The renewable energy sector is undergoing an interesting phase of growth and development with the industry working towards achieving the aggressive targets set by policymakers. Capacity addition of the scale envisaged – 175 GW by 2022, up from 48 GW at present – will be challenging, no doubt, given the counterparty risk issues and the need for stable policy initiatives to support long-term investments. How does the industry plan to achieve this task? Key developers share their views, discuss emerging trends, and take stock of the progress so far…
What have been the three most noteworthy achievements in the renewable energy sector over the past one year?
The momentum around solar upliftment has been inspired by the target to achieve 100 GW of solar photovoltaic (PV) capacity by 2022, a move that has prompted a series of multi-GW trade announcements, driven largely by international players and by India’s ratification of the COP21 Global Climate Agreement. Over the past couple of years, India has made impressive progress in developing its solar power potential. It has added capacity at a commendable pace and successfully reduced the cost of solar energy, making India one of the lowest-cost destinations for grid-connected solar power in the world.
The government’s efforts in creating a roadmap for 24×7 affordable and environment-friendly “power for all”, and working towards making India a power-surplus country have been commendable.
The most noteworthy achievement has been the execution of the solar capacity build-out plan. Over 7 GW of new PV capacity has been successfully awarded in 2016 with all stakeholders (government, regulators, lenders and developers) working in tandem with a common goal. If this pace is sustained, it 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. Other achievements have been the unveiling of an innovative policy around wind-solar hybrid that allows optimal utilisation of transmission capacity as well as the success of the solar-pump programmes in various states, thereby creating a new market segment in distributed generation.
One of the biggest achievements in the sector has been the government’s ratification of the COP21 targets. As a result of committing the country to reduce the carbon emission levels, it is only logical that our renewable energy will have to be scaled up. The government has declared unprecedented targets to reach 175 GW by 2022, which has opened an almost unlimited market for developers. The industry is happy with the current pace of growth, considering that the policy changes have taken place only a couple of years ago. In addition, the government has made consistent efforts to reduce the cost burden for renewable energy. One of the steps taken in this direction was the introduction of reverse auction, which has brought down the cost of power generation sharply. The other step is the reduction in interest rates, one of the major components of the cost of renewable energy.
Apart from capacity additions, there were two significant developments last year. One is the increased adoption of tracker technology. The other is the acquisition of Welspun Renewables by Tata Power, which validated the worth of the business in terms of more money being made by investors. For CLP India, 2016-17 has been a milestone year with the company entering the solar segment. With the Veltoor solar project, we are now one of the largest renewable energy producers in the country with a committed capacity of over 1,100 MW across wind and solar.
The renewable energy sector has taken big strides since 2014. The central government’s push for renewables has made the states review their energy portfolio to include renewables for a sustainable future. In my view, the decision taken by the states to abolish the charges on the transmission of renewable energy is a landmark move. This is because it shows that there is a broad consensus between the central and state administrators that renewables are the energy sources of the future. It also goes a long way in easing the constraints between renewable energy demand and supply across state boundaries. 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 other two notable achievements have been the ratification of the COP21 agreement and the establishment of a $1 billion fund by the government to support investments in clean energy. While the former provides a fresh impetus to the government’s ambitious renewable energy plans, the latter will be instrumental in helping developers sell power to the state utilities in spite of their poor financial health.
What are the key challenges faced by renewable energy project developers?
Land acquisition is one of the biggest challenges for solar projects in India. With the archaic land Act and complexity in owning/transferring/acquiring land, this is one of the biggest hurdles for the development of solar in the country. Grid connectivity and stability is another area of concern. With the increasing share of renewables in the electricity mix, the grid infrastructure needs to be strengthened and the pace of augmentation planned ahead of solar project implementation. The financial health of some discoms is by far one of the biggest concerns for developers. Discoms’ failure to honour their commitment regarding timely payments for the sale of electricity and committed offtake is one of the biggest fears. The government has acknowledged these bottlenecks and is working to strengthen the ecosystem to harness the country’s solar potential.
We are beginning to experience delays in revenue collection along with increased curtailment risk for renewable generation. Recycling equity is critical for developers to build new projects, and unless macro-level issues related to the financial health of the distribution segment are resolved, access to lower-cost long-term equity capital for such assets from traditional sources like pension and insurance funds would be a challenge, thereby causing stagnation in sector growth.
Land acquisition continues to be a big challenge. As more capacity is installed, land availability keeps shrinking. In fact, this problem is not just applicable to solar, but also to wind projects. Evacuation infrastructure is another point of contention for the industry. While the government has been making efforts in this direction with green corridors, there is no denying that the past one year has been extremely difficult in terms of power evacuation. States such as Rajasthan and Tamil Nadu backed down from evacuation and developers had to resort to legal means to restore parity.
