Growth of rooftop solar installations in 2018 is likely to witness a decline on the back of regulatory complexity and policy uncertainty. POWER TODAY spoke to a cross-section of experts to understand what it would take to return traction to the segment.
India has reached the milestone of 20 GW in cumulative solar installations, with utility scale cumulative installation at 18.4 GW and rooftop solar at 1.6 GW, according to a research report by Mercom Capital. The feat was achieved in four years, which is much ahead of the goal set for 2022 by the government-led National Solar Mission (NSM).
In 2017, solar emerged as the top source of new power capacity additions for the first time, with preliminary numbers showing that solar installations had reached 9.6 GW and accounted for 45 per cent of total capacity additions. Rooftop solar continued to be the fastest renewables sub-segment in India, and has clocked a four-year compound annual growth rate of (CAGR) of 117 per cent, said a Bloomberg New Energy Finance report.
However, the Mercom report explains that the growth of solar installation in 2018 is likely to witness a decline as some of the government policies could increase developers' costs and create uncertainty. Quoting Raj Prabhu, CEO, Mercom Capital Group, "The government's revised solar installation target of 100 GW by 2022 has recently been clashing with PM Modi's 'Make in India' initiative to promote domestic manufacturing. The recommendation for 70 per cent safeguard duty on (solar panel) imports, the ongoing anti-dumping case and a 7.85 per cent port duty on imported modules are together creating an atmosphere of regulatory uncertainty that is taking a toll on the industry and slowing down installation activity."
The federal government had initially targeted
200 MW of installed rooftop solar capacity in 2016, growing to 4.8 GW in 2017 and 5 GW in 2018. However, just 271 MW was installed till December 2017, according to figures from the Ministry of New and Renewable Energy (MNRE). A combination of factors has led one of the largest solar markets in the world to go for a downward revision of its rooftop solar target for the 2017û18 financial year to 1 GW.
As against MNRE's target of 5 GW in 2017û18, cumulative rooftop solar capacity had only touched 982 MW in December 2017. "With less than 3 per cent of the 40 GW rooftop solar target achieved, it is clear that there are bottlenecks on the supply and demand sides that are posing significant challenges to the segment's growth and they need to be tackled well," said an industry expert Vishwanathan Iyer.
According to Iyer, on the supply side, factors such as lack of debt financing, high customer acquisition costs, low entry barriers resulting in inexperienced players entering the fray and focus on capital expenditure (capex) over operational expenditure (opex) by service providers have led to the situation. On the demand side, factors such as heavy focus on commercial and industrial entities, exclusion of residential sector, lack of consumer awareness, lackadaisical movement on net metering and moderate tendering activity due to multiple stakeholder involvement appear to be the key reasons for the slowdown.
Commending the "good job" done by central and state governments on solar rooftop policies, Andrew Hines, Co-Founder, CleanMax Solar, recommends changes to the net metering rules and plant size specifications to accelerate adoption of solar rooftop. "Since last year, many uncertainties have disrupted growth momentum like fluctuation in PV module prices, bottlenecks in the implementation of net metering and recent uncertainty in policy on the implementation of unviable duties," he opined.
Sushil Sarawgi, Director, Kor Energy India, says that a combination of several factors has been responsible for the truncation of targets as well as slowdown in the segment. "Firstly, the previous targets were somewhat over ambitious, which the government has recognised of late. Many government agencies including Solar Energy Corporation of India (SECI) had tendered mega projects for subsidies and incentives for residential, social and government sector rooftop installations in the previous year, but the achievement is less than 10 per cent of the tendered capacity in some cases," said Sarawgi.
Added to that, due to demonetisation and the Goods and Services Tax (GST) rollout, private investment was somewhat curtailed in the sector. Moreover, with the industry adjusting itself to changes in tax laws, there was reduced capex on rooftop solar.
