BRIDGE-TO-INDIA-India-RE-Outlook-2019-1

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INDIA RE OUTLOOK 2019 2016 2017 2018 2021 2022 2019 2020

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© BRIDGE TO INDIA 2019 TERMS OF USE This report is owned exclusively by BRIDGE TO INDIA and is protected by Indian copyright international copyright and intellectual property laws. BRIDGE TO INDIA hereby grants the user a personal non-exclusive non- transferable license to use the report pursuant to the terms and conditions of this agreement. The user cannot engage in any unauthorized use reproduction distribution publication or electronic transmission of this report or the information/forecasts therein without the express written permission of BRIDGE TO INDIA aims to provide accurate and up-to-date information but is The information contained in this report is of a general nature and is not intended to address the requirements of any particular individual or entity. not legally liable for accuracy or completeness of such information. © 2019 BRIDGE TO INDIA Energy Private Limited Authors Arti Mishra Saran BRIDGE TO INDIA Tanmay Sardana BRIDGE TO INDIA Vinay Rustagi BRIDGE TO INDIA C 8/5 DLF Phase I Gurgaon 122001 India www.bridgetoindia.com For all other enquiries please contact contactbridgetoindia.com Subscribe to our reports marketingbridgetoindia.com Track the Indian RE market with our reports and blogs www.bridgetoindia.com/reports

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Page 2 © BRIDGE TO INDIA 2019 Executive summary 2018 was a forgettable year for the Indian RE sector. One silver lining was the surge in auctions as 20436 MW of projects were awarded +174 y-o-y notwithstanding multiple tender cancellations. Most of the pain was self-inflicted. Relatively minor issues such as GST safeguard duty and BIS standards caused major frustration. Solar park development stalled and transmission capacity also struggled to keep pace with needs of the sector. Market confidence was further eroded by undersubscription and cancellation of tenders and the government’s failure to implement much heralded schemes like SRISTI and KUSUM. The big event in 2019 is obviously the general elections. A policy purdah is imminent. Politics is likely to dominate over reforms and concrete action for most of the year. It means that swift resolution of sector problems is unlikely. On the plus side we don’t expect any retreat in push for RE irrespective of who comes to power. So what can we look forward to in 2019 Our key predictions for the year: a. There should be good news on the project implementation front. Dictated purely by tender time-tables capacity addition should jump from 10560 MW last year to 15860 MW. Most of the uplift will come from utility scale solar although rooftop solar is also expected to register another year of fantastic growth. b. Open access would have a subdued year with capacity addition of about 600 MW down 63 over last year. c. Module prices are expected to stay firm at about USD 0.22/ W. d. We should see greater adoption of new technologies such as mono-type modules micro inverters storage finally expected to start rolling with likely announcement of a National Storage Mission. e. Floating solar is expected to make major strides. Recent tender results indicate sharp dip in tariff premium over ground-mounted plants. Falling cost and constraints in land and transmission capacity would force policy makers to prioritise floating solar. We expect a surge in floating solar tenders with an aggregate issuance of up to 5 GW. We are looking forward to announcement of the National Storage Mission and rapid progress on floating solar. Two or three successful IPOs would go a long way in boosting market confidence. f. We do not anticipate any notable development on domestic manufacturing front. The integrated manufacturing tender has failed and the government now seems keen to issue tenders with quotas for domestic manufacturers. It is possible that we would see petitions from the domestic manufacturers seeking higher duties. The big event in 2019 is obviously the general elections. A policy purdah is imminent. Politics is likely to dominate over reforms and concrete action for most of the year

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Page 4 © BRIDGE TO INDIA 2019 1. Capacity addition We expect a total RE capacity addition of 15860 MW in 2019 a sharp jump of 50 over 2018. More than 69 of capacity addition is expected to come from utility scale solar projects. Figure 1: Total RE capacity addition in 2019 MW Figure 2: Utility scale solar capacity addition during 2015-2019 MW 2019 should register an all-time high in utility scale capacity addition crossing 10000 MW mark for the first time ever. Based on the time-table of various projects under execution and current implementation status we expect capacity addition to be low in first half of the year 2635 MW and speed up in the second half 8267 MW. More than 75 of this capacity is expected to come up in Rajasthan over 2000 MW Andhra Pradesh 1950 MW Tamil Nadu 1872 MW and Karnataka 1555 MW. Utility scale solar Source: BRIDGE TO INDIA research Source: BRIDGE TO INDIA research Wind 2300 14 Off-grid solar 290 2 Rooftop solar 2368 15 Utility scale solar 10902 69 12000 10000 8000 6000 4000 2000 0 1519 2015 2016 4274 2017 8489 2018e 6833 2019e 10902 Q 4 Q 3 Q 2 Q 1