The third biggest challenge is the non-disbursement of dues. Many states are lagging behind significantly in terms of payments. For instance, Maharashtra has delayed payments by over one and a half years, Rajasthan’s was lagging behind by one year but has now reduced the gap to eight months, Madhya Pradesh is lagging by five to six months, and Tamil Nadu’s payment delay is going to be close to a year. Even as Rajasthan and Madhya Pradesh are making efforts to rectify this, Maharashtra and Tamil Nadu continue to be the black spots. In fact, there is a clear bias between the payments made to solar projects and those to wind projects, with the former being skewed against the latter, which is bad news for the segment and needs to be resolved.
Delayed signing of power purchase agreements (PPAs) continues to be another bottleneck. A key challenge is the practice being increasingly adopted by the state governments wherein the price of the tender is renegotiated after being discovered, as they believe that the prices could be further reduced. This has happened in the case of Madhya Pradesh, Telangana and Jharkhand. Apart from having an impact on the project cost, it raises serious questions about the process of auctions.
With an installed capacity of over 28 GW, wind energy is a major contributor to India’s operational capacity. However, the biggest challenge in the segment is the poor financial health of discoms, resulting in payment delays. States like Maharashtra, Rajasthan and Madhya Pradesh owe huge amounts of money to developers. Another challenge is inadequate transmission capacity. The installation on the generation side has outpaced the transmission capabilities. This has resulted in choked grid networks, as has been observed especially in the case of Rajasthan.
For the wind power segment specifically, the transition from the feed-in tariff regime to competitive bidding has become challenging. The central government has launched wind project allocation through competitive bidding-based tenders; however, the states are yet to introduce it. This adds uncertainty regarding the regime currently in place. There are also a few gaps in the solar segment. With the increase in the global market demand, there is a need to create a better domestic supply chain to meet our requirements. The Make in India campaign is expected to help the country manufacture indigenised panels that will help in meeting the demand under the domestic content requirement. While the pricing of indigenously manufactured panels is expected to remain high, the implementation of the goods and services tax (GST) is certainly going to affect the project pricing. There is also a need to put in place a mechanism for making readjustments in tariffs before GST is implemented.
There are three major challenges faced by any renewable energy project in India: financing, land and offtake risks. The government should look at renewable energy as a priority sector and accord it the financing benefits that are currently given to companies that generate power through traditional means. Land titles in India can get risky and murky. One solution being looked at by the state governments, and in some cases the central government, is earmarking land parcels specifically for the renewable sector. Setting up wind power projects may be an issue at some of these places but solar should not be a problem. Private land with unclear titles almost always carries litigation risks.
The other challenge pertains to offtake risks. To whom can a renewable energy company sell its power if the buyers (the state utilities) are in bad financial health? The central government has taken cognisance of this fact and introduced the Ujwal Discom Assurance Yojana (UDAY), which seeks to bring some fiscal discipline to the books of these state utilities. Other issues such as curtailment, non-signing of PPAs, non-payment of dues and, in some cases, even dishonouring signed agreements are avoidable risks.
What kind of policies and business strategies are needed to overcome these issues?
Developing solar parks in areas where there is enough waste/barren land and that too with ownership lying 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, sublease it to developers in the solar park, thereby reducing the time for land acquisition. Some state governments are exploring ways to address the land availability problem through innovation – for example, in the form of canal-top solar photovoltaic projects (such as in Gujarat), thereby harvesting solar energy while reducing the loss of irrigation water by evaporation.
Timely implementation and augmentation of the green energy corridors along with improvement in the health of discoms through UDAY would go a long way in maintaining the momentum achieved in capacity addition over the past one year. Further, the industry needs to focus on the shortage of skilled and qualified manpower. The current university courses and curriculum do not cater to the specific skill requirements of the solar industry. The curriculum must focus on technology and design, and institutions should provide extensive training with appropriate exposure on the latest trends and technologies in the industry. There is a need to build an industry-academia ecosystem and nurture suitable manpower for the industry.
Improvement in the financial condition of the primary consumer – the state discoms – is critical for the sustained growth of the sector. As a short-term measure, the implementation of UDAY should alleviate some of the financial constraints. However, in the long term, creating an energy market and undertaking reforms in the tariff structure are required. In order to achieve the 175 GW renewable energy target by 2022, we need to start planning for more flexible generation capacity. To this end, a rethink is required of the current approach to add larger baseload thermal plants as these plants do not allow the flexibility needed to operate a grid that will have 15 per cent penetration of renewable energy. The planning agencies need to consider factors such as utilising smaller and older capacity thermal plants for flexible despatch or envisaging the use of diesel reciprocating engine-based plants. The cost of generation needs to be optimised at a system level by maximising the despatch of renewable energy based on the least marginal cost as compared to any other fuel source. Apart from this, the green energy corridor initiative needs to be implemented at a faster pace and renewable energy management centres established to enable the scheduling and forecasting of renewable generation.
