If the renewable energy story in 2017 was to be described through three trends it would be plunging tariffs, hyper-competition and a weak project pipeline. Leading consultants talk about the sector’s performance in 2017, the key risks and challenges, the possible solutions and future outlook…
How has the renewable sector performed over the past year? Which states have done well in terms of capacity addition, RPO compliance, discom payments and policy implementation?
As of end September 2017, the installed renewable capacity stood at 60,157.83 MW, accounting for 18 per cent of the total installed capacity. Wind energy continued to dominate India’s renewable energy industry with an installed capacity of 32,700.64 MW. In 2016-17, the states that performed well in the wind energy segment were Andhra Pradesh, Gujarat and Karnataka while those in the solar segment were Telangana, Tamil Nadu and Andhra Pradesh. In 2015-16, Karnataka and Andhra Pradesh exceeded their renewable purchase obligation (RPO) targets with compliance beyond 100 per cent. However, discom payments continued to be a challenge even though the Ujwal Discom Assurance Yojana (UDAY) has provided a fillip to the state discoms. The impact of this scheme is still awaited. The recent direction issued by the Karnataka government under section 108 to honour the tariffs determined in the wind power purchase agreements (PPAs) signed prior to Karnataka Electricity Regulatory Commission (KERC) order of a lower tariff was a welcome step. On the other hand, Madhya Pradesh’s curtailment issue was disconcerting. Overall, the policy framework around the renewable energy sector is still evolving.
While 2016-17 was a record year for both wind and solar with the highest capacity addition and lowest tariffs, the first seven months of 2017-18 have been slow in terms of capacity addition especially for wind. Around 5.5 GW each of solar and wind capacity was added in 2016-17 while the first six months of 2017-18 have seen only 2,483 MW of solar and 420 MW of wind capacity addition. However, at the same time, record low tariffs have been achieved for both wind (Rs 2.64 per kWh) and solar (Rs 2.44 per kWh). The payment cycle of states such as Rajasthan and Madhya Pradesh has also improved. With regard to total installed capacity, Tamil Nadu (7.86 GW), Gujarat (5.34 GW) and Maharashtra (4.77 GW) are leading in the wind segment while Telangana (2.79 GW), Rajasthan (2.22 GW) and Andhra Pradesh (2.15 GW) have the highest installed solar generation capacity. States such as Andhra Pradesh and Telangana have taken proactive steps to promote rooftop solar projects through government schemes for setting up projects on state-owned buildings.
Although India has made remarkable progress in the past seven years, starting from the introduction of the Jawaharlal Nehru National Solar Mission, the 14 GW of solar capacity installation is not as impressive as it sounds. India needs to install 86 GW of solar capacity in the next five years at the rate of 18 GW per year, which is quite significant. In 2016-17, India missed its RPO target, both solar and non-solar. The actual non-solar renewable energy procurement stood at 5.51 per cent, as against a targeted 8.75 per cent. Meanwhile, the solar RPO target was 2.75 per cent, whereas the actual procurement was just 1.11 per cent. The overall renewable energy generation was 6.62 per cent against the procurement target of 11.50 per cent. During the period April to August 2017, wind energy generation in India was up 28 per cent compared to the previous year, while solar power generation was up 84 per cent. Total renewable energy generation was up 25 per cent compared to the previous year. Tamil Nadu, Andhra Pradesh and Telangana have emerged as the fastest growing states and this year too, nearly 60 per cent of the total new capacity addition is expected to come from the southern states of Telangana, Andhra Pradesh and Karnataka.
The installed renewable energy capacity in India has increased by 11.32 GW in 2016-17 while the cumulative capacity as of September 30, 2017 stands at 60.2 GW, contributing 18.2 per cent to the Indian power sector. The large capacity addition during this period was supported by factors such as favourable policy, shorter gestation periods and improving tariff competitiveness for solar energy. In the wind energy segment, the capacity addition was higher-than-expected triggered by the removal of generation-based incentives and reduction of accelerated depreciation benefits in April 2017. These apart, independent power producers were trying to utilise the feed-in tariff (FiT) regime in states while it was still in place. However, the wind segment witnessed a slowdown in the first half of 2017-18 given the ongoing transition from FiT-based PPAs to competitive bidding-based PPAs.
