Solar and wind project allocations slowed down considerably in 2017, compared to the allocations in 2016. Moreover, aggressive bidding and the sharp fall in prices raised concerns about these segments suffering the same fate as thermal power or the road sector where irrational pricing led to many projects being abandoned or getting financially distressed. Leading renewable energy developers express their views on the emerging trends, challenges and policy requirements for the sector…
What have been the major highs and lows for the renewable energy sector in 2017?
The year 2017 saw tariffs fall significantly, making solar energy one of the cheapest sources of power in the country. Although this made the segment financially attractive to the discoms, it has resulted in delayed long-term power procurement on the expectation of a further fall in prices. The year also saw a shift in the wind power procurement methodology from feed-in tariffs (FiTs) to reverse auction-based competitive bidding, which resulted in tariffs declining to Rs 2.65 per unit, almost at par with solar.
One of the biggest developments has been the wind industry’s move away from the FiT structure to competitive bidding. The tariffs that have emerged are fantastic for the segment. However, the supply side has been adversely affected and is struggling to adjust to the new scheme of things. Some developmental challenges, especially those relating to grid connectivity, have already emerged following the first wind auction that concluded in February 2017, making us a bit cautious as developers.
Solar power has become more affordable with a decline in tariffs, leading to large-scale acceptability by distribution utilities. The decline in tariffs is attributed to the notification of the Renewable Fuel Standard (RFS)/power purchase agreement (PPA) framework by the government for transparent bidding, the solar park concept and the decline in the project costs. The availability of affordable power near the consumption point will reduce technical losses and under-recovery on the sale of power. These factors have increased the demand for solar power. Meanwhile, policy uncertainty on the goods and services tax claims and tariff revisions by the Central Electricity Regulatory Commission (CERC) and the state electricity regulatory commissions, confusion over the classification of solar modules under CTH 8541/8501 at customs, the unknown value of the anti-dumping duty and global solar panel supply constraints were the lows for the industry.
One of the key positive developments in 2017 was the advent of competitive bidding in the wind energy segment, which resulted in tariffs that are sustainable and attractive to the offtakers. This will, in the long run, lead to a much bigger market for wind, which has been lagging behind solar for some time. It has also led to ensuring a level playing field for industry participants.
Another significant highlight has been the CERC’s draft Grant of Connectivity and General Network Access to the Inter-State Transmission System Regulations, directed towards providing a level playing field for industry participants and promoting sector growth. The year also witnessed some hindrances such as the initiation of anti-dumping duty investigations into solar modules in light of the limited domestic manufacturing capacity and lack of clarity in the RFS of tenders regarding coverage of the same under change of law. Another hurdle has been the classification of solar photovoltaic modules under 8501, attracting basic customs duty at 7.5 per cent ad valorem, resulting in module shipments getting stuck at ports and leading to project delays.
What is your opinion on the declining tariffs in light of the changing cost structure and competitive landscape? What does it imply for developers/engineering, procurement and construction (EPC) companies and the government?
Solar power tariffs in the country witnessed an unprecedented fall in the past couple of years, primarily owing to the fall in imported solar panel prices and the competitive bidding dynamics in the industry, which has helped in achieving more than 20 GW of installed or under-installation solar capacity. Unfortunately, this has also resulted in delayed signing of PPAs. Global developments such as the extension of the solar programme in China or the verdict in Suniva’s case in the US, which have led to a shift/increase in domestic demand in these markets, have not augured well for Indian developers. Therefore, project developers have to keep looking for niche areas to stay competitive in future bids.
A live auction always carries an element of aggression where the numbers do not make sense to a lot of people, especially those with the losing bids. The FiT regime implies multiple inefficiencies in the entire value chain. With the auctions being overseen by the Solar Energy Corporation of India, risks will be priced differently, eventually lowering the cost estimates. While the government is quite happy about the decline in tariffs, EPC companies and developers have been adversely impacted, with the biggest blow being felt by turbine manufacturers. Developers will now have to become more innovative and discover more profitable sites. Turbine manufacturers have to focus on cost control and on making their operations more cost efficient.
Lower tariffs indicate a cost reduction across the entire value chain owing to innovation, technology improvement, greater economies of scale, higher investment in research and development, and lower cost of finance. This advancement in technology is useful for you, me and all stakeholders. Lower costs will help utilities to improve their balance sheets, freeing up capital for upgradation and expansion of infrastructure, and providing payment security to power generating plants and power to people living on the margins of society. This will lead to an increase in the demand for power, ultimately benefiting project developers with the award of more projects, creating more opportunities to grow business, attract investment and create employment opportunities for people.
The decline in tariffs has been aggressive on account of limited tenders and high competition in the sector. It leaves very little error margin for developers and in case of any unforeseeable risks, projects could come under stress. The example of module prices going up by about 6 cents per Wp in the past few months highlights this risk. For the government to provide a sustainable ecosystem, a continuous flow of tenders in line with its overall targets should be a key consideration.
What are the emerging areas of opportunity for project developers (rooftop, solar-wind hybrids, EVs, storage, offshore wind and smart cities)? How are you planning to leverage these?
Being a pioneer in electric vehicle (EV) charging networks in the Nordic countries, our company is looking at setting up a promising number of EV charging stations in India, keeping in mind the government’s larger vision. Starting with the pilot launch in New Delhi, Fortum is aiming to set up 150-160 chargers over the next 12-18 months across different cities. The company also aims at building awareness and providing assurance of services associated with e-mobility in order to increase the acceptability of EVs in India. Fortum has recently installed a 22 kW AC charger on a pilot basis in the New Moti Bagh area, which would be operated using Fortum’s cloud-based system. The company has also recently signed an MoU with the Nagpur Municipal Corporation for the planning, designing, investment and operations of charging infrastructure.
