India by 2030.

  • Although India and China will account for nearly half the increase in power demand, the per capita consumption is going to be only 1/4th of China’s.
  • India will be the largest growth market for coal with demand doubling from 10% in 2015 to 20%. Nearly two-thirds of India’s increase is to be fed into the power sector.

    The projection seems strange considering the coal power capacity addition is going to be nil post 2022 according to a latest CEA forecast for India.

Indian RE growth in the previous period was ~ 5% and in the period 2015-35 to be ~ 10%.

The projection looks to be an understatement considering India’s targets of 175GW by 2022.

 

Key global highlights

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  • China and India will account for nearly half of the increase in global energy demand
  • Renewable Energy (RE) with hydro and nuclear will account for 50% of the energy increase in this period
  • RE will be the fastest growing fuel source, quadrupling over the next 20 years.
  • Only 20 % increase in energy demand in energy demand compared to doubling of the GDP in this period considering significant gains in energy efficiency
  • RE will grow by over 7% and account for 10% of global primary energy by 2035 (a modest projection)
  • Share of power consumption in primary energy to account for nearly 47%
  • Carbon emissions would rise by 13% in the period when IEA suggests a decline by 30% to achieve the climate goals.
  • Global liquids demand will increase from15Mb/d to 110Mb/d by 2035.

Overall, the energy outlook at India level seems to ignore a few of the scenario projections and forecasts given by Indian agencies.

(Data and image source: BP Energy Outlook; For more info check the BP Energy Outlook)