The solar park concept seems to be working. However, evacuation approvals are often delayed for long periods of time, which is an impediment to project development. Also, the implementation of the green energy corridor needs to be expedited. The government has to take the help of the private sector to be able to complete the route in all four directions simultaneously. As far as payments are concerned, the state governments must look at opening escrow accounts for developers’ to at least release a part of the payments owed at regular intervals. Besides, the government should link the renewable purchase obligation (RPO) with targets with the payments made instead of the energy consumed.
Another policy that needs to be brought in is the signing of PPAs in advance to avoid delays, irrespective of the sector. Maharashtra has delayed the signing of PPAs by two years and has now refused to sign them despite some of the projects being already commissioned. Such practices send wrong signals to investors.
Business strategies are often reactions to policies made by the administration and are specific to the company in question. The government must be cognisant of the gaps prevailing in the sector and devise policies to address those. Even though UDAY has been introduced, it will take time to deliver results. We expect that the problems faced by discoms will be resolved over the next two years. The green energy corridor is another policy decision that is being implemented. Another key area that needs a more focused approach is open access. Currently, open access is allowed by most of the states, but only on paper.
There has been concerted action on the policy front. Since November 2015, the government has been carrying out 1,000-1,500 MW of new auctions every month. These are conducted by discoms, the central government as well as NTPC Limited. Institutions with a large footprint like Indian Railways, the airports and the Delhi Metro have been working with us for altering their power consumption patterns. The government has raised the RPO targets to 15 per cent by 2019 and 17 per cent by 2022, thus increasing the renewable project capacity of the state discoms. The revised number will help in increasing the demand for renewable energy with an effective fund inflow.
What is the outlook for the sector? What are the key trends that will mark the future of renewables?
India has a huge potential owing to its geographical location and high energy requirements. The country is likely to hold the centre stage of solar developments across the globe and may outstrip China as the largest solar market by 2020. Solar for individual/self-consumption is also likely to gain momentum, with battery energy storage systems gaining traction.
With the ratification of the COP21 agreement by member countries including India and initiatives like the International Solar Alliance, we remain optimistic about the growth of the solar segment. We expect the following trends in the next few years: hybrid generation solutions using renewable as the core and supplementing it by storage/gas/hydro and the emergence of a “digital grid” and the interplay between internet of things and renewables, especially in plant control, forecasting and demand-side management.
In my opinion, the targets for installed capacity will be missed this year, especially in the wake of the ongoing demonitisation drive. Although it is a masterstroke, the drive has created a situation where there is no cash to pay daily wages to labourers for a period of about two months. Land acquisition, which is partially a cash-based transaction, will become even more challenging and projects would be delayed. To overcome this problem, the government can perhaps grant an extension of a couple of months to meet the targets until the required liquidity comes back into the sector. Solar energy is expected to outshine the wind segment. Wind will continue to grow at a rate of about 4 GW annually. The renewable energy sector is highly dependent on financing, which could see some equity financing hiccups owing to the new administration in the US. However, the debt is likely to be far cheaper so that it could balance the financing well and bring down the cost of power. Interest costs in the sector are likely to fall owing to inflation being in control, liquidity in the market and a stable dollar. In addition, with the current steps taken by the government, the market should be flooded with liquidity, lowering interest rates further.
The outlook for the sector is bright. Wind will become increasingly competitive, especially with the introduction of the new bidding regime. The supply side is on track to provide generation capacity. However, bottlenecks such as delays in payments by utilities and transmission losses should be dealt with to ensure that capacities do not become redundant. The delays in payments and signing of PPAs not only disturb companies’ financial statements but also deflate investor confidence, which may lead to restricted sector growth. In terms of technology adoption, storage is expected to be a big market in the long term. However, in the short term it does not seem to be commercially viable, especially when the tariffs are achieving grid parity.
The outlook for the sector is promising. We finally see the pieces of the jigsaw coming together. By way of next steps, the government should look at a stable financing regime for projects that are finding it difficult to raise capital because of falling tariffs and offtake risks. Since banks are reluctant to invest money, companies are relying on alternative sources of financing. In the next seven to ten years, $150 billion-$200 billion of investments will be required and out of this, $50 billion must come through private equity funding.
Wind power tariffs will not come down unless relief comes from tax sops and there is a fall in interest rates. If these two factors are in place, wind power tariffs can be reduced to Rs 4-Rs 4.50 per unit.