Slowing tenders, project actualisation and looming threat of 70-per cent safeguard duty are likely to result in a major downturn for the EPC market.
The Director General of Safeguards (DGS) has proposed a provisional duty of 70 per cent for a period of 200 days on solar cells and modules and has issued its recommendations in a preliminary report.
The decision, which has come as a major shock, is proposed to be levied on imports from all countries except developing countries other than China and Malaysia, covering almost 90 per cent of cells and modules used in India.
'Coming after the moves to levy 7.5 per cent import duty on modules and Goods and Services Tax (GST) ranging between 5-18 per cent on various input costs, the recommendation also betrays lack of policy consistency and clarity in various government departments,' feels Vinay Rustagi, Managing Director, Bridge to India.
Anmol Singh Jaggi, Director, Gensol Group said, 'The Indian solar industry had close to 9 GW of EPC work in 2017, and we are expecting a sharp dip in 2018. In my opinion, we will not be breaching 7 GW of EPC work this year and this will continue until mid-2019.'
Hard times in offing
Jaggi points out, 'Between August-December 2017 there were hardly any tenders that came out in the market. Also, for those tenders that did come, it took
about six-seven months for the EPC job to start.'
Now, with safeguard duty threatening to affect project costs, the viability of projects will be questioned and may lead to already-awarded projects too being stalled.
Since 2014, around 29 GW of utility scale solar tenders have been issued in India. Most of this capacity (81 per cent, 23.5 GW) has been tendered by NTPC, SECI, discoms and other public sector entities for project development by private sector.
But, there is also a sizeable 19 per cent (5.5 GW) tendered in the form of EPC contracts, where capital investment will be made by NTPC and other public sector companies including state government-owned generating companies (for example, KREDL, APGENCO).
Actual progress on these two types of tenders is very different. For project development tenders, 36 per cent (8.5 GW) of total issued capacity has been commissioned and 7 per cent of the capacity has been cancelled. In contrast, for EPC tenders, only 18 per cent (930 MW) has been commissioned and as much as 29 per cent stands cancelled.
The poor progress in EPC tenders is as predicted by us last year. Despite that, public sector companies continue to bring out more EPC tenders - more than 50 per cent
of new tenders issued in Q3 2017 were structured as EPC contracts.
Rustagi further added that the decision process and rationale seemed fundamentally flawed, stating, 'The DGS recommendation is based on a very weak premise that rising cell and module imports have caused an injury to the domestic manufacturers. More important issues to consider, in our view, are why have the Indian manufacturers failed to scale up, upgrade plants or integrate backwards? Do they have the technical and financial capacity to meet growing demand in the sector? Why is their cost of production higher than the cost of imports?'
Rustagi opines that it is a policy failure that rather than addressing these substantive issues, the Indian government is proposing to create trade barriers to support domestic manufacturers. Moreover, DGS report expresses concern about loss of jobs in the manufacturing sector. But it fails to take into account the tens of thousands of jobs created in the downstream design, construction and operation of solar plants because of cheap imports.
'It is very clear that the sector growth - about 900 per cent in last three years û has been largely underpinned by sharp fall in costs. A trade duty of 70 per cent, or even, say 30 per cent, would result in a substantial slowdown in the sector and lead to loss of many more jobs than potentially to be created on the manufacturing side,' he states.
Developers seem resigned to the decision and their best bet seems to be to: i) delay the final decision as long as possible so that under construction projects are not affected; and/or ii) to get relief for projects already auctioned and awarded.
However, the likelihood of government granting a simple waiver of duties on projects in pipeline seems slim. If such relief is not available, up to 4,500 MW of projects risk becoming unviable and/or abandoned.
There are currently about 4,800 MW of tenders awaiting allocation and MNRE wants to bring out several new tenders in the coming months. A final duty of between 30-70 per cent would mean that tariffs would need to go up by 17-35 per cent, or about `0.45-0.90/ kWh, to maintain financial returns. But some of these tenders have a prescribed tariff ceiling of as low as `2.93/ kWh. The discoms are obviously not keen on tariffs going up substantially from current levels creating uncertainty for all new tenders.
Private market, both rooftop and open access solar, is likely to be the worst. Most end consumers are in no hurry to build projects and would prefer to wait until there is complete clarity on duty decision, and final costs are acceptable. However, this segment could see volumes declining by as much as 50 per cent if a duty exceeding 20 per cent is imposed.
Says Jaggi, 'If you look at the EPC contractors end, new ones will emerge in a moving sector, so today thereÆll be 1,500 EPC contractors, but if there is six months to one year of a slump, you will see this number reduce to 550 contractors.'
Thus, those on the weaker end of the market shut shop once there is a downturn. We already see many such small players shutting shop and if this kind of duty is implemented, there will be a very high number of contractors out of business. This will thus end up not only impacting those not serious about the business, but genuine small players who have limited capital.
Power from EPC tender based projects is significantly more expensive than from project development tenders; Most EPC tenders issued by public sector companies face long or indefinite delays in allocation; Participation of state-owned companies at a time of aggressive competition among private companies is difficult to understand.
As against an average two-five months taken between announcement and allocation of project development tenders, allocation of EPC tenders by public sector companies has taken an average of six-eight months. Some of these tenders including NLC Tamil Nadu 500 MW and NLC Odisha 250 MW were issued almost a year ago but they have not yet been allocated. Moreover, some tenders including CIL 200 MW and KREDL 200 MW have been issued, cancelled and subsequently reissued with modified requirements. The frequent cancellations as well as delays reflect low market interest for such tenders.
EPC tenders from public sector companies stipulate more stringent technical specifications resulting in higher execution costs (and presumably, better quality). Moreover, many EPC tenders have domestic content requirement (DCR) stipulation again resulting in 5-7 per cent extra capital expenditure. Higher capital expenditure coupled with conservative financial assumptions means that the final tariff offered to the discoms is about 20-30 per cent higher than that offered by private sector developers, who are willing to make more aggressive operating and financial assumptions. Discoms are understandably not too keen on buying such power.
Today if you consider solar, it is the cheapest form of energy. But if the 70 per cent safeguard duty is implemented, it will finish viability for the sector.
'We are keeping our fingers crossed that this is not implemented. To summarise, 2018 is going to be a tough year, for every EPC player small or big. The market had exploded and a lot of people enjoyed but not every year will see a rise, and we will have to undertake expense control to tide over,' said Jaggi.
Large players like Ostro & Orange Renewables are being bought by ReNew Power Energy and Hero Future Energies, respectively. Besides these big ones, there are also many small deals happening in the 60-100 MW space, so there is definitely consolidation happening.
'In fact, I am expecting 2018 to be a bad year for everybody across the board û thermal and renewable segments. India is currently in a power surplus mode and as such policymakers do not want more power generated in the system, because power plants are operating at 50-55 per cent plant load factor (PLF). In the second half of the year, politics will begin because elections are due in early-2019. Thus, 2018 till mid 2019 will see tight times for everyone,' he feels.
In conclusion, a knee-jerk response to duty petitions risks damaging investor confidence and undermining achievements of the last three years. The government needs to act in concert across different departments and provide long-term policy visibility to ensure continued growth in the sector.
Jaggi also points out that states overall may fare better, ' Uttar Pradesh, Haryana, Karnataka, Tamil Nadu and Rajasthan are the few that will do very well. In fact, out of the estimated 7 GW, Uttar Pradesh, Karnataka, Tamil Nadu and Rajasthan will have around 4-5 GW share.'
- JOCELYN FERNANDES
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