The policy and regulatory initiatives taken over the past few years have provided an impetus to the renewable energy sector. Dynamic adjustments made to the renewable policy framework have led to capacity growth in line with the country’s renewable energy plans and climate change commitments. Meanwhile, India’s intended nationally determined contribution targets have helped define the country’s renewable policy mechanism.
The past year witnessed several key policy and regulatory changes that will shape the future of renewable energy in the country. Renewable Watch analyses the policy highlights of the year…
Disrupting trends in wind
Earlier this year, a major policy initiative completely changed the course of the Indian wind power segment, upending the traditional wind industry. The segment moved from the feed-in tariff regime to competitive bidding for tariff determination and project allocation with the launch of the country’s first ever wind tender. The tender, for a capacity of 1,000 MW, was launched by the Solar Energy Corporation of India (SECI) in January 2017. The results discovered in the bidding bore testimony to the disruptive influence of the policy change. The tender was oversubscribed 2.6 times and the tariffs plunged to Rs 3.46 per unit from around Rs 5 earlier.
More action followed. The second tranche of SECI’s wind auction for a capacity of 1,000 MW concluded in October 2017 and was oversubscribed three times. Prices spiralled down further to Rs 2.64 per unit, a 24 per cent decline. Access to competitive capital, increased competition for a handful of projects and the entry of large companies led to ultra-low tariffs, which may not be sustainable in the long run.
In April 2017, the Ministry of New and Renewable Energy (MNRE) released a draft policy for the procurement of wind power through competitive bidding. The policy guidelines provide a framework for wind power procurement through a transparent bidding process, while also laying down the norms for its standardisation and defining the roles and responsibilities of various stakeholders. These guidelines are applicable to all grid-connected wind energy projects with more than 5 MW of capacity.
With the auction-based allocation of projects, wind power tariffs have come down significantly, thereby impinging on the high margins enjoyed by developers earlier. Reduced profits will compel them to take cost-cutting measures across the value chain, including deploying competitively priced equipment. In turn, turbine manufacturers will have to reduce their prices and margins, and improve efficiencies in order to remain relevant in the market.
In addition, project opportunities for developers are expected to reduce since allocations in the segment are moving entirely towards competitive bidding. Given the maturity of the segment, the capacity already installed and the limited site availability in the eight wind-rich states, developers will have to compete for a handful of projects in each auction.
On the flip side, low tariffs will lead to greater offtake of wind power by discoms, thus reviving the wind segment that had been neglected until recently due to the offtaker emphasis on solar power.
National energy policy
The country’s energy and power sectors are currently undergoing a transformation, with constantly changing capacity and generation shares. To streamline growth, NITI Aayog has released a forward-looking draft national energy policy that outlines the roadmap for the energy sector up to 2040. The policy also envisages a growth in the share of renewable energy in the power generation mix, from 5 per cent to 24-29 per cent by 2040. The policy also envisages a gradual phasing out of all subsidies, must-run status, renewable purchase obligations and other incentives available to renewable energy plants in order to create an independent and self-sustaining market. The policy, moreover, suggests the use of large-hydro power for load balancing and reducing the dependence on coal-based power generation. It, however, does not dwell on newer technologies such as energy storage and electric vehicles.
According to the policy, the country’s installed renewable energy capacity is expected to increase at a compound annual growth rate of 10 per cent, from 58 GW at present to 597 GW by 2040. The installed solar and wind power capacities are likely to reach 367 GW and 187 GW respectively. For better renewable energy integration, it suggests investing in grid expansion and automation. Further, the forecasting and scheduling time interval should be reduced from 15 minutes to five minutes.
Solar bidding guidelines
While competitive bidding has benefited the Indian solar power segment, the lack of standard documentation and proper guidelines for the process has impacted the quality of auctions. To this end, in August 2017, the MNRE released draft guidelines for tariff-based competitive bidding. These are applicable to all solar power projects that have a capacity of over 5 MW and are feeding power to the discoms. The guidelines also propose to introduce standard bidding documents such as requests for selection and power purchase agreements (PPAs). This is expected to significantly improve the auction process, especially for project developers.
The guidelines attempt to streamline the bidding process by setting strict timelines for each process such as undertaking land acquisition and transmission connectivity, and obtaining requisite approvals for developing projects. All statutory clearances as well as transmission availability must be in place before signing the PPA. The guidelines also introduce a payment security mechanism, wherein a security fund must be established with a three-month billing amount, in addition to the traditional letter of credit for one-month billing.
