Ep 4 Why the solar C&I market in India is one of the biggest in the world with Vinay Rustagi

Ben: Welcome to sustainable energy Asia. A Podcast hosted by benjamin Pan Hi everyone welcome to the show I'm Benjamin. And today my guest is Vinnie rose. managing director at breeze to India a consultancy and research from focusing on India and when your boss markets. We are going to speak about the solar CNA market in India. CNI standing for commercial and industrial.

Which is basically all the solar project that have as enough taker or a poet. Purchaser of corporate sync about Google purchasing, renewable power for its data center. I reckon it is quite a technical subject, whoever it is really important to understand for two reasons. One, the CNA market has been developing across the world, expected to becomes a new area of growth in the renewable sector.

Second. Due to India regular Dory specificity india is currently the biggest CNA market in the world. And you see the EAs very high growth potential in this markets. Before we start the show. I would really appreciate if you can take a minute to rate and leave a comment on the show on your book, aspirator. This helps the listeners. Nurse to discover the ship thanks.

Hi, Vinny. Welcome to the show. Could you introduce bridge string? Yeah. And speak about how you came to lead the team after carrier in banking

Yeah. Sure, man. And thanks for having me. It's a pleasure to talk to you. I worked for about 17, 18 years in banking, in multiple geographies. And then my last stint was with standard chartered bank in india financing, renewable the project. And it was then I can say that there was a little bit of a light bulb moment.

it was quite obvious that renewables even though it was quite small back in 2011 but it was going to grow very, very rapidly given the various in a detector issues India. And then at the same time, I was also kind of keen to branch out and do something own after having worked in large international organizations for many years. So basically the two things came together. I felt that there was really very little understanding of the sector in India. But the growth opportunity was immense. So I wondered if I could be the one who could kind of set a strong knowledge-based entity like this and help international Indian companies to grow the business.

Thank you, Nate. Today's discussion is CNI market in India. Could you just as an introduction, discuss the role or solar generation in the energy mixed in India, it highlights the key policy of the government.

Vinay: Yeah. So solar isn't very, very compelling source of power for India as an economy reason being India is very heavily dependent on coal about 75% of our total power comes from coal. And even though we have enough coal reserves in India but we still remain dependent on inputs. So every year we are importing about a hundred to one 50 million tons of coal from other countries for the power sector. Now we don't have enough domestic or in gas because that again is important mainly from overseas. Hydro and nuclear are not really mainstream viable options because they just have such long distance periods and the cost is competitively quite high. So, if you look at the total energy mix, it is very important to branch away from the fossil fuels, particularly coal, and there solar its modular installation, falling Costco obviously environmentally friendly et cetera, becomes immediately the most obvious choice for the government and that is exactly how things have played out. Solar today now accounts for about 50 to 60% of total power generation capacity, which is added every year in the country. So on an incremental basis solar has already taken the lead over all the other sources of power generation. So the inventors really are one clean sources of energy, second energy independence, you know, not being overly dependent on other countries. And then hopefully there are some other benefits, shortage, gestation period. Now modular nature means that there are consumers who can become energy independent by installing rooftop solutions at their homes or factories et cetera. So I think it makes all these factors has basically added to the attraction of solar.

Ben: Thank you. And if we dive deep in our subreddit, which is sort of CNI market in India I like to. And sometime to define this market, who I'm looking at it is there's a demand side, so which is CNI, so commercial, industrial and then the supply side. So if you will start defining what do we mean by commercial industrial regarding solar. And then we can go and look at the supply side.

Vinay: Yeah. sure. So CNA is essentially the entire corporate or the business sector in India essentially excluding the residential and the cultural parts of the economy. Now it is a very large part of the power sector, because if it comes for 51%, Of total consumption in India. The interesting thing is that because the tariff structure in India is rooted in old times with a very socialist bent of mind. So what that means is that the residential and the agriculture consumers are heavily subsidized. By the corporate consumers. So the corporate consumers are paying a much higher tariffs for consumption of grid power to subsidize the other consumers. Now that introduces a dynamic where certainly the cost of part for these consumers is very high. And obviously every consumer, every corporate entity is trying to reduce their cost base to become more and more competitive. And in the last six, seven years there, they found that by building rooftop, solar, or even offsite large solar projects they can actually reduce the cost of power so commercial attractiveness of solar has played a very important role in the growth of CNI solar market. And then increasingly over the last two to three years, but it's really kind of bolstered the market again is the whole de-carbonization agenda with many companies are increasingly saying that they want to reduce their carbon emissions. So these two factors together have basically really led to a huge quart in demand and CNI solar in India today actually is one of the largest such markets anywhere in the world for that reason.

