Gujarat Solar Power Project (RRP IND 54035)

SECTOR OVERVIEW

A. Background

1. Sector. India is ranked as the third-largest electricity producer in the world after the
People’s Republic of China and the United States,1 with an installed capacity of 368.8 gigawatts
(GW) as of 31 December 2019.2 Average per capita energy consumption for India was, however,
1,181 kilowatt-hours (kWh) in fiscal year (FY) 2019, the lowest among the so-called BRICS
countries (Brazil, Russia, India, the People’s Republic of China, and South Africa) and estimated
at one-third of the global average.3 During FY2014–FY2019, electricity consumption grew at an
annual rate of 4.9%. By comparison, gross domestic product growth averaged 7.3% annually
during the same period. Furthermore, electricity consumption is expected to grow at an annual
rate of 4–4.5% over the next 5 years (FY2020–FY2024).4

2. Energy deficit. Base load and peak load deficits have been decreasing in India since
FY2012. In fact, in FY2019, the base load deficit (0.6%) and the peak load deficit (0.8%) were at
their the lowest levels since 1992.5 Factors contributing to the improving deficit scenario include
(i) addition of electricity generation capacity of 182 GW from 2012 to 2019, (ii) adequate coal
stocks and transmission facilities, (iii) muted growth in electricity demand because of weak
industrial growth, and (iv) increased government focus on energy efficiency.

3. Energy mix. As reported by the Central Electricity Authority, the total installed capacity in
India was 368,788 megawatts (MW) as of 31 December 2019. The total power generation
capacity and share of energy sources as of 31 December 2019 are shown in Table 1.

Table 1: Installed Capacity by Resource

Capacity Capacity Share of Energy
Resource (MW) (%) Sources (%)
Thermal (coal, gas, oil) 230,701.0 62.6 75.0
Hydro 45,399.0 12.3 12.5
Nuclear 6,780.0 1.8 3.4
Renewable energy resources 85,908.0 23.3 9.1
Total 368,788.0 100.0 100.0
MW = megawatt.
Source: Central Electricity Authority.

4. Although thermal power accounts for 62.6% of the installed capacity, renewable energy
has been a key driver of growth. Renewable energy’s share of total generation capacity is
expected to increase to 40% by 2030. This is in line with the Government of India’s target of
achieving 175 GW of renewable energy capacity by 2022. India added 84 GW of power generation
capacity during 2016–2019, of which renewable energy accounted for 48 GW (about 57%). India
ranks fifth in installed renewable energy capacity globally.6

5. Gujarat. As of December 2019, Gujarat had an installed power capacity of 34.7 GW, of
which 10.2 GW came from renewable sources (2.9 GW solar capacity). After Karnataka and Tamil

1 Enerdata. 2019. Global Energy Statistical Yearbook 2019.

2 Government of India. Ministry of Power. Central Electricity Authority.
3 The fiscal years in India end on 31 March, so FY2019 refers to the year ending 31 March 2019.
4 Crisil Research.
5 Government of India. Ministry of Power.
6 Economic Survey 2018–19.
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Nadu, Gujarat has third highest renewable energy capacity installed. Gujarat is a power surplus
state, with nil base load and peak load deficits.

6. Capital cost and tariff. With the fall in solar module prices and balance of systems,7 there
has been a significant reduction in solar power tariffs. Larger individual projects (250–500 MW)
have led to economies of scale and have attracted larger developers with more efficient
operations. Large solar parks are being promoted whereby land is leased to developers at very
low cost and transmission infrastructure is shared across a larger capacity with multiple
developers, thereby reducing the risks for developers and bringing down the cost of capital. This
has led to very competitive reverse bidding8 for solar tenders.

7. After reaching a low of ₹2.44 per kilowatt-hour (kWh) in July 2018, the solar tariff trended
up and averaged ₹2.67/kWh for FY2018–2019 and FY2019–2020 (through December 2019).
Furthermore, the Ministry of New and Renewable Energy of the Government of India has removed
the tariff caps for solar and wind tenders in March 2019, which will further boost auction activity
in the renewables segment.

8. Regulatory framework. The regulatory framework that governs the renewable energy
industry in India comprises three key acts and policies: the Electricity Act, 2003; the Electricity
Policy, 2005; and the Tariff Policy, 2006.

B. Sector Challenges

9. Customs duty. In July 2018, the Government of India imposed a safeguard duty on solar
cell imports from the People’s Republic of China and Malaysia for a period of 2 years—25% from
30 July 2018 to 29 July 2019, 20% from 30 July 2019 to 29 January 2020, and 15% from 30
January 2020 to 29 July 2020. As a result, imports of solar cells into India decreased from $3.83
billion in FY2018 to $2.15 billion in FY2019 (imports were $1.4 billion for the first 7 months of
FY2020).9 Given India’s inadequate domestic manufacturing capability and capacity of solar
components, this drop in solar cell imports resulted in reduced solar capacity additions. Annual
solar capacity additions fell to 7.1 GW in FY2019 as compared to 9.4 GW in FY2018. For projects
affected by the safeguard duty, increased project costs attributable to the duty can be recovered
through a tariff increase.

