India: Solar Power Projects: Boosting Solar Power Generation In India

Last Updated: 12 October 2015
Article by Ajay Shaw and Ashish Pahariya

With the success of its flagship solar scheme, the Central Government is keen on promoting generation of solar power to augment the country's generation capacity. The Government's step in this direction has been bolstered by (i) the decreasing capital expenditure required in setting up solar power projects and achieving reduction in cost of the solar equipment; and (ii) increase in economic viability on account of falling solar tariffs which reduces gap in the per unit price of solar generated power in context of power generated from conventional energy. In its recent annual budget, the Government has revised the targeted solar capacity from 20GW to 100 GW to be achieved by the year 2021-22. While the target has been termed as unrealistic by people from various quarters, the Central Government has already embarked on its ambitions to achieve target with release of various schemes in recent months. As per the new schemes, the target capacity will be achieved through 40,000 MW of Rooftop solar projects and 60,000 MW of large and medium scale solar projects. The policy push for development of solar power projects has been going on for a decade. In fact, the National Tariff Policy of 2006 required State Electricity Regulatory Commissions (SERCs) to mandate renewable purchase obligations (RPO). Under the RPO, the distribution companies are required to purchase a certain percentage of their total power requirement from solar projects.

Later in 2008, National Action Plan of Climate Change (NAPCC) set an ambitious target of 15% of total power requirement to be met through renewable sources. The development of solar projects was put on fast track with the launch of National Solar Mission known as Jawaharlal Nehru National Solar Mission (JNNSM) as required by the NAPCC.

SOLAR PROJECTS UNDER THE JAWAHARLAL NEHRU NATIONAL SOLAR MISSION

The JNNSM is an ambitious program of the Ministry of New and Renewable Energy, the Government of India launched in the year 2010 for the development of solar power projects in the form of Solar Photovoltaic (PV) projects and Solar Thermal Projects.

Under JNNSM, NTPC Vidyut Vyapar Nigam Limited (NVVN) (a PSU) as the nodal agency invites bids from parties for development of solar projects. Pursuant to this, Solar Energy Corporation of India enters into a Power Purchase Agreement with the successful bidder for a term of 25 years, which power is further sold to distribution companies for meeting their RPO obligations.

The projects of 3,743 MW capacity have already been commissioned under the JNNSM.

For the next batch of Phase II of JNNSM, the Government has approved setting up of 2,000 MW of solar projects. The projects will be set up with viability gap funding by the Central Government with a pre-defined tariff of Rs. 5.43 per kWh.

The tariff will be subject to escalation by 5 paisa per kWh each year, making it effective levelized tariff of Rs. 5.79 per kWh. However, the viability gap funding will be subject to caps, being Rs. 1.31 crore per MW for the projects under domestic content requirement category and Rs. 1 crore for others. A huge corpus of Rs. 2100 Crore has been earmarked as viability gap funding for the batch of the JNNSM bidding.

SOLAR PROJECTS UNDER STATE POLICIES

Like JNNSM, many State Governments have formulated policies towards promoting the development of solar power projects. In this regard, Distribution Companies (DISCOM) owned by State Governments enter into long term power purchase agreement to meet their RPO obligations pursuant to a tender process. The State Governments offer various waivers and concessions to encourage the project development and reduce burden on the DISCOMs.

SOLAR PARKS

The Solar Parks are sought to be set up, to save project developers from the hassles of land procurement and evacuation worries; and providing economies of scale for construction, operation and maintenance. A Solar Park means a developed project site with all necessary support facilities, where the selected solar power developer can go to and directly set up their project on a plug and play model. The Central Government has framed a separate policy with a plan to set up 25 Solar Parks of 500MW capacity each. This is to be achieved over a period of five years. The procurement of the land shall be the responsibility of the State Government's with a total financial support of Rs. 4,050 Crore by the Central Government. The Central Government will provide financial support of Rs. 20 lakh/MW or 30% of the project cost including Grid-connectivity cost, whichever is lower.