Ben: Is that actually a really good transition towards the supply side of the market. So you mentioned previously there are onsite project and open access projects. Could you just spend some time to define those two terms and i'm thinking specifically about open access projects, because those projects are quite specific to india.

Vinay: Sure. So, you know, the consumers have basically when it comes to buying solar power, they essentially have two choices. One, they can install as much solar capacity onsite so that is typically on the rooftop where it can also be, if they have a car park some companies will have large scale land inside the premises so they can set up ground mounted projects onsite as well. But most consumers by and large don't have enough space on site. Which means that they can only need about five to 10% of the total power consumption. From a rooftop, solar or other onsite solar systems. And that is where open access, becomes very, very attractive. Open access is essentially setting up a ground, wanted project anywhere in the country offsite obviously and using the grid to build power from the point of generation to the point of consumption. The principle was mooted back in India and, 2003. Because many corporate consumers have been complaining about unreliable, grid supply so the government allowed the corporate consumers to go and buy power from any other source outside the grid to make sure that the corporate consumers can diversify their energy sources, hopefully reduce their power costs and get reliable power also in process.

Is that these really interesting. Could you explain why is it soda CNI? Market in India is the biggest in the world and present home. This market has evolved over the years and i think you already mentioned two 80 men which are relevant here one being the high grid, tariff for corporates and the second one being the ability of the corporates to purchase power outside of the grid.

Vinay: Yeah sure. Solar started becoming attractive for the corporate consumers in India, I would say around about 2015, 2016 and basically solar costs started coming down by 10 to 15% every year and grid prices in India have been going up year on year in some states by as much as 5 to 10% in other states by maybe 2% or 3% on an average every year. So after the two lines intersected basically solar powered became cheaper and over a period of time, the Delta has increased. I would say that the Delta today between the two is almost 50% for onsite solar projects. So if a consumer is paying about, let's say eight rupees per KWH for grid power. That effectively paying about four to rupees for onsite, uh, from rooftop, solar et cetera. So that is a huge and immediately a very attractive source of power for the consumers. And even if they have to set up an open access project and pay all the charges for using the grid banking, transmission, wheeling charges, et cetera, even after all of that in most states, the landed costs of open access and the point of consumption is still about 20 to 30% cheaper than in comparison to the credit card. So there is a very substantial economic incentive for consumers to shift away from the brand.

Ben: Could you present the leading solar? CNI developer in the markets. It will be interesting to understand how much he still capacities you have and what are the different development strategies they are pursuing

Vinay: yeah, sure. I think it's a very, it's a fascinating marketplace. You can divide the market in many different. But very broadly, there are three kinds of players in the industry. The first one and the most dominant one today, is basically these startups CNM platforms which were established about five to six years ago. And these were companies which were basically set up by entrepreneurs with very, very little capital. in first one or two years, for example, they were doing projects out of half a megawatt, one megawatt in total, across the whole year. And when the inflection point was paid these businesses basically grew at a hundred to 200% every year and today they had about at least eight to 10 of search, CNN platforms who have really scaled up quite substantially. Then the second segment today is because the market is growing so rapidly and is poised to grow even more rapidly going cupboard the large IPPs are beginning to come into this. So there are companies like renew, Zio, Tata, power these are all companies, which are all they've all got existing, renewable capacities of between five to 10 gigawatts. So these are really, really large companies and even utilities. So people, companies like shell oil and gas tech, total, all these companies are setting up platform. Separate platforms in addition to the utility scale platforms to cater to the CNI consumers and these companies have been slightly late to the business having said that because they have a much stronger financial 14 obviously a very deep pool of corporate relationships. They are mainly focusing on open-access projects and within open access projects, the larger projects. So for example in a open access portfolio for a CNF platform, the average ticket size might be five to 10 megawatt. But, you know, when the large IPP moves into the sector, their average ticket size might be 20 or 30 megawatts, maybe even

higher.

Right? So that is the, and many of them are now, coming very active in the sector. And the third I would say is really the local regional level player who is operating in a very, very small geography. And That's really nothing more than a moment pop kind of a solution provider who is mainly focusing on contracting and engineering services rather than offering an integrated optics modeling with financing and installation, et cetera.