Industry insiders point out that a lot is still required to be done to promote and educate private sector for rooftop solar installations. Hostile attitude of government agencies responsible for extending capital subsidy and ambiguity on net metering in many states continue to discourage customers. Moreover, with the Director General of Safeguards recommending imposition of 70 per cent safeguard duty on imported solar equipment, uncertainty prevails. In January, the Madras High Court put a temporary stay on the recommendation after the contractor and developer of solar projects, Shapoorji Pallonji Infrastructure, petitioned the court against it.
Municipal bonds and rooftop
India has so far installed about 1.6 GW of rooftop solar capacity. It needs to add another 38.4 GW, if it seeks to achieve its targeted goal of about 40 GW of rooftop solar capacity by 2022.
A new report by the Climate Policy Initiative (CPI) proposes using municipal bonds to facilitate the achievement of this goal and details how such bonds could be designed and implemented to support the scaling up of rooftop solar across the country.
"The proposed solar municipal bond model," CPI says, "would remove three key barriers to the continued growth of the country's rooftop solar sector, namely: the high upfront capital expenditures required for installation, perceived performance risk and limited access to debt capital."
The report asserts that the solar municipal bond model could aid in achieving India's solar installation goals by increasing the availability of debt for rooftop solar project developers and ultimately reducing the costs of development by as much as 12 per cent. The success of the proposed solar municipal bond model hinges on the ability and willingness of municipal bodies to play the role of finance aggregators for renewable energy projects.
Municipal bond funds would be disbursed to project developers using a public-private partnership (PPP) approach that would make financing the responsibility of a municipal corporation or a corporate municipal entity. The model aims to facilitate greater access to debt capital markets for project developers. The report says municipalities are strong candidates to play the role of finance aggregators because they have financial advantages in the form of superior credit profiles, access to public guarantees and diverse revenue sources.
The report also suggests that the solar municipal bond model could mobilise significant untapped investment potential for the rooftop solar sector, for example, from domestic institutional investors. Issuing municipal bonds for solar could also help build the capacity of municipalities to access the debt capital markets and use a similar innovative transaction structure for other projects as well.
However, the proposed model does not come without hurdles and challenges. The report recognises that there is no statutory mandate for using municipal corporations to promote electricity generation. "Though they would play limited roles as financiers in the proposed model, this may prove to be the most significant barrier," the report stated.
In order to attract enough investors, the solar municipal bonds would need high credit ratings. Municipal bonds credit ratings are critical components to the success of the model, the study noted.
Moreover, municipalities would be required to provide a minimum equity contribution of 20 per cent of the cost of each project, according to Section 12 (5) of regulations by the Securities Exchange Board of India (SEBI). Since most municipalities are already struggling to meet this investment requirement for basic infrastructure services, this regulation would again be hard to meet.
The absence of supporting regulations could also make it difficult for municipal corporations to act as financial companies, the CPI report observed. Under the proposed transaction structure, bond proceeds would be disbursed to projects through capital lease arrangements. Since capital leases are typically executed by financial entities, the absence of specific regulations could make municipalities reluctant to act as finance aggregators.
Another potential downside to the proposed model, the report noted, is that transaction costs could be higher than either self-ownership or third-party financing models, mainly due to the novelty of the approach. The sheer reluctance of municipal bodies to issue bonds could also curtail the success of the model unless current practices are revamped. Despite all of its grey areas and potential pitfalls, the CPI report says the "radical and futuristic" SMB model still has the potential to provide a boost to the country's rooftop solar sector.
The study concluded that if all potential barriers are addressed, the solar municipal bond model would "not only help rooftop solar to scale up its growth, but also help (enable) municipal corporations to use similar structure for other priority infrastructure projects." The potential implementation of government regulations designed to support the rooftop solar sector is not impossible.
Need for policy overhaul
Does this mean that a policy overhaul is required in the renewable energy space? "Yes, in fact MNRE is aware of it and being credibly efficient as its self-appraisal process has also come out with a note in December enumerating steps for a policy overhaul, clearly acknowledging that what has been done is not sufficient and needs tweaking," said Iyer. This would include reworking the Central Financial Assistance (CFA) across sectors, namely residential, and focus on the involvement of distribution companies, besides promising more outreach to debt financial institutions.