Further, the State Government will appoint the selected developer of the Solar Park as the Implementing Agency who will be responsible for the development and management of the park for a period of 25 years including procurement of all licences and clearances, internal transmission system, grid connection, drainage and water supply. All infrastructural requirements outside the park such as connecting road, provision of water supply, construction electricity, etc. to make the park functional, will be the sole responsibility of the concerned State Government.

However, the setting up of Solar Parks will not ensure power offtake, which will be responsibility of the project developer.

The idea is that the developer who wins a bid under any solar scheme can find ready-made facility for setting up solar equipments for power generation. The developer can tie up offtake of power to be generated in the Solar Park by participating in the tenders for PPA floated under the National Solar Mission or State Solar Mission. The developer can also make their own arrangement to sign up a PPA. However, the scheme makes it mandatory for the State Government to purchase at least 20% of the power produced in the park through its DISCOM. Further, where the State refuses to buy at least 50% power, the park is required to be connected with central transmission utility system or the STU/State Government concerned will have to agree to waive off the wheeling charges or reduce the wheeling charges to affordable level.

The Central Government has already identified potential sites of 20 solar parks in 15 States.

RENEWABLE PURCHASE OBLIGATIONS

In accordance with the provisions of the Electricity Act, 2003 and the National Tariff Policy, 2006, the SERCs have imposed RPO on DISCOMs, captive power consumers and open access consumers. Under this, such power consumers are required to purchase certain minimum percentage of their annual requirement of power from renewable sources including solar projects. The percentage obligations vary from State to State ranging between 0.25% and 10% of the annual consumption. Out of the total percentage of RPO, a specific percentage of power is required to be purchased from solar projects.

Under these RPO obligations, the solar power is purchased at a preferential tariff rate fixed by SERCs or it is purchased under JNNSM or through other State Solar Missions. If an entity cannot purchase solar power to meet its RPO obligations, such RPO Obligations can be met by purchasing Solar Renewable Energy Certificates (as set out below).

RENEWAL ENERGY CERTIFICATES (RECS)

The solar power developer have option to earn credit in the form of RECs. The solar power developer becomes entitled to RECs in the event the solar power cannot be sold at preferential tariff rates. RECs are issued by Renewable Energy Certificate Registry of India to power generators for power from generated from renewable energy sources.

Such certificates are categorised in two categories i.e. Solar RECs which are issued for generation of power from solar energy and Non-solar RECs which are issued for generation of power from other renewable sources of energy.

Such RECs can be sold to the power consumers (i.e. DISCOMs, captive consumers and open access consumers) to enable them to meet their RPO obligations in case such consumers have not directly purchased the requisite percentage of power from renewable energy under their RPO obligations.

The sale can be carried out under a private treaty arrangement or on the power exchange. CERC fixes floor price and forbearance price for trade on power exchanges in such RECs. However, as per the data available, trading in RECs has been very limited (i.e. 30% of the total RECs issued) due to bad financial conditions of the DISCOMs and poor implementation of the RPO Obligations.

CARBON CREDIT CERTIFICATES (CERS)

Like RECs, the Carbon Credit Certificates (CERs) are tradeable certificates. However, CERs are significantly different from RECs, as these are issued and governed by an international convention i.e. Kyoto Protocol under United Nations Framework Convention on Climate Change (UNFCCC). Under Kyoto Protocol, certain developed countries are required to reduce their carbon emissions.

Such reduction can be either met directly or they have option to do it by undertaking carbon emission reduction projects in the developing countries under Clean Development Mechanism (CDM) of Kyoto Protocol. Such obligations can also be met by purchasing CERs form developing countries.

Under CDM framework, a project in India which leads to reduction of carbon emissions is eligible for the grant of CERs. One unit of CER represents reduction of one ton carbon dioxide or the mass of another greenhouse gas with a carbon dioxide equivalent (tCO2e) equivalent to one ton of carbon dioxide.