10. The union budget of the Government of India for FY2021, has proposed a 20% basic
customs duty on imported solar cells and modules; however, this duty had not been promulgated
as of February 2020.

11. Delays in receivables. Power distribution in India is dominated by state-owned electricity

distribution companies (DISCOMs or offtakers). A power project can enter into a power purchase
agreement (PPA) with either central or state offtakers. The central offtakers, Solar Energy
Corporation of India (SECI) and NTPC Limited, are financially strong and creditworthy. However,
the financial health of many of the state DISCOMs has been a cause for concern as their losses
have mounted because of high aggregate technical and commercial (AT&C) losses and failure to
recover cost of power sold. As a result, these have resorted to delaying payments to developers.
The average payment cycle for state DISCOMs as of February 2020 was about 4–5 months–and

7 The components and equipment that move energy produced by solar panels through the conversion system which
in turn produces alternating current (AC) electricity.
8 An auction where the developer who quotes the least price to sell electricity is selected.
9 V. Petrova. 2020. India Considering Extending Safeguard Duty on Chinese PV Imports - Report. Renewables Now.
07 January.
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in some cases (e.g., in Andhra Pradesh, Telangana and Tamil Nadu states), the delay was about
10–12 months.

12. State offtaker, Gujarat Urja Vikas Nigam Limited (GUVNL) is a financially strong
counterparty, on par with the central offtakers, and has a consistent track record of making timely
payments toward power purchases. It has negligible outstanding payments owed to renewable
energy projects. GUVNL’s operating performance is robust and its AT&C losses, at 8.9%, are
much lower than the country average of 19.7% as of December 2019. GUVNL has a surplus of
₹0.03/kWh between average revenue realized and average cost of supply, whereas the average
for the entire country is a deficit of ₹0.33/kWh as of December 2019.10

13. Renegotiation of PPAs. Andhra Pradesh DISCOMs issued notice to developers for
renegotiation of PPAs entered into at feed-in tariffs11, which were perceived by the state
government to be awarded at higher tariff levels than the present tariffs in the renewable energy
sector. Although the high court issued a stay order, this has adversely impacted investor
confidence.

C. Sector Outlook

14. Government initiatives: structural changes. The government identified three key risks
that limit the growth of renewable energy—the poor credit quality of DISCOMs, land acquisition
difficulties and transmission bottlenecks. To mitigate payment risks, the government created a
strong, centrally sponsored entity in SECI and mandated that SECI and NTPC Limited act as
intermediaries. The Government of India, the Reserve Bank of India (RBI), and state governments
entered into a tripartite agreement to serve as a payment security mechanism for SECI and NTPC
Limited in February 2017. In the event of payment delays and/or default by DISCOMs, the RBI
can deduct funds from the central government’s financial allocation to the states. In addition, the
government in 2015 launched Ujwal DISCOM Assurance Yojana (UDAY), a financial and
operational restructuring scheme, that aims to improve the weak financial health of state
DISCOMs.

15. To mitigate land acquisition and transmission risks, the Ministry of New and Renewable
Energy is promoting the establishment of solar parks with pre-developed infrastructure. In
addition, to improve transmission infrastructure, grid capacity additions are planned under two
main schemes: the Green Energy Corridor Scheme and Renewable Energy Zones, both of which
are to be implemented by FY2022. These will add about 80 GW of transmission grid capacity to
existing grid capacity of about 24 GW for renewable energy, taking total grid capacity to more
than 100 GW.12

16. Ujwal DISCOM Assurance Yojana. The key components of the UDAY scheme are:
(i) state governments take over financial liabilities of their DISCOMs in phases, (ii) operational
efficiency is improved through reduction in transmission and distribution losses and tariff
rationalization, and (iii) states meet their renewable purchase obligations. Thirty-two states and/or
union territories (out of 36 in India) have joined the scheme so far.

10 Government of India. Ministry of Power. Ujwal DISCOM Assurance Yojana.

11 A policy mechanism to promote investment in renewable energy by offering long-term contracts and guaranteed
pricing to renewable energy producers.
12 CRISIL Research.
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17. Since the launch of UDAY, there have been improvements in the operational and financial
indicators of DISCOMs, and DISCOMs continue to improve financially in most states. Key
improvements are: (i) AT&C losses have been declining continuously and were 19.7% as of
December 2019 as compared to 26.6% in FY2012, (ii) the deficit between average revenue
realized and average cost of supply declined from ₹1.25/kWh in FY2012 to ₹0.27/kWh in FY2019,
and (iii) combined losses for DISCOMs were reported at ₹280 billion in FY2019, down from ₹516
billion in FY2016.

