The Indian renewable energy sector has taken big strides during the past year. A key milestone has been the renewable energy capacity surpassing the capacity of hydroelectric projects, which are a major source of power in the country. As of end-October 2016, renewable energy, at 46 GW, was contributing almost 15 per cent of the total installed capacity, compared to 43 GW of hydropower projects. In fact, the renewable energy sector has seen the highest growth rate among all other fuel sources, recording a compound annual growth rate of over 11.5 per cent in the past five years compared to just 5 per cent growth witnessed by the rest of the power sector.
The momentum around renewables has been built by the target to achieve 175 GW of capacity by 2022, a move that has prompted a series of multi-GW trade announcements, driven largely by international players and India’s ratification of the COP21 Global Climate Agreement, and facilitated by a strong sustained policy push and a regulatory infrastructure that is consistent and stable.
The wind repowering policy, the draft wind-solar hybrid policy, Reserve Bank of India (RBI) guidelines on renewable energy financing and the Surya Mitra skill development scheme are some of the multidirectional efforts being made by the government to make this sector more efficient and lucrative. The introduction of the new bidding regime for wind power projects by the Solar Energy Corporation of India (SECI) is likely to accelerate growth in the segment, which otherwise seems to be losing out to more competitive solar power.
The most noteworthy achievement of the year has been the execution of the 100 GW solar capacity build-out plan. It included the successful award of over 7 GW of new photovoltaic capacity in 2016 with all the stakeholders (government, regulators, lenders and developers) working in tandem with a common goal. If this pace is sustained, the industry will go a long way in reinforcing India’s position as one of the world’s largest solar markets and probably the most sustainable one, given that the tariffs are unsubsidised.
For a long time, the Indian renewable market had relied mostly on government handouts in the form of capital subsidies or tax cuts, which, according to critics, did create capacity but did not lead to actual power generation. Today, that is no longer the case. Both the solar and wind power segments have become competitive with conventional sources of power and, therefore, no longer rely on subsidies. The government’s decision to withdraw the accelerated depreciation benefits with effect from April 2017 and phase out generation-based incentives for wind power indicates that it is trying to introduce fair play for all sources of power.
Given these developments, investors are now more confident of the sector in terms of the opportunities it offers, the reduced risk profile, and the availability of a wider portfolio of customers through a combination of long-, medium- and short-term contracts or trade in the open market. However, there are several challenges along the way to achieving the ambitious targets set by the government. Some of these are inherent to the renewables’ technology, while others can be alleviated through prompt policy planning and implementation by the government.
Renewable Watch takes stock of the growth trends in the sector during the past one year, noteworthy policy and regulatory developments, emerging opportunities across the value chain, the evolving financing scenario, the risks and challenges, and the road ahead…
Capacity addition trends
Amongst the various segments, wind power witnessed the highest capacity installations in 2015-16, followed by solar, biomass and small hydro. On an annual basis, wind energy surpassed all its previous records with over 3,400 MW of installations in 2015-16. It was a historic year for the segment, not only in terms of wind capacity addition but also in terms of investments. The wind segment attracted investments of over $3.16 billion and the cumulative installations increased to about 64 per cent of the country’s total grid-interactive renewable energy capacity.
Although wind power has led the capacity additions in the renewable power space so far, the pace at which the solar power industry is adding capacity is commendable. The solar segment witnessed a capacity addition of over 3 GW in 2015-16, almost three times the capacity added in 2014-15. Meanwhile, both the bioenergy and small-hydro power (SHP) segments have been witnessing a slowdown due to unfavourable project economics. While the government plans to revive these segments, investors are not too enthusiastic to invest in such projects. The capacity addition in the bioenergy and SHP segments stood at 400 MW and 170 MW respectively in 2015-16.
In 2016-17, till now, the solar power segment has been leading in terms of capacity addition. It has added over 1.75 GW of capacity in the first half of the year, followed by the wind power industry, which has witnessed an addition of 1.3 GW. The bioenergy and SHP segments have added 51 MW and 49 MW respectively during this period.
Policy and regulation: Proactive approach
The government’s proactive approach towards promoting renewable energy is the prime reason for the sector charting high growth. Policymakers were upbeat throughout the year in terms of designing and implementing policies as well as resolving existing issues.
A landmark move was the issuance of the National Tariff Policy, 2016, which waived interstate transmission losses and charges. It will also go a long way in bridging the gap between renewable energy demand and supply across states. For example, if a project generates power in State A but the demand for such energy is in State B, the resultant transmission charge through interstate lines adds to the developer’s costs. The policy has provided a fresh impetus to the off-grid segment as it seeks to address the key risk of grid arrival perceived by micro/mini-grid investors by creating exit options for developers. Moreover, the Ministry of New and Renewable Energy’s recently announced guidelines and the initiatives taken by SECI for developing 1,000 MW of wind power projects through a transparent competitive bidding process have generated significant enthusiasm among industry players. The successful implementation of the scheme is expected to open up avenues for non-windy states to benefit from wind power.
There has been a greater policy push to promote the rooftop solar market as well. With the government offering attractive subsidies to some consumer groups and new rooftop solar-specific concessional debt funding schemes becoming operational, this segment is expected to grow faster than utility-scale solar in the coming years. Meanwhile, the implementation and adoption of the Ujwal Discom Assurance Yojana by 17 states has resulted in a substantial improvement in the financial status of discoms. At the current pace, the scheme is likely to be a success and will minimise the offtake risks associated with renewable power.
