Mercom Exclusive: Elimination of Key Subsidies Adds to Challenges Faced by Rooftop Solar in India
February 7, 2017
The government of India in 2014 revised the national solar installation target from 22 GW to an aggressive 100 GW by 2022. The target was split between large-scale solar (60 GW) and distributed solar (40 GW). Though large-scale is seeing exponential growth year-over-year, distributed solar largely consisting of rooftop and ground-mounted captive projects of up to 1 MW has lagged with just over 600 MW installed as of December 2016.
The sector currently faces several challenges and bottlenecks which must be removed to achieve the necessary growth for the rooftop sector to take off.
Apart from regulatory issues, other challenges facing the sector include lack of awareness among consumers, high upfront costs, and lack of consistent policy support from the states.
While over 20 states have some net-metering policy, very few states have demonstrated functioning net-metering programs. In tandem with the Ministry of New and Renewable Energy’s (MNRE’s) 40 GW goal, most states have announced rooftop targets to reflect those goals, but few are executing on a serious plan to achieve these targets.
The poor financial health of power distribution companies (DISCOMs), have contributed to an unwillingness to actively subsidize rooftop installations knowing that DISCOMs will lose their most important customers and revenue, putting them into a deeper hole. Accelerated depreciation (AD) rates will come down from the current 80 percent to 40 percent starting April 1, 2017, making things tougher. The 10-year income tax holiday under section 80-IA was not reinstated in the recent budget and will end on March 31, 2017.
In a recently held MNRE review meeting, many states flagged the issue that 30 percent subsidy currently available is only for individuals and institutions registered under society act and NGOs, and no subsidy is provided for government buildings except for a few incentives.
Regulatory actions need to be taken by states and union territories to ensure uniformity in maximum allowed rooftop solar (RTS) capacity with respect to sanctioned load, exemption from Certificate of Employment Intermediaries (CEI) for small RTS systems, net/gross metering regulations, and mandatory solar provisions.
Rooftop Installer Perspectives
Installers are reluctant to participate in the rooftop market as policies and their implementation is not consistent in all states and consumer participation has not been up to expected levels.
Securing project financing has been a challenge as banks are not sure whether rooftop solar is financially viable at current quoted low rates.
“Net metering is not that difficult to implement,” said a source at Vivaan Solar. “All it requires is coordination between the state electricity regulatory commissions, DISCOMs and state nodal agencies.” A lack of working net-metering policies and their implementation is a major hurdle for the sector, added another developer.
The sector is facing skepticism from government bodies due to the high cost of energy generated from rooftop solar systems, stated a source at Madhav Infra. The poor condition of DISCOMs aggravates the situation as they are not willing to install costly, net-metering systems, added the source at Madhav Infra.
In a developing country, affordability in residential sector is much lower than in developed countries. People are less aware of government policies and the available incentives, stated Mercom’s source at Rays Expert.
The government should help by setting up consumer awareness and guidance centers to educate on the placement and functioning of meters, processes for metering and interconnection with the grid as well as maintenance, stated another developer.
Funding an initiative like 40 GW of rooftop by 2022 is a challenge, given India’s inadequate financing capabilities. Even the finance ministry has explicitly raised concerns about funding such ambitious programs; the government should facilitate easy financing in the sector, stated a source at Azure Power.
Rooftop land allotment and power purchase agreement (PPA) signing are long complicated procedures which lead to delays in project commissioning, stated the source at Rays Experts. If higher renewable purchase obligations are set for rooftop solar, it will push the sector in a positive way, added the source.
“The industry can get to 40 GW in rooftop solar only if favorable tax regimes and policy regimes are enforced strictly. Many state electricity agencies and DISCOMs do not have strict timelines or monitoring of timelines to install net meters once the application have been submitted and if they do, they aren’t strictly enforced. This leads to a lot of back and forth and eventual discouragement for investors. Some states still have backward net metering policies like Tamil Nadu which restricts net metering to the highest consumers of power, industrial and institutional customers. Since commercial and industrial establishments have already reached grid parity in multiple states, the will to enforce integration into the grid is the missing ingredient to accelerating rooftop solar success at this point in time,” stated Mercom’s source at SolarTown.
What’s Being Done
To promote rooftop solar, Rs.50 billion (~$734.37 million) has been approved for implementation of grid-connected rooftops systems up to 2019-20.
In May 2016, the World Bank approved a $625 million (~Rs.42.01 billion) loan to support the Government of India’s program to generate electricity from widespread installation of rooftop solar PV. The Board also approved a co-financing loan of $120 million (~Rs.8.06 billion) on concessional terms and a $5 million (~Rs.336.11 million) grant from Climate Investment Fund’s (CIF) Clean Technology Fund.