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Page 5 © BRIDGE TO INDIA 2019 Figure 3: Capacity addition in individual states MW NTPC offtake SECI offtake State offtake Others 400 150 50 150 Haryana Uttar Pradesh 85 Assam Madhya Pradesh 500 Gujarat 1890 750 2640 Rajasthan 1000 750 200 150 2100 Andhra Pradesh 1250 150 1400 Maharashtra 1363 509 1872 Tamil Nadu 1555 Karnataka Source: BRIDGE TO INDIA research

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Page 6 © BRIDGE TO INDIA 2019 Figure 4: Leading project developers to commission utility scale solar capacity in 2019 MW - 200 Azure Acme NLC SoftBank Shapoorji Pallonji Renew Power Sprng Energy Ayana Renewable Hero Future Tata Power Mahindra Susten Adani Engie Fortum Avaada Atha Group APGENCO Others 400 600 800 1000 1200 1400 Source: BRIDGE TO INDIA research Our estimates include 83 MW of floating solar capacity addition 33 MW NTPC Kerala tender and 50 MW SECI Uttar Pradesh tender. We also expect India’s first utility scale storage project – 3 MW by SECI to be commissioned in Leh Jammu Kashmir during the year. Open access solar capacity addition is expected to fall significantly from 1630 MW last year to just around 600-650 MW in 2019. Maharashtra Andhra Pradesh Uttar Pradesh and Haryana are expected to lead the market. 32 developers are expected to commission utility scale solar projects in 2019. Azure Acme and NLC are expected to be the leading developers. Ayana Renewable Raasi Green Earth Asian Fab Tec Think Energy Partners TEP and Technique Solar are expected to commission their first ever projects in India in 2019.

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Page 7 © BRIDGE TO INDIA 2019 Rooftop solar capacity addition in 2019 is expected at 2368 MW 49 higher than in 2018. We expect the market to be again dominated by CI consumers as activity in other segments stays slow. Rooftop solar Source: BRIDGE TO INDIA research Figure 5: Rooftop solar capacity addition MW 556 2016 337 2015 1082 2017 1588 2018e 2019e 2368 About 290 MW of aggregate off-grid capacity mostly from solar pump installations is also expected to be added in 2019. Off-grid solar Figure 6: Wind power capacity addition during 2015-2019 MW About 2300 MW capacity addition is expected in 2019 up 18 over previous year. Almost all this new capacity would come up in Tamil Nadu and Gujarat. Projects are expected to be commissioned under SECI tranche I II and III tenders and Gujarat and Maharashtra’s 500 MW tenders. Projects are expected to be commissioned by Adani Orange Renewable Engie Sembcorp and Torrent Power. Wind power Source: BRIDGE TO INDIA research 5000 4000 3000 2000 1000 0 2019e 2300 1948 4690 1486 2747 2018e 2017 2016 2015

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Page 8 © BRIDGE TO INDIA 2019 Figure 7: Utility scale solar and wind tender announcements and auctions MW We expect to see a strong emphasis on domestic manufacturing tenders. MNRE may yet issue more integrated tenders offering a mix of project development and manufacturing capacity. Large tenders are also expected with domestic supply restrictions for supplying power to public sector consumers. Source: BRIDGE TO INDIA research Solar auctions Wind tender issuance Wind auctions Solar tender issuance 2019e 2018 2017 2016 2015 10000 10000 20000 30000 40000 50000 0 2. Domestic manufacturing Safeguard duty on PV cell and module imports shall fall to 20 in July 2019. As observed over the past few months we expect no significant uplift in domestic PV manufacturing sector. Total module manufacturing volume is expected to remain at about 3000 MW. It is possible that domestic cell and module manufacturers may file another petition for trade protection. 3. Tender issuance and auctions MNRE announced in December 2018 that it plans to issue 80 GW 60 GW solar and 20 GW wind of tenders by March 2020. We believe that such large issuance is implausible and not consistent with overall power demand-supply situation or actual land and transmission infrastructure available. A pressure to issue more tenders would see a recurrence of problems witnessed last year – lack of planning poor tender design arbitrary tariff ceilings – resulting in under subscription and cancellations. Successful implementation of the SAUBHAGYA scheme and cyclical power demand uplift before general elections may force some DISCOMs to fast track RE tenders.