Renewable financing: Greater commitment and confidence
Bloomberg New Energy Finance recently carried out an assessment of the money going into India’s clean energy industry. According to its report, about $10.5 billion was invested in the country’s renewable energy space in 2015-16, which is almost 60 per cent higher than the $6.6 billion invested in 2014-15. The report further states that 7.3 GW of clean energy projects were developed in 2015-16, which is 71 per cent higher than in the previous period. Going forward, funds of at least $100 billion will be required to finance the country’s goals for clean energy.
Several initiatives have been taken by the government over the past one year to strengthen the financing ecosystem. Key among these was the inclusion of renewable energy in priority sector lending by banks and financial institutions. Financial institutions such as the Rural Electrification Corporation have started extending loans to renewable energy projects at 75 basis points below the pricing of comparable conventional projects.
The sector has been witnessing increasing participation from new lenders as an increasing number of projects are moving from the under-construction stage to the operational stage, thereby reducing the perceived risks associated with such projects. The greatest comfort for lenders has been the close cost proximity of renewable power to the pricing of conventional power, thereby reducing offtake risks.
While the current interest rate in this sector is in the range of 10.5-12 per cent, it is facing significant downward pressure due to decreasing inflation and increasing debt financing options. The government’s recent demonetisation drive has further increased the possibility of a reduction in interest rates due to additional funds availability in the banking system. Further, greater investor confidence has led to longer loan tenors, which have increased from 10-12 years to 16-18 years at present.
Multilateral development institutions as well as development banks are also increasingly providing credit lines to domestic banks to fund solar energy projects. As a result, more capital at cheaper rates is available for these projects. Meanwhile, investors, both domestic and foreign, have started warming up to the concept of “green papers”, while various banks and corporates have been raising money for renewable projects by issuing green bonds. India’s green bond market took off this year with $2.7 billion worth of these bonds issued as of October 12, 2016, according to the Climate Bonds Initiative. Going forward, this trend is expected to continue.
The entry of yieldcos has opened up another avenue for capital infusion in the sector. This will help in monetising the operating assets and the capital released in the process could be used for further capex. Such structures are suitable for investors with a moderate risk appetite. The yieldco model has been impacted lately, but many expect that India’s yieldco version – infrastructure investment trusts (InvITs) – will be successful. In essence, InvITs and yieldcos do the same thing – securitising an otherwise illiquid portfolio consisting largely of commissioned assets to enable investment from retail and institutional investors that perhaps have a lower return expectation than the original developers.
That said, attracting $100 billion into this sector is no small task and calls for the introduction of more innovative financing options. Going forward, India needs to mobilise investments from alternative sources of financing such as global banks and institutional investors like pension and sovereign wealth funds as traditional bank finance may not be sufficient.
Manufacturing: Make in India gives hope, but still a long way to go
India is well-positioned in the wind power equipment manufacturing space. However, it lags significantly in the solar power equipment market. The government’s Make in India initiative has generated considerable interest in manufacturing. While there are some incentives for solar product manufacturing, primarily modules and cells, any significant effort from the industry will come only when the government provides it with a more robust and long-term sustainable policy framework and a more level playing field to compete with global players. Moreover, in order to ensure the success of the Make in India initiative, both the industry and the government should work towards skill development and training.
From the wind energy perspective, there is a need to introduce innovative products that can harness energy at low-wind sites at a competitive cost. Turbines with advanced control systems, improved scheduling and forecasting, and digitally controlled smart grids and storage systems are also needed to address the issue of variability. These will be crucial in maintaining the growth momentum in the segment.
Sector outlook: Opportunities galore despite challenges
The outlook for the sector is very positive as the fundamental drivers for renewable power remain very compelling. These are the growing demand for power, and the need to reduce carbon emissions and improve energy security.
Assuming an overall growth in power demand of 6 per cent per annum between 2015 and 2030, the peak demand is expected to be around 350 GW by 2030 and the energy requirement around 2,500 BUs (about 2.5 times the levels in 2015-16). In order to service this demand through a combination of non-fossil fuels (40 per cent) and fossil fuels (60 per cent), the overall capacity will have to be around 800 GW, a significant increase over the current levels.
Having an intermittent source of power generation of that scale calls for a number of cautious strategies and solutions. The power transmission system would need to have the capacity to absorb the excess generation and transfer excess power from a renewable energy surplus region to a deficit region. The Green Energy Corridors project, the National Smart Grid Mission and the guidelines for the implementation of forecasting, scheduling and imbalance handling are the key initiatives taken by the government to handle this issue. If implemented effectively and in a timely manner, these will help resolve the issue of variable power to a large extent.
Land acquisition is also emerging as a key challenge for large-scale project development. In this regard, developing solar parks in areas where there is enough waste/barren land and the ownership rights are with government agencies is a step in the right direction. In addition, state nodal agencies have worked out a model with many farmers/landowners to lease out their land on a long-term basis to these agencies, which would, in turn, sub-lease it to developers in the solar park, thereby addressing the problem of land acquisition. The risks related to power evacuation are also minimal in the case of solar parks. Solar-wind hybrids will also help tackle the challenges related to land acquisition.
In terms of segment-wise capacity addition, solar energy is expected to outshine wind. However, the annual capacity addition targets across the sector are likely to be missed this year, especially in the wake of the ongoing demonetisation drive, which may lead to delays in project execution. But overall, the sector is looking at interesting times ahead.