18. Growth outlook. The sector’s growth will be driven by several critical factors. First, India
has the advantage of having one of the highest solar irradiances13 globally. Second, the price of
solar panels has been falling because of technological improvements, driving down tariffs. Solar
tariffs were about ₹12.0–₹13.0/kWh in 2011, falling to ₹2.5–₹2.7/kWh in 2019, making it highly
competitive compared with conventional sources of energy. Third, larger individual projects (250–
500 MW) are being awarded, which leads to economies of scale and attracts larger developers
(para. 6). And lastly, large solar parks are being promoted (para. 6). The overall growth prospects
for solar power in India remain robust. Capacity additions from solar power accounted for an
estimated 27.2 GW during FY2014–2019. Another 51–53 GW of solar capacity is expected to
become operational by FY2024 (footnote 4). Strong momentum is expected to continue as a result
of the government’s thrust on renewables, with the aim of providing universal household
electrification, supporting an aggressive tendering roadmap, introducing new technologies, and
attracting healthy global investor interest.

D. Role of the Private Sector

19. Total installed energy generation capacity from renewable resources was 85.9 GW as of
31 December 2019, comprising 37.5 GW of wind power, 33.7 GW of solar power, 10.0 GW of
biomass power and cogeneration, and 4.7 GW of small hydro power–the private sector’s share
was 95%, while the states’ share was 3% and the central government’s share was 2%. In FY2019,
8.7 GW of renewable capacity was added, with solar contributing 7.1 GW and wind 1.6 GW. The
leading independent power producers in the solar power sector are ACME, ReNew Power
Ventures Private Limited, Azure Power, Adani Green Energy Limited, Tata Power Renewable
Energy Limited, Greenko and Avaada Power.

Table 2: Solar Portfolios of Key Players

Operational Under implementation Total
Company (MW) (MW) (MW)
Acme 2,900 2,600 5,500
Renew Power 2,160 1,200 3,360
Azure Power 1,798 1,017 2,815
Adani 2,148 497 2,645
Avaada 665 1,749 2,414
Tata Power 1,694 700 2,394
Greenko 1,358 180 1,538
MW = megawatt.
Source: Crisil Research.

20. Asian Development Bank’s Experience. The Asian Development Bank (ADB) has been
significantly involved in the renewable energy subsector of India. For the solar power industry in
particular, ADB’s past approvals include (i) a $48 million debt facility for the Dahanu Solar

13 Measurement of solar power and the rate at which solar energy falls onto a surface.
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Project;14 (ii) a debt facility of up to $103 million for the Rajasthan Concentrating Solar Power
Project;15 (iii) a $100 million debt facility to Hindustan Power;16 (iv) a $100 million debt facility to
ACME Power;17 (v) a $50 million equity investment in ReNew Power Ventures;18 (vi) a $50 million
equity investment in Welspun Renewables;19 (vii) a $175 million debt facility for the Mytrah Wind
and Solar Power Development Project;20 (viii) a $195 million debt facility for the ReNew Clean
Energy Project with another $195 million from ADB administered Trust Fund, Leading Asia Private
Infrastructure Fund, LEAP;21 (ix) a $100 million debt facility for the Ostro Kutch Wind Project;22
(x) a $50 million equity investment in Avaada Power ($25 million from ADB and $25 million from
LEAP);23 (xi) a $500 million debt facility for Powergrid Green Corridor Project;24 and (xii) a $2.0
million equity investment25 and a $6.0 million debt facility26 in Simpa Networks.

21. To support the renewable energy sector in India, ADB has also provided sovereign-
guaranteed loans to (i) Power Grid Corporation of India Limited,27 (ii) Punjab National Bank,28
(iii) India Infrastructure Financing Company,29 (iv) Gujarat Solar Power Transmission,30
(v) Rajasthan Renewable Energy Transmission Investment Program,31 (vi) Clean Energy Finance
Investment Program,32 and (vii) Solar Transmission Sector.33

14 ADB. India: Dahanu Solar Power Project.

15 ADB. India: Rajasthan Concentrating Solar Power Project.
16 ADB. India: 145 Megawatts Grid-Connected Solar Project.
17 ADB. India: ACME-EDF Solar Power Project.
18 ADB. India: ReNew Power Investment Project.
19 ADB. India: Solar and Wind Power Development Project.
20 ADB. India: Mytrah Wind and Solar Power Development Project.
21 ADB. India: ReNew Clean Energy Project.
22 ADB. India: Kutch Wind Project.
23 ADB. India: Solar Project.
24 ADB. India: Green Energy Corridor and Grid Strengthening Project.
25 ADB. India: Off-Grid Pay-As-You-Go Solar Power Project.
26 ADB. India: Off-Grid Prepaid Solar Leasing Project.
27 ADB. India: Green Energy Corridor and Grid Strengthening Project (Guaranteed by India).
28 ADB. India: Solar Rooftop Investment Program (Guaranteed by India).
29 ADB. India: Accelerating Infrastructure Investment Facility.
30 ADB. India: Gujarat Solar Power Transmission Project.
31 ADB. India: Rajasthan Renewable Energy Transmission Investment Program.
32 ADB. India: Clean Energy Finance Investment Program.
33 ADB. India: Green Energy Corridor and Grid Strengthening Project (Guaranteed by India).