It has been an eventful year for the renewable energy sector. Demand from discoms has slowed down and new tenders for solar projects are down by more than 30 per cent. But on-the-ground construction activity has been picking up despite severe delays in many cases and we expect 2017 to be a record year for utility-scale solar with an estimated capacity addition of 9.4 GW, a 115 per cent increase over the previous year. Wind energy saw very encouraging numbers until March 2017, but activity in the segment has now come to a standstill because of the transition from FiTs to the auction model. RPO compliance remains very poor and there have been nasty surprises like tenders getting cancelled and PPAs being renegotiated.
Dr Gireesh Shrimali
The total installed renewable energy capacity stood at about 59 GW in September 2017. The renewable energy sector closed 2016-17 with a record capacity addition of 11.32 GW, though it fell short of its target (16.6 GW) for the year. In 2015-16, around 7.1 GW of capacity was added. So the achievement in 2016-17 was almost 155 per cent more than what was achieved in 2015-16, which is commendable!
In light of the record low wind and solar tariffs witnessed in the past year, how do you foresee the tariff trends in the coming years?
Earlier this year, the market expected wind and solar tariffs to fall further, which seems unrealistic now. The solar tariffs may see an upward revision in view of the increased Chinese module prices, Chinese domestic market requirement, the proposed anti-dumping investigation and goods and services tax (GST) roll-out. For the wind segment, the tariffs post competitive bidding fell to Rs 2.64 per kWh for a host of reasons including higher efficiency wind turbines being available without an increase in cost. In the coming years, the number and capacity of bids for wind and solar projects would contribute to lower tariffs. As for the past year, the quantum of bids has not met the developer expectations.
The latest tariff bids were seemingly aggressive for both wind and solar power mainly on account of a reduced project pipeline. Going forward, if the proposed wind tenders by the Solar Energy Corporation of India (SECI) come through, the wind tariffs might see an increase from the current low of Rs 2.64 per kWh. On the solar front, while the pressure on developers will remain due to the lack of a pipeline, the tariffs are expected to be less aggressive at Rs 3-Rs 3.5 per kWh with the increase in module prices. The increase in the share of renewables in the total generation will also increase the need for scheduling and forecasting, which needs to be factored in seriously by project developers in the price bids going forward.
In 2017, tariffs have already tumbled to a record low of Rs 2.44 per kWh for solar and Rs 2.64 per kWh for wind. One of the key reasons for this was the easy availability of equipment, access to cheaper debt and low return expectation. There was a demand-supply glut of solar PV modules in the Chinese markets while wind original equipment manufacturers (OEMs) were sitting on a huge inventory. We see tariffs getting stabilised in the coming months and they may even increase from the current bidding prices due to the increase in the execution price post GST, the likely imposition of anti-dumping duties and the expected increase in the global PV market demand. In the long run however, the tariffs would go down further with improvements in technology, larger bid sizes and fierce competition among global OEMs to capture the growing Indian market.
Solar tariffs witnessed a sharp reduction, with the lowest tariff of Rs 2.44 per unit discovered in the bidding held in May 2017 for the Bhadla solar park in Rajasthan. However, the recent increase in imported module prices could adversely impact the viability of projects with tariffs lower than Rs 3.5 per unit. As per ICRA estimates, a 6 cent per Watt increase in module prices may result in an increase of about 11 per cent in the capital cost. With respect to wind energy, competitive bidding has led to a reduction in tariffs to Rs 2.64 per unit in the second 1,000 MW auction held by SECI. The viability of competitively bid tariffs (in wind and solar) depends highly on the capital cost, the plant load factor and debt structuring including the cost of debt.
Our strong belief is that the tariffs have bottomed out. Most winners in recent auctions will struggle to implement projects with the ongoing rise in module prices, extra costs due to GST implementation and import duties. In addition, there is the new threat of anti-dumping duties for solar projects. There is still a lot of capital chasing projects, but the renewable gold rush is over in our view. We expect many of the small and mid-sized developers to simply go out of the market and even the largest developers should become cautious going forward.
What are the factors impeding the growth of the renewable sector? What solutions can be implemented to address these issues?