Such CERs can be sold to entities in the developed world which have obligations to reduce their carbon emission under Kyoto Protocol. Thus, this creates an additional revenue stream for the projects which qualify from the grant of CERs under the CDM.

Both bid based and independent solar power projects are eligible for the grant of CERs provided that the project qualifies under the CDM framework. In India, the issuance of CERs by UNFCC is done through National CDM Authority. It is important to highlight that a project entitled to the benefit of RECs can receive CERs.

FISCAL INCENTIVES

A solar power project which begins to generate power before March 31, 2017 is entitled to income tax holiday for 10 years. The Central Government has also granted various concessions in the form of waiver/reduction of excise duty and custom duty on manufacture and import of solar equipment, respectively.

Further, various State Governments are also providing various tax incentives i.e. exemption from electricity duty, concession in Sales Tax/VAT, stamp duty exemptions, etc.

LICENSES AND PERMISSIONS

Key licenses and permissions required for solar power projects are as follows:

  • Environmental Consents: Environment consents are required from State Pollution Control Board under the Air Act, the Water Act and Hazardous Waste Management Rules.
  • Land Conversion Approval: In the event, as per the present sanctioned uses of the proposed land of the project does not cover development of such power project, the land conversion is required from local authority. However, many State Governments have either waived this requirement or are giving deemed conversion status to the land used for solar projects.
  • Approval for Water: For solar thermal power project, a borewell may be required for water. An approval is typically required for such borewell from local authority.
  • Approval from the Transmission Company for grid connectivity.
  • Registration with Renewable Energy Certificate Registry of India for RECs in case preferential tariff is not received under from the DISCOM under RPO of the DISCOM.
  • Registration under CDM mechanism with National CDM Authority and UNFCCC for RECs.

PROPOSED CHANGES IN TARIFF POLICY

To ensure greater push to the development of solar and other renewable projects, the Government is planning to amend the National Tariff Policy of 2006. As per the proposed changes, the promotion of renewable generation sources is being identified as a key objective of the policy. To balance the environment impact of coal/lignite projects, setting up of a renewable energy project equivalent to 10% of the generating capacity of thermal project is being made mandatory.

The power generated from such renewable energy project will be allowed to be bundled together with thermal power for the purpose of determination of tariff and onward sale. Further, the purchase of solar power under RPO obligations are proposed to be increased to 8% from existing 3%, by the year 2019. Further to streamline procurement of renewable energy by distribution companies, the Central Government is planning to standardize bidding framework. Inter-state transmission of renewable power will be exempt from transmission charges.

FINANCING

Off late, financing of projects has become very difficult considering most of the public sector banks have reached sectoral lending limit for the power sector mainly due to thermal and gas based power plants being stuck and not being able to service the debt availed by such projects. To give push to development of projects generating renewable energy, the Reserve Bank of India has recently added renewable energy sector within the priority sector lending, for a loan upto Rs. 15 crore per project. The Central Government is also pushing for international and multilateral finance from World Bank and Asian Development Bank to finance solar projects. It has recently inked an agreement with the Export-Import Bank of the United States to finance import of solar equipments from USA.

CONCLUSION

The development of solar projects has been fraught with many issues as it requires immense support of the State to make development of solar projects sustainable and economical. The developers have been grappling with land procurement and grid connection delays. Further, ambiguous state policies have made the task of setting up the project a tricky one. Further, the lending to renewable projects under the priority sector lending does not resolve the larger issue of the funding difficulties that the sector is faced with, as it has been capped at Rs. 15 crore per project. The setting up of solar parks may help in overcoming issues relating to land, grid connectivity and licences. Further, the proposal to enact a separate legislation i.e. National Renewable Energy Act paves the way to fill-up the regulatory void and streamline the development activity as this sector has to be supported by the legal, regulatory and policy framework of the State.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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