Kor Energy's Sarawgi was overtly critical of what he defined as complete lack of coordination between distribution companies, state nodal agencies, central agencies and MNRE for collation of necessary data in this regard. "There is a need for a common project approval and completion report submission platform or integration of all such platforms, so that data can be seamlessly compiled on real time basis," he asserted.
But, several others view any drastic changes to the policy as needless. Hines of CleanMaxx Solar feels that growth can be returned to the sector with only a few necessary policy-related changes. "Artificial capping on net metering, that is, size restriction on the solar capacity needs immediate review. The government should allow you to cover the full roof," adds Hines. For instance, an automaker may have space worth 20 MW of solar power, but the policy allows only 1 MW of installed capacity." Lifting of such restrictions would encourage those who have already adopted rooftop solar and realised its cost benefit, to add capacity.
Consistency in policy is also required. "Although the opex model has been driving the growth in rooftop solar space, policies of some states do not allow net metering for solar plants. For example, in Gujarat, if a solar plant is owned by developers like CleanMax, then end-users cannot avail its benefit," informed Hines. It then requires capital investment from the end-users, instead of enabling them avail the benefits of solar power without having to make any upfront investment. This becomes an obstacle in the way of more people switching over to solar power.
Net metering challenges
It is often said that one of the best ways of popularising adoption of rooftop solar is by making net metering policies cohesive and also allowing users to sell surplus electricity. Net metering is helpful because the excess power is harnessed and used elsewhere and the source consumer gets equivalent benefit on his tariff or power consumption. A strong net metering policy not only helps in increased consumption of power generated by rooftop solar, but also encourages its faster adoption among corporations and institutions when they see reduction in their operational costs.
"One of the biggest challenges of net metering has been involvement of various agencies and multiple approvals leading to inevitable delays in implementation. Other challenges include lack of uniform regulation across the country, caps on energy that can be returned to the grid at an absolute number of KWs without regard to the class of consumer, reluctance of distribution companies due to anticipated revenue loss and lack of understanding on part of implementing agencies of net metering as a concept for being an enabler for residential rooftop solar," surmised Iyer. He felt that addressing these issues in a time-bound manner in relation to the yearly targets envisaged will help give thrust to the adoption of net metering as a key tool in achieving the overall growth of rooftop solar.
"For the net metering policy to be made cohesive, artificial capping needs to be removed and distribution companies should become enablers in the implementation of such policies. Also, the policies introduced should be long term to make solar an attractive proposition for developers and consumers," said Hines. Citing Maharashtra, he said the western State's net metering policy involved a 20-year contract with the distribution company, which provided an element of comfort to signatories that assumptions made in the contract will not change abruptly.
Sarawgi described net metering policies in most states as a major bottleneck. "Officials of distribution companies are not aware of the policies, and they do not have the required infrastructure to record and give benefits of units exported to grid," he said. There is a need to first build infrastructure for the same and then educate all concerned so that net metering can be implemented quickly. He mentioned cases where rooftop solar power plants remained shut for over six months after installation for not getting approval for net metering.
According to reports, Anand Kumar, Secretary, MNRE said that rooftop solar programme was not doing too well owing to a clash of interest between power distributors and high-end consumers. He said the government was working on a new scheme called Sustainable Rooftop Implementation for Solar Transfiguration of India (SRISTI) to create a win-win situation for all stakeholders.
Distribution companies the world over are not very enthusiastic about rooftop solar. In January 2016, the solar industry in the US state of Nevada collapsed after the public utility commission allowed the state's only power company to hike rates and fees for solar panel users. Given the relatively small size of solar rooftop projects, things are presently different in India. Here, the rooftop segment might present a solution to the country's loss-making power distributors to diversify their business.
As against MNRE's target of 5 GW in 2017-18, cumulative rooftop solar capacity had only touched 982 MW in December 2017.'
Distribution companies the world over are not very enthusiastic about rooftop solar.
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