Some of the factors impacting the growth of renewables are rising solar module prices, poor discom credit ratings, policy uncertainty, weak transmission infrastructure and grid instability. A more recent issue is the uncertainty around the existing PPAs executed at higher tariffs. A Gujarat Urja Vikas Nigam Limited case requesting reduction in the 2011 solar PPA tariffs is pending before the Supreme Court. These issues can be addressed by government intervention and a clear policy framework. Initiatives such as the Green Energy Corridor, waiver of interstate transmission charges for renewable energy, deployment of energy storage technologies and increase in domestic battery manufacturing would help strengthen the renewable energy sector.
The slow growth in demand is one of the major factors considering the majority of the states are reportedly in a power surplus situation. The lack of evacuation infrastructure is another factor leading to delays in project commissioning. Green corridors intended to support renewable energy evacuation are being implemented with delayed timelines. States like Rajasthan and Madhya Pradesh are facing issues in power evacuation. The wind segment in particular is going through a transition from FiT-based allocation to an auction-based one. The states have been delaying the signing of FiT-based PPAs on account of the lower wind tariff discovered in the recent SECI bids. In solar as well, the reduction in the tenders being on offer can be seen, with SECI announcing only one tender (Bhadla 750 MW) this year in comparison to 5 GW of tenders in 2016. There have been expectations of new tenders being issued in select states like Chhattisgarh, Karnataka, Andhra Pradesh and Bihar, but none of these have materialised till now.
Furthermore, SECI has again extended bid submission timelines for the ongoing Bhadla-III (250 MW) and Bhadla IV (500 MW) tenders. With RPOs still not being enforced strongly, there is a shortfall in the demand for PPAs. In order to increase renewable penetration, the states need to plan the efficient and flexible operation of coal and other resources. With solar and wind generation now being cheaper than conventional plants, a state-level framework needs to be in place for the operation of conventional plants as balancing power managed by the state load despatch centres. A clear pipeline of the state and central tenders in line with targets set for 2022 will enable a sustainable development of renewable energy projects. State-level action plans steered by a national-level committee for renewable energy development can help in monitoring of renewable energy development in the states. Discoms can tie up with SECI and a single tendering agency can be made responsible for undertaking the tender process.
Factors impeding the growth of the renewable sector are as follows:
- Discoms are reluctant to sign new PPAs citing surplus power and weak demand situation: The power surplus Maharashtra State Electricity Distribution Company recently agreed to supply electricity for two months to discoms in the power-deficit Uttar Pradesh. Similar efforts need to be taken by other companies as well, possibly using enabling platforms like the Discovery of Efficient Electricity Price to facilitate short-term bidding of power.
- Sluggish power demand: The demand-supply deficit has reduced significantly from 8.71 per cent energy deficit and 8.98 per cent peak demand deficit in 2012-13 to 0.70 per cent and 1.63 per cent in 2016-17 respectively. If you look at the demand pattern, 40 per cent of the demand comes from industries, and it has not been picking up. The electricity requirement of commercial entities, which account for 10-15 per cent of the total power demand, has also dropped.
- Grid congestion and renewable energy despatchability: About 60 per cent of the current installed generation capacity comes from coal plants, most of which are based on sub-critical coal technologies. These are designed to operate primarily as base load units and are not fully capable of quickly ramping up and down to match the needs of the new net-load curve. Renewable energy and energy storage will be an optimal solution to stabilise the electric grids under high penetration scenarios.
The renewable energy sector continues to face regulatory challenges such as wide variance in RPO norms across states, weak RPO compliance with no penalty enforcement and the risk of forced back-down by the utilities. The RPO compliance level was very low (less than 60 per cent) in Assam, Bihar, Odisha, Telangana, Uttar Pradesh and West Bengal in 2015-16, whereas it was between 70 per cent and 85 per cent in Chhattisgarh, Gujarat, Haryana, Madhya Pradesh, Maharashtra, Rajasthan and Tamil Nadu. The alignment of the RPO trajectory with the targets specified by the Ministry of Power along with improvements in RPO compliance remains crucial for achieving the 2022 targets. Renewable energy players remain exposed to significant counter-party credit risks as utilities in many states have weak financial profiles. While UDAY has improved the liquidity profile of discoms to some extent, the operational improvement remains to be seen. Meanwhile, the tariffs remain inadequate in relation to the cost of supply for the discoms. For improvements in discom finances, efforts are required to improve efficiency levels, and ensure timely tariff revisions by regulators and timely and adequate subsidy release by state governments.
