Testing Times

A year of big developments but small achievements

The Indian renewable energy sector has witnessed significant changes over the past few years – in terms of the pace of development, commercial dynamics, development model, risks and opportunities. The change has been most visible in the past one year as capacity additions in the power sector (planned or developed) are coming almost entirely from renewable sources. Notably, in 2016-17, for the first time, renewable capacity additions were at par with thermal capacity additions. The renewable energy sector ended 2016-17 with a record capacity addition of 11,320 MW, comparable with the 11,551 MW added in the thermal power sector.

In fact, 2016-17 witnessed many milestones being achieved in the renewable energy sector. The total installed capacity crossed 50 GW, and the wind and solar segments crossed the 30 GW and 10 GW marks respectively.

The renewable capacity additions have been accompanied by commercial dynamics that are completely different from those that existed even a year ago. At a solar power tariff of Rs 2.44 per kWh and a wind power tariff of Rs 2.64 per kWh (the winning tariffs achieved in the latest round of auctions), the economic advantage has shifted in favour of renewables from thermal power. These tariffs are significantly lower than the Rs 3.20 per kWh average rate of power generated by NTPC Limited’s coal-fuelled projects. This implies that discoms, which were earlier reluctant to buy renewable power, prefer to purchase this over thermal power. For developers, this signifies a much lower risk of power offtake defaults, although it comes at the cost of losing out on a substantial part of their margins.

Such low bids, at least in the wind power space, have stemmed from the ongoing transition from the feed-in tariff (FiT) regime to competitive bidding-based allocation, which, for the time being, has left the project pipeline dry. Further, the adoption of the solar park-based model and the decline in global equipment prices in 2016-17 also led to a drastic fall in solar tariffs. In the 100 MW domestic content requirement-based tender in Karnataka in May 2016 for instance, the winning tariff was Rs 4.84 per kWh; in comparison, in the latest tender for 500 MW capacity at the Bhadla Solar Park in May 2017, a tariff of Rs 2.44 per kWh was discovered. Moreover, with no project visibility for the future, both solar and wind power developers with access to low-cost funds have been trying to capture as much capacity as possible, leading to aggressive bids. Distress sales by equipment manufacturers have further enabled independent power producers (IPPs) to quote lower tariffs.

The increasing competition, changing dynamics and growing private and public sector interest in renewable energy development are a ringing endorsement of the government’s vision for clean energy development. In fact, financing, which was earlier considered a key impediment to sector growth, has now turned into a major growth enabler.

However, this growth comes with its own set of risks and challenges, of which spiralling tariffs have been the most talked about in the past one year. Such low tariffs raise several questions for policymakers, discoms, project developers, investors and lenders. Some states that have completed auctions with higher prices in the past two years (Jharkhand, Andhra Pradesh, Karnataka and Haryana) refused to sign power purchase agreements (PPAs) in 2017, thereby creating uncertainty in the market. Jharkhand has already renegotiated the tariff and signed PPAs at a much lower tariff than that quoted by developers at the time of bidding. Falling prices also imply that projects that have already signed PPAs and have commenced or even completed construction face a growing risk of discom default over time. Will the discoms honour older PPAs signed at tariffs of Rs 4-Rs 6 per kWh after, say, five years when new projects are available at tariffs of Rs 2 per kWh or even less?

Many such questions have cropped up. And while clear answers may not be available, as the year 2017 draws to a close, it may be a good time to take stock of the progress made so far, analyse the key trends and developments, and examine the issues that need to be resolved going forward.

Capacity addition trends

India’s installed renewable energy capacity increased by 11.32 GW in 2016-17, taking the cumulative capacity to 60.2 GW as of September 30, 2017 and contributing 18.2 per cent to the energy mix. The large capacity addition was on account of factors such as a favourable policy environment, shorter gestation periods and enhanced tariff competitiveness for solar energy. In the case of wind energy, the capacity addition was better than expected, owing to the impending removal of generation-based incentives and the reduction in accelerated depreciation benefits in April 2017. In addition, IPPs were trying to leverage the prevailing FiT regime in the states. 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.

The key highlight of the year was the heightened activity in the developer space, which saw many players competing for whatever little capacity was up for tendering, thereby driving down tariffs.

Innovative and large-scale financing

With project sizes of over 100 MW and the government’s thrust on the sector, the financial landscape has changed significantly. Borrowing capital for renewable energy projects is no longer restricted to domestic banks; multilateral banks and non-banking financial institutions too are looking to invest in this market aggressively.