The solar segment has been struggling with grid unavailability and curtailment issues, particularly in the southern region, despite the “must-run” status accorded to renewable energy plants. The guidelines seek to address this challenge by providing compensation to those developers that are asked to back down their plants. If evacuation infrastructure is unavailable for more than 50 hours in a year, the developer will be entitled to sell an equivalent amount of extra energy to the discom over three subsequent years. Moreover, 50 per cent of the revenue losses incurred on account of the curtailment will be borne by the discoms. However, no compensation will be provided for grid instability or safety issues.
The guidelines also secure the developer against PPA termination by providing them with compensation equivalent to the total outstanding debt as well as 150 per cent of adjusted equity or six months of the billing amount, whichever is lesser. Also, the new standard PPAs will allow for substitution if the developer defaults on payments to its lenders.
Goods and services tax
The goods and services tax regime was rolled out by the government on July 1, 2017 in a bid to create a single tax system by categorising items into tax slabs of 5 per cent, 12 per cent, 18 per cent and 28 per cent. Much to its dismay, the renewable energy sector, which was earlier exempt from taxes, fell into the 5 per cent bracket. Moreover, there was confusion in the taxation system regarding the equipment that was used for not only renewable energy generation but also for conventional power generation (taxed in higher brackets). Meanwhile, equipment prices recorded a marginal increase, with minimal impact on the overall tariffs.
Incentivising rooftop solar
The rooftop solar segment has witnessed strong resistance from discoms, especially with regard to the industrial and commercial segments that constitute some of the highest-paying consumers. This has prevented the expansion of the rooftop segment. In a move that could change the current hostile environment towards rooftop solar plants, the MNRE has announced financial incentives of Rs 3.75 million per MW for discoms that support rooftop solar installations of up to 1,350 MW. These funds can be used for developing grid infrastructure, raising consumer awareness, providing training to employees, etc.
Amendment to the Electricity Act
The government is planning to reintroduce the Electricity (Amendment) Bill, 2014 in the winter session of Parliament. If passed, it will replace the Electricity Act, 2003. It attempts to divide the power distribution system into power carrying and selling activities. While the lines carrying power will be laid by the state entities, private companies will be responsible for competitively selling power. The bill is expected to reduce the role of states to that of an enabler for private companies, thereby putting an end to the state versus centre power struggle. Further, the bill seeks to distribute the losses across the country while providing the profits to private companies as an incentive for better power quality and service. However, the bill has met with strong protests from states and employee unions, which allege that the government is trying to privatise distribution. The new act is expected to reduce power prices for big consumers while increasing them for small consumers.
To address concerns regarding the dismal manufacturing scenario in India due to the bulk import of cheap solar power equipment from China, Taiwan and Malaysia, the government has initiated an anti-dumping investigation. Foreign imports, which constitute about 85 per cent of all solar cell and module sales in the country, have reduced the competitiveness of Indian equipment in the market. The petition was submitted by the Indian Solar Manufacturers Association (ISMA) on behalf of Indosolar, Websol and Jupiter Solar, some of the largest Indian solar equipment manufacturers.
Stay on REC trading
In March 2017, the Central Electricity Regulatory Commission introduced a new pricing regime for renewable energy certificates (RECs), wherein the forbearance prices were reduced from Rs 3,500 per REC to Rs 2,500 per REC, and floor prices from Rs 1,500 to Rs 1,000 per REC. The price reduction was aimed at encouraging REC trading, which has failed to take off so far. However, the REC generators objected to the sudden reduction in prices, which would further shrink their small revenues. The matter was being contested at the Appellate Tribunal for Electricity when the Supreme Court intervened and imposed a stay on REC trading in April 2017. In July 2017, however, the stay on the trading of non-solar RECs was lifted, while trading of solar RECs remains suspended. The new pricing regime has also been suspended, although the court has ordered that the difference in amount is to be placed in an escrow with the regulator while the matter is pending.
With the growing focus on renewable energy, there is a strong need for regulatory support to enable targeted development of the sector. Moreover, dynamic policy changes to adapt to the changing renewable energy market will help create a conducive ecosystem for growth. The government should also ensure effective implementation of the policies. It should focus on addressing the persisting challenges relating to land acquisition, grid infrastructure availability, discom payments and conflict resolution, especially in light of the reducing tariffs and dishonouring of PPAs.
As the country approaches the 2022 target deadline, it is expected that actionable policy initiatives and regulatory changes will be announced and implemented over the next few years.