There are two main challenges, and there is no easy answer for either of these. First, the power demand-supply situation remains in surplus. Unless demand grows at a sustained rate of 7-8 per cent for a few years, this scenario is not going to change and the total renewable capacity addition will remain well short of annual targets. Second, the policy environment in India is volatile and affected by poor enforcement. State regulators do not have sufficient control over discoms and the sector is subject to constant political interference. We would like to see state regulators coming under the ambit of the Central Electricity Regulatory Commission with no intervention from state agencies.
Dr Gireesh Shrimali
In the context of increasing electricity demand in a growing economy and its historic overdependence on fossil fuels, India has set an ambitious target of 175 GW of renewable energy target by 2022 -100 GW of solar power, 60 GW of wind power, 10 GW of waste-to-energy and 5 GW of small-hydro power. Climate Policy Initiative (CPI) India, which focuses on the financial aspects of clean energy, has established that $190 billion in additional investment will be required to achieve this capacity addition target. There may be an expected shortfall of 29 per cent on the equity side and 27 per cent on the debt side. While the renewable sector is growing rapidly, some factors may constrain its growth. The following are the key risks and possible solutions:
- Off-taker risk (a payment delay due to unwillingness and inability to pay for power purchased or refusal to off-take power on the part of discoms): A transparent mechanism along with adequate risk coverage through payment security funds is needed to address these issues.
- Lack of liquid instruments/structures and market: New financial practices such as the securitisation of renewable energy assets is an attractive option to drive institutional investors’ capital to the renewable energy sector, particularly in rooftop solar.
- Currency risk: Foreign investors usually use foreign currency (such as USD) instead of local currency (INR) to lend in the emerging market. This forces foreign currency borrowers to buy currency swap to hedge currency risk.
It is clear that public-private collaboration is essential to raise the finance needed for India’s clean growth. While the right domestic policies will be the key to facilitating finance, greatly scaling up investment from the private sector will be the only way to mobilise the full amount of capital needed to meet India’s renewable energy targets.
What are the emerging technology trends in energy storage and electric vehicles? What will be their likely impact on renewable energy?
Energy storage is imperative to meet India’s renewable energy targets. While a few tenders for solar projects with energy storage have been floated by SECI, none have been awarded as yet. The government this year announced its target to replace the country’s entire passenger vehicle fleet with electric vehicles (EVs) by 2030. However, for the success of this initiative, a clear policy framework and strengthening of the existing infrastructure to establish renewable energy-based charging stations are needed.
In the next five to eight years, both EVs and energy storage are expected to turn economically viable alternatives to conventional technologies driven by the reduction in the cost of lithium ion batteries, which is expected to reduce by almost 60 per cent in the next decade. EVs are likely to add to the power demand, which, if managed properly, can help in better grid management. By 2030, if the Indian government’s 100 per cent EV nation goal is achieved, EVs would add 10-15 per cent to the power demand. However, in order to achieve the above goal, support is needed from both the government and the private sector. The development of policy with adequate incentive mechanisms and creation of demand are the principal responsibilities of the government. This should be followed by supply fulfilment and better manufacturing standards managed by the private sector. Energy storage in EVs and otherwise can help in reducing variability in energy supply. Energy storage can thus contribute towards grid stability and allow discoms to procure more renewable energy without worrying about supply variation. Renewable energy-based mini-grids will emerge as an increasingly low-cost option in rural areas with the reduction in the storage cost and thus allow the latent demand to be tapped. There is an urgent need for drafting robust policies to promote energy storage.
The EV industry has seen a staggering growth in the past five years. However, battery costs have been the major hindrance to EV adoption. Lithium-ion batteries are the major driver for EVs, and they are getting cheaper at a very significant rate. The cost of this technology has fallen 30-40 per cent in the past three to four years, and this has given a boost to EV adoption. A combination of EVs, batteries and renewables will be the future. In the coming months, the market will see new and existing players plunging into different segments of the EV value chain. These would include charging infra developers, EV and battery manufacturers, and aggregators. There is a long way to go before an EV ecosystem is established with an enabling infrastructure, credible EV manufacturers and supporting ancillaries.