Further, the World Bank approved a grant of $22.93 million (~Rs.1.55 billion) to enhance installed capacity of grid-connected solar rooftop and strengthen the capacity of relevant institutions for widespread installation across India.
To provide necessary financing for development of rooftop solar projects, the Government of India and the Overseas Private Investment Corporation (OPIC), the U.S. government’s development finance institution, launched the US-India Clean Energy Finance (USICEF) Facility Initiative with $20 million (~Rs.1.36 billion) in June 2016.
In June 2016, the U.S.-India Catalytic Solar Finance Program (CSFP) was launched to raise $40 million (~Rs.2.69 billion) from U.S. foundations and the Government of India. The fund will be utilized to invest in India’s solar sector with a focus on off-grid and rooftop solar. The CSFP is expected to mobilize close to a billion dollars in capital.
In the special category states and union territories of Sikkim, Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Lakshadweep and North Eastern states, central financial assistance (CFA) is provided for up to 70 percent of solar project costs. For general category states, CFA provided is 30 percent.
Through soft loans and tax credits, the government is trying to boost growth in the sector, stated an MNRE official. The UDAY program (Ujwal DISCOM Assurance Yojana) has covered over 90 percent of DISCOM debt so DISCOMs will be more willing to invest in net-metering systems and the solar rooftop sector, added the MNRE official.
The MNRE and state nodal agencies have been providing subsidies and incentives to help the sector grow. Recently, the MNRE announced incentives for DISCOMs to the tune of Rs.3.75 million (~$55,078)/MW to support rooftop solar.
“This will empower the DISCOM to focus on rooftop solar as the incentive/MW is very attractive,” stated an official at Uttarakhand Power Corporation (UPCL).
“We are not able to implement policies and programs on time and as expected, as we are financially tied down,” stated an official at Madhya Pradesh Madhya Kshetra Vidyut Vitaran Company.
When asked about the deadline for the end of subsidies such as Tax Holiday and 80 percent accelerated depreciation, and incentive program coming near, an MNRE official said, “Reviews are done to provide subsidies and incentives for each fiscal period. There is no need to panic as after reviewing, a new target will be set and incentives and subsidies will be announced for targeted capacity. In some states the subsidies can be more than in others,” stated the MNRE official.
The MNRE official also added that the Ministry of Finance has issued an advisory to all public-sector banks to encourage home loan and home improvement loan seekers to install solar rooftop systems and include the cost of such equipment in their home loan proposals.
“If the MNRE thinks there is a need to change the current assistance program, implementation will be done keeping in mind the requirements of the sector,” stated the MNRE official, when asked about the changing incentives.
For solar rooftop to grow, policies have to be made keeping in mind the dissimilarities between rooftop solar and utility-scale solar. Government policies should encourage power generation through rooftop systems at the point of consumption rather than only providing capital subsidies.
One approach could be to provide generation-based incentives for end-users including household segments which can drive growth of rooftop without putting additional burdens on distribution and transmission infrastructure, while at the same time achieving targets for renewable energy installations, stated Mercom’s source at Rays Experts.
“The government should also remove bottlenecks to getting clearances, certifications and subsidies as delays lead project commissioning delays which ultimately leaves a sour taste with installer that lose more than expected,” commented Mercom’s source at Hero Future Energies.
According to Mercom’s India Solar Project Tracker, as of December 2016, 605 MW of rooftop solar has been installed. In 2016, SECI auctioned 500 MW and tendered 1,000 MW of rooftop solar. A total of 3,044 MW of rooftop solar was approved by the MNRE.
Indian states will have to implement policy changes through nodal agencies to achieve rooftop targets. All states will have to show a conscious effort; for this to happen MNRE must facilitate ease of constructing and commissioning rooftop systems.
“Achieving 100 GW by 2022 is the primary goal of the government; whether rooftop makes up 40 GW of it is secondary. Every country is different and the markets will eventually decide where the opportunities lie and move towards installations which offer the most returns with the least amount of risk. It will not be considered a failure if India comes close to achieving 100 GW by 2022 with rooftop making up only 10-15 GW. The policy makers should not dilute their efforts by trying to put together a patchwork of incentives and subsidies which will eventually be ineffective and instead focus on areas that are working – like large-scale projects – and make it better. The states will not go against their own financial interests and many feel that they are being pulled from one direction to another and unable to focus and execute on any,” commented Raj Prabhu, CEO and Co-Founder of Mercom Capital Group. “The government cannot take away the most important incentives and expect to reach these aggressive goals – that is counterintuitive. The goal of current subsidies/incentive structure for rooftop solar seems to be minimizing subsidy costs to the government and is not structured to spur growth,” further stated Prabhu.
Image Credit: SolarTown Energy Solutions Pvt. Ltd.