We are engaging commercial and industrial consumers for providing them with long-term on-site (rooftop/ground-mounted) or off-site (open access) solar power and aim to become the custodian of all their power requirements in the future. We have already installed a 1 MWh energy storage project in Finland and are keenly evaluating the solar-with-storage potential in India.
Rooftop solar has emerged as an extension of solar projects. For the offshore wind energy segment, the government has begun framing a policy. Further, wind-solar hybrid projects may see an FiT-based auction mechanism. Meanwhile, EVs, storage and smart cities present a number of opportunities for growth. We are focusing on these opportunities at our “Innovation and New Energy Group” located in Hong Kong.
We have over 1 GW of wind and solar capacity, 1,320 MW of coal capacity and 650 MW of gas capacity. While we rely on a balanced fuel mix, renewable energy projects are available in the market and that is where our focus will be.
The emerging areas in the renewables space would be more neighbourhood solar power plants and innovative solutions for solving the water crisis in coastal areas by desalination, using low-cost solar energy. The increasing role of electricity in transportation using EVs and energy storage would be the trends in future. The demand for energy storage is going to increase with the rise in renewables in the energy mix to ensure grid stabilisation, considering the intermittent nature of renewable energy. Since all these are at the initial stage, continuous government support and investments are needed.
Solar-wind hybrids and storage are the emerging areas of opportunity. We would like to participate in tender opportunities in both these areas, which would lead to better grid infrastructure utilisation and stability.
What are the unaddressed challenges today and what are the key recommendations for policymakers as well as the industry?
The government has done a remarkable job in the past couple of years by boosting demand and ensuring smooth implementation, which contributed to the record solar tariffs achieved early this year. However, it is important that the pace of change and certainty in regulatory policies continue unhindered for India to achieve the 100 GW target by 2022. The recent uncertainties regarding the anti-dumping duty, customs clearances, power evacuation delays/constraints, renegotiation of tariffs, and must–run status are the challenges that developers had not factored in when committing to the capacity at low tariffs. These risks, if they materialise, would be detrimental to investor and developer confidence. Also, the sector suffers from issues of quality in installations. There should be better measures for quality control of solar panels so that they last the stipulated 25 years. Another challenge for the sector is the slowing power demand from discoms. The present power-surplus situation indicates a decline in solar power demand, which may continue for three to four years. A conducive policy framework that balances the demands of manufacturing and project development is the need of the hour.
After the first auction, getting evacuation approvals has been a nightmare for some developers because the transmission utilities continued to follow the first come, first served approach. Thus, some developers with PPAs did not have connectivity, whereas others with connectivity lacked PPAs. Further, each state has its own set of challenges. The government should look at making the implementation process easier. Mega auctions, recently proposed by the government, are an excellent idea to give assurance to the industry.
To counter these issues, the government has already begun work on grid integration. The dialogue over forecasting and scheduling has ensured that most states have put the required mechanisms in place. During the introduction of competitive auctions, a large number of projects that had been commissioned lacked approved PPAs. This is the category of PPAs that is facing difficulty in execution. Therefore, I would not categorise it as PPA renegotiation but as negotiation on the regulated tariff before the PPAs are signed. However, it does not augur well for investors.
My key recommendation to policymakers would be to ensure a transparent bidding mechanism, remove uncertainties owing to frequent policy changes, and create a strong framework agreement and a fast dispute resolution cell. This will help the industry to attract global investors and lenders, and encourage Indian companies to invest more in this sector.
Grid curtailment is a key unaddressed challenge in the sector despite must-run status for renewable energy projects. This issue could be addressed by looking at it from the lens of having a solution to store and utilise energy at the required time. Late payments by offtakers are also a concern for developers. The offtakers need to be incentivised for investing in storage solutions in the form of funded energy storage on a pro-rata basis if they opt for higher RPOs over and above those set by the SERCs. This will help them in managing the difference in peak and off-peak demand, renewable variations, trading of surplus power at exchanges, reduced demand-side management-based penalties and thereby control the curtailment of renewable power.
What is the future outlook for the renewable energy sector?
Owing to the plunging solar and wind energy costs as well as the anticipation of a more carbon-constrained future, the Indian renewable energy space is witnessing increasing growth. The solar segment is still at the growing stage and continues to face many challenges. To diversify resource-based risks, more investment is required to fund projects across regions and asset classes. India’s renewable energy growth is primarily propelled by a few factors such as considerations to meet energy demand, sustainability, energy security and lower costs.
The outlook is fantastic not only for India but for the whole world. Apart from some core services that should be powered by conventional sources, capacity addition will most likely come from renewable sources only. The government has no plans to hold auctions for conventional energy. In the private sector, renewable energy will dominate in the foreseeable future.
Going forward, the sector will witness a mix of consolidation and expansion as, with the maturity of the sector many small players will merge with genuine players to form GW firms and solar power will witness continuous expansion. The sector will also observe greater demand for energy storage on a large scale for providing stability at affordable rates. This integration of renewable energy with storage will lead to more demand for renewable energy and reduce the demand for coal-based power plants.
Overall, the renewable sector in the country has a bright future. We will have the maximum growth in energy consumption per capita and a large part of this requirement would be met through renewable sources, as per the plans of the government. India is amongst the few countries in the world where industry participants could build large energy platforms to deliver competitive renewable energy to the people.