These are promising technologies with huge synergistic benefits for renewable energy. But we are still a good three to five years away from any concrete on-the-ground progress. Most of the ongoing energy storage tenders have been scrapped because of demand or cost reasons. We feel that storage costs need to come down by another 30-40 per cent before renewables and storage can become a genuine alternative to base load power. Similarly, it will take some time for the government to create a charging infrastructure and for the private companies to build the necessary ecosystem for the manufacturing and servicing of EVs. If you see EV growth around the world, it is still underpinned by substantial government subsidies and high cost remains a barrier.
How do you see the renewable energy sector evolving in the near future? What is the likely capacity addition in 2017-18 and by 2022?
The sector’s growth potential is huge. It is perhaps the most sought after industry in the Indian market from the investors’ perspective. If targets are to be achieved, a large number of solar and wind tenders would need to be released by the state governments and nodal agencies. Further, market consolidation would remain the dominant trend in this sector in the near future. The sector would most likely see growth in capacity addition, though chances of achieving the 175 GW target seem grim.
The wind segment, as mentioned earlier, is undergoing a transition from the FiT regime to the auction-based regime. With only SECI tendered projects in the pipeline, mild growth is expected during this fiscal. In the solar segment, projects are being executed and thus there would be significant capacity addition this year. However, the tender pipeline is weak and if more tenders are not planned, the next fiscal may not see capacity addition at a scale witnessed during 2015-18. Going forward, the rooftop solar segment is likely to gain momentum with capacity building efforts being done at all levels across the value chain. The World Bank through State Bank of India has already identified projects worth $625 million for financing. Further, the Ministry of New and Renewable Energy has received support from the Asian Development Bank and KfW to create fund availability in the solar rooftop segment.
There has been a significant slowdown in the announcement of utility-scale solar power plants from SECI and NTPC in 2017-18. They have announced only one tender (750 MW) for the Bhadla solar park this year in comparison to over 5 GW of new tenders in 2016-17. SECI has again extended bid submission timelines for the ongoing Bhadla III (250 MW) and Bhadla IV (500 MW) tenders. A weaker project pipeline and shift to competitive bidding have marred the positive sentiment in the sector and OEMs have reported the lowest quarterly profit in a year. Given the current landscape of solar PV and wind auctions, 6-7 GW of solar PV capacity addition is expected in 2017-18 with the overall capacity reaching almost 19 GW including grid-connected rooftop PV, whereas the wind installed capacity would hover around 35 GW by the end of 2017-18.
The long-term demand outlook for renewable energy is strong, aided by favourable policy support from the central and key state governments as well as the improving tariff competitiveness of wind and solar power. Based on a conservative assumption of the overall RPO at 15 per cent by 2021-22, the cumulative renewable energy requirement for 2017-22 is estimated at 63 GW. Of this, the share of wind and solar energy would be 35 per cent and 55 per cent respectively. Further, ICRA expects solar capacity addition of 7-7.5 GW in 2017-18, which is likely to be higher than the wind energy capacity added during the period. Given the ongoing transition from FiT-based PPAs to competitive bid-based PPAs, wind capacity additions are likely to be affected in the current fiscal.
There is no doubt that renewable energy is the technology of the future. In many ways, India has already made the energy transition leap with renewable capacity addition exceeding the combined capacity addition from all other sources in 2016-17. But the sector is likely to face significant challenges in the near future due to weak demand growth and aggressive bidding. The decision to impose anti-dumping duty could be a major swing factor for capacity addition. Our estimate for total renewable energy capacity addition during 2017-18 is 12 GW. For 2022, we estimate a total renewable capacity addition of 15-16 GW.
Dr Gireesh Shrimali
As the renewable sector flourishes, the credit must go to the policymakers and the market participants who have shown tremendous faith in the sector. Still, to support further capacity addition and make up for the shortfalls, financing must be made available with more attractive terms. Moreover, India needs a greater focus on distributed renewable energy solutions and catalytic financing to scale up renewable energy investments. Distributed solar power projects – rooftop solar, solar mini-grids, off-grid solar and small-scale grid connected solar projects – are promising alternatives to improve quality energy access in India. The US-India Clean Energy Finance managed by CPI, is India’s first project preparation facility to scale up distributed solar power projects and drive long-term financing.