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Page 9 © BRIDGE TO INDIA 2019 4. Policy outlook With general elections due in May 2019 we expect little development on policy front in the year. RE has already been falling behind in this government’s policy priorities. If a coalition-based government is formed as widely expected the sector is likely to be pushed back further in the new government’s policy agenda. Some critical amendments have been proposed by the Modi government to the Electricity Act 2003. But we expect no progress of the bill in the winter session of the Parliament. Time is also running out for announcement of a concrete plan on SRISTI or KUSUM schemes. However as the government is under mounting pressure to help farmers before elections it may yet allocate some budgetary allocation to KUSUM scheme. Despite Central Electricity Regulation Commission CERC’s recent decisions granting relief to developers from GST and safeguard duty we expect uncertainty to persist through the year. The DISCOMs do not have the financial capacity to compensate developers upfront and are in any case going to wait for direction from the respective state regulators. 5. Equipment prices and tariffs It is widely believed that module prices will continue to soften through the new year due to oversupply in the global market. There are many estimates of prices falling below USD 0.18/ W in the year. We believe that scope for any significant decline is limited as demand from Europe and US is likely to be strong. Chinese market may also surprise on the positive side which means that prices are expected to stay firm for most of the year. We expect average price of about USD 0.22/ W in the year although there may be some marginal decline at the end of the year. Consequently we expect solar EPC costs to decline only marginally from current levels. Our estimate for utility scale solar EPC cost by year-end is INR 26/ Wp. We see almost no room for bid tariffs to fall in 2019. Tariffs are likely to stay range bound within INR 2.50-3.00/ kWh depending on project location and offtake risk profile. No major change is expected in EPC cost or tariffs for wind power plants. Figure 8: Bid tariff trends INR/ kWh 0 1 2 3 4 5 6 7 8 9 10 2015 4.63 9.33 2017 3.47 2.43 2016 7.79 4.34 2018 3.55 2.44 2019e 3.00 2.50 Winning bid range Weighted average bid Some critical amendments have been proposed by the Modi government to the Electricity Act 2003. But we expect no progress of the bill in the winter session of the Parliament There are many estimates of prices falling below USD 0.18/ W in the year. We believe that scope for any significant decline is limited

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Page 10 © BRIDGE TO INDIA 2019 6. Financing RE projects have been facing debt financing challenges due to increasing cost of debt and tight liquidity in the financial markets. The liquidity situation would probably ease-off by Q2 although financing cost is expected to stay firm throughout the year. Also if no clear way out is found for GST and safeguard duty pass-through lenders would continue to be highly selective in the sector. Many companies including ReNew Acme Sembcorp and Sterling Wilson have announced their IPO plans. Successful IPOs would boost confidence in the overall sector but prospects are unclear due to political uncertainty and stock market volatility. The sector has seen gradual consolidation through both organic and inorganic activity. Project pipelines of leading developers are in the range of 1000 -2000 MW suggesting significant capital raising activity in 2019. Most of the new capital is expected to come from large international pension funds and sovereign wealth funds. But capital raising may face challenges due to squeezed returns and unfavorable risk profile. MA activity is also likely to be subdued due to mismatch in valuation expectations. Successful IPOs would boost confidence in the overall sector but prospects are unclear due to political uncertainty and stock market volatility 7. Conclusion Except for rooftop solar Indian RE is getting stuck in the slow lane. The sector needs fresh thinking and concrete decisive policy action to go up a gear. But that seems unlikely in an election year. On the other hand problems associated with GST safeguard duty BIS quality standards land and transmission constraints etc. look likely to linger for some time. We are looking forward to announcement of the National Storage Mission and rapid progress on floating solar. Two or three successful IPOs would go a long way in boosting market confidence.

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