Proposed Policies Attractive, But Will They Materialise?

BMI View : The Indian government's proposed policies to help develop the country's solar energy sector should materially reduce costs for solar developers in India if implemented. At present, we believe that the government will be able to secure the funding necessary to support these regulations. That said, we do see a number of challenges and problems for these proposed policies, including a lack of regulatory frameworks at a state level. Additionally, the business environment in India continues to be challenging for solar developers, and proposed policies could still be changed in the near future.

On December 05 2012, the Indian government released a draft policy outlining the country's goal to build 9,000 megawatts (MW) of grid-connected solar capacity by 2017. According to the draft, the Ministry of New and Renewable Energy (MNRE) was planning to develop 3,600MW of this capacity on its own, with the remaining 5,400MW by the individual states. The draft also proposed several incentives for solar projects which we have listed below:

  • Grants for solar projects: MNRE proposes to subsidise up to 40% of the upfront cost of new solar projects. Grants would be paid in stages as projects reach milestones to prevent developers from bidding too low and ignoring plant performance.

  • Imported equipment: MNRE proposes to loosen curbs on the purchase of equipment from overseas to reduce project development costs.

  • Local equipment: MNRE proposes to subsidise selected locally-manufactured solar products to reduce project costs.

We believe that these proposed policies would materially reduce costs for solar developers in India should they be implemented. The majority of renewable energy projects in India are undertaken by small developers that have to rely on funding from the private sector. According to the Climate Policy Initiative and the Indian School of Business, interest rates for renewable projects in India are significantly higher than in the US or Europe, thus increasing the cost of renewable projects in India by up to 32%. MNRE also said that investors and financiers have been relatively reluctant to provide funding for solar energy due to a 'lack of confidence in the technology'. As such, we believe that the grant and lower equipment costs could greatly reduce capital requirements for solar projects, making it more viable for small developers to undertake projects.

At this juncture, we believe MNRE will be able to secure the funding necessary to support its proposed regulations. MNRE is proposing to fund the grants with revenue from the National Clean Energy Fund (NCEF), which imposes a tax of INR50 (US$0.92) per metric tonne of coal produced by various coal producers. The fund was started in July 2010 and is estimated to have collected some INR50bn (US$923mn) since its inception, according to The Financial Express. Industry sources also estimate that the fund collects INR30-40bn per annum and we believe that this should be sufficient to bankroll the proposed grants.

Challenges To The Programme

In our opinion, MNRE's draft policy is likely to encounter several problems. Firstly, we are unsure if MNRE's plan for 5,400MW of solar capacity to be developed by the individual states is feasible. The majority of Indian states have not yet created regulatory frameworks for solar energy, with only the states of Rajasthan and Gujarat having credible and proven frameworks (see our online service, October 01 2012, ' Economic Feasibility Trumping Government Policies'). As there is a limit on the amount of solar capacity that can be integrated into the grid - for stability purposes - Rajasthan and Gujarat will be unable to meet the whole 5,400MW quota by 2017, and the other states would have to play a part in meeting the target. We believe this could be difficult to achieve if the other states do not introduce the necessary regulations.

India - Feed-In Tariffs
Sector Technology Scale Province Tariff
Source: BMI's Feed-In Tariff Database.
Solar PV na 17.91
Solar Thermal na 15.31
Solar PV Gujarat 15
Solar Thermal Gujarat 11
Hydro <3MW na 19% ROE
Biomass Rankine Cycle na 19% ROE
Biomass Gasifier na 19% ROE
Biogas na 19% ROE
Wind Andhra Pradesh 3.5
Wind Gujarat 3.5
Wind Karnataka 3.4
Wind Kerala 3.14
Wind Madhya Pradesh 4.03-3.36
Wind Maharashtra 3.5
Wind Rajasthan 4.25-4.5
Wind Tamil Nadu 3.39
Wind West Bengal 4

We also highlight that the attractiveness of MNRE's proposals to private investors could be undermined by the country's weak institutional strength. According to our methodology, institutional strength is measured against parameters such as the speed of opening and registering businesses, receiving construction permits, the pervasiveness of corruption and intellectual property protection. India scores relatively poorly based on these metrics. For instance, a number of high-profile corruption scandals have surfaced in recent years - most notably the ongoing 2G spectrum auction affair, which is estimated to have cost the fiscal coffers US$40bn in losses. We have also seen a major logjam in terms of construction approvals and project delays. According to data from the Centre for Monitoring Indian Economy, private sector projects that have stalled in their implementation phase accounted for 6.2% of outstanding project value in Q112 - marking a 7½-year high - while stalled public sector projects have surged to the highest on record at 3.4% of total project value.

Institutional Weakness
India - Business Environment Ratings Versus Global Average

Lastly, we point out that these measures have not yet been approved by the country's legislature, a downside risks given India's convoluted political landscape. India's ruling coalition, the United Progressive Alliance, is extremely reliant on smaller non-coalition partners following the departure of its erstwhile ally, the All-India Trinamool Congress (TMC). This has added an extra layer of complexity to the country's policymaking process, and MNRE's proposal to tap into the NCEF could prove extremely unpopular. Therefore, we believe there is scope for the draft to be materially changed or even rejected altogether.

This article is tagged to:
Sector: Infrastructure, Power, Renewables
Geography: India

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