Ben: It seems for sure to be agreed. Dynamic markets. No. I'd like you to put your head a former project finance banker. And tell us what are the key risk when you look at a portfolio of projects whether it is on sites or open access projects

Vinay: sure. I think that's a very good question because the project finance banker really took a long, long time to be convinced about this business for some good reasons to start with the ticket sizes were quite small. Even if a platform or a IPP has got, let's say a 20 megawatt or a 50 megawatt portfolio, that portfolio would typically comprise 10 or 15 consumers with every consumer signing a small PPA in there. So, which means to really assess the bankability of that portfolio of any project size, the lenders were forced to basically go and look at the financial standing of every individual of taker. So certainly instead of doing one off, take one project of 15 minutes. No, you had to do 15 off takers each have taken between less than one megawatt typically. And many of those off-takers were sometimes not rated or not publicly listed company. So, which means that assessing their financial status actually becomes quite challenging. So, to assess bank immunity of the off-taker is a big challenge for the project financial and. At the second and very big challenge for the risk factor for the lenders system policy risk in these projects particularly in the open access projects which are dependent on using the grid they have to pay these open access charges for the grid and these charges get revised every year which means there is not a hundred percent assurance, whether the project, which is viable today, based on the current cost structure, the grid tariff structure, et cetera, will be Bible in two years time or five years time or not. So in particular there is a lot of resistance to open access and the whole CNM market from the monopoly utilities in the country because they don't like their premium high tariffs paying consumers to go. So they have done actually a lot of things like denial of approval changing the charges changing the policy and properly without any warning et cetera. So assessing the whole policy risk and migrating the projects on a long-term basis in the face of such a strong opposition from the local utilities has been a major, major challenge for the bankers and I think over a period of time, they have got comfortable. I would say with two, three main factors. One, the platforms have basically, it is a lot of equity, capital and gained credibility and in many cases, what happens is that the projects are initially financed with equity. Our very heavily equity financed and they have some track record. Then the debt basically plays the role of takeout financing. So a lot of the construction risks, the initial policy risk in terms of availability of approvals, et cetera, has kind of taken out of the whole process. So Financing timetable is slightly different from CNET projects than it is for the utility scale projects. The third thing of course, as I said, is that the ticket sizes in the sector in this market have become larger. There are larger companies who are looking to buy more and more enabled. So if it is a publicly listed AA or AAA rated company, there is financing, which is very, very easily available from any number of banks and financial institutions. But on the other end of the spectrum if you are a small CNI company financing, SME projects, you know, average installation sizes, let's say 200 blowers then it is still very, very difficult to raise any project finance

Ben: is that three? Interesting. No, I just want to have your view on the key trend you're expecting in this market and how you expect this market to evolve in five or 10 years.

Vinay: Sure. You know, I think it is a super exciting market. one so far it's been basically led by rooftop, solar and open access now more and more procurement models are opening up. One, the utilities themselves are offering something called green power to the customers. So the consumers don't actually need to do anything. They just need to sign a piece of paper with the utility and say that I will buy green power from you. And I will just have to pay a small data or my normal grid tariffs. So that route green power from discount now is available in about six or seven states. Until two years ago, no state was offering a green bar under this kind of structure. And the comment is not encouraging more and more states to come and start doing that. The second road, which is also becoming popular is buying renewable power on the exchange. So, there is a dedicated, I think, first of its kind renewable power exchange in India where, Consumers can buy power on a short-term basis on a spot basis, they had basis and on a week ahead basis and as part of that, they get the green attributes to get them to the power that they find. So there is the content is still not very high because. The merchant capacity that can be sold on exchange in India is very, very small, but nonetheless, I think that is going to become a more promising venue going forward. And I think the third route that we expect to become more popular is the VPP road. The virtual power purchase agreement and it is essentially like a contract for difference kind of struggle, struggle. Well, the project owner and the generator is basically selling power on the exchange and not directly to the consumer. But the consumer is buying the green attributes from this project owner, and then settling the price Delta between a strike price and the power price on the exchange to basically offer a fixed price guarantee or assurance to the project. So we are beginning to see some deals as we speak right now. Like we have seen in the Western world we do expect VPP to become a pretty substantial part of the market or going forward. So on one hand, there are these new procurement routes, which are opening up.

The second thing which is opening up, which has become changing in the market is the central government in India has basically said that interstate transmission charges on all open access projects will be waived off. What that means is that a consumer in state a, if they can't set up an open access project in that state, because either land is not available or the solar resource or the wind resource is not attractive. They can actually go to the most attractive parts of the country, set up a project we have the power all the way from north to south or east to west in the country and get all the transmission charges waved off. So in a sense we are moving from small intrastate open-access projects to large interstate open access project. And it is likely that more and more of these projects will be located in two or three states where there is a lot of cheap land with good wind and solar resource available. So, which means that the cost of interstate open access will come down and there'll be further uptake. And you ask consumers coming in, moving in that direction. So that is the second big step change in the market.

And the third thing I told you, you know, there is this very, very strong consumer push because of the old Netcito and the de-carbonization angle. So it really literally is becoming like a initial trickle, which became like a river. And now it's kind of turning into a flower in the market in terms of net total volume.

Ben: Thank you for all the insights and it was a great pleasure to have you on the show. Vinay.

Vinay: Thank you, Ben. Pleasure talking to you