Despite having entered the bond market fairly recently, India has emerged as one of the largest green bond markets in the world, driven by favourable policies and a promising business environment. As of July 2017, India’s green bond issuances reached $2.1 billion, including $1.5 billion raised by the Greenko Group and Azure Power together in just two weeks. The amount is enough to fund the debt of over 3.5 GW of renewable energy projects.

On the equity front, the sector has been witnessing greater consolidation, higher private equity interest and the entry of strategic investors from across the world. Notably, a large number of players in the sector have crossed the 1 GW portfolio mark in 2017, which puts them on a strong wicket for accessing the capital market.

RPO default

The renewable purchase obligation (RPO) is a benchmark against which the sector’s progress can be gauged. While the sector is taking rapid strides, from an RPO perspective, it is far behind the targets. In 2016-17, India missed the overall RPO target yet again – as against a targeted non-solar renewable energy procurement of 8.75 per cent, the actual procurement stood at 5.51 per cent; and as against a solar power target of 2.75 per cent, the actual procurement was just 1.11 per cent. The overall renewable energy generation was 6.62 per cent as against the procurement target of 11.5 per cent.

Most states have specified RPO targets; however, due to the lack of enforcement of RPO regulations and the absence of penalties for non-compliance, many of the state discoms are not meeting their RPO targets fully. In fact, 25 states and union territories are lagging behind their specified solar RPO targets for 2017-18. The total solar RPO deficit amounts to 64 per cent, which is equivalent to 2,033.94 MW of capacity.

Record generation

Despite significant growth in renewable energy capacity, achieving the RPO targets seem to be a distant dream because the increase in renewable energy generation is not as significant as the addition in installed capacity due to the lower plant load factors of solar and wind power projects. However, on a stand-alone basis, renewable energy generation has been increasing at a fast pace.

In July 2017, India generated 12.9 BUs of electricity from green energy sources including solar, wind, biomass and small-hydro. This is 37.2 per cent more than the 9.4 BUs generated in July 2016 and 12 per cent more than the 10.2 BUs generated in June 2017. Significantly, the share of renewables in the total energy generation of 98.1 BUs, touched 13.2 per cent in July 2017, the highest ever in the sector. (The data for August 2017 is not yet available but the industry estimates it to be even higher than in the previous month.)

Rooftop solar steals the show

Over the past one year, there has been a strong impetus to rooftop solar, which has resulted in a sharp increase in installed capacity. The rooftop solar segment grew by 81 per cent in 2016-17 over 2015-16. As opposed to other rooftop-rich countries that have grown on the back of high capacity additions in the residential rooftop segment, the Indian market has seen greater growth in the commercial and industrial rooftop solar segments. As of March 2017, the installed rooftop solar capacity in India stood at 1,396 MW and another 1.5 GW is expected to be added in 2017-18.

The development of rooftop solar projects makes considerable sense for the industrial and commercial segments as the levellised tariffs are significantly lower than grid-based tariffs. These segments are, therefore, driving growth in the rooftop solar space, followed by the government and institutional segment. Almost all utility-scale developers have jumped on to this bandwagon, assigning separate teams for establishing their rooftop solar businesses. In the past one year, at least 100 engineering, procurement and construction companies have entered this market, mostly concentrating on different regions in the country. As far as the policy framework is concerned, all the states have announced their net metering policies for rooftop solar, which is noteworthy.

Challenges in policy implementation

While the government has introduced some growth-enabling policies, their implementation has run into many challenges and operational issues. Different land and infrastructure agreements have different duties levied on them. Instead of a stamp duty of Rs 0.6 million, a company could end up paying Rs 18 million in some states. Taking another example, the goods and services tax (GST) for the solar segment has been the subject of discussion in 2017. There was a major debate about taxing modules at 5 per cent or 18 per cent, before it was finally settled at 5 per cent. There is also ambiguity regarding the GST for balance of system equipment. While GST has been specified for a few components such as inverters, the rates for the remaining parts remain ambiguous. A developer’s primary job is to set up a plant and produce power, instead of going to the judiciary to settle legal and regulatory issues. In addition, any changes in law will only lead to legal complications, thereby delaying project development. Therefore, there should be greater certainty regarding the regulatory regime.

Sluggish growth in power demand

The 10 largest states in India consume over 60 BUs each, and they together account for almost 75 per cent of the total demand. States like Karnataka, Andhra Pradesh, Tamil Nadu, Telangana, Rajasthan, Madhya Pradesh and Punjab together account for over 80 per cent of India’s total installed and upcoming capacity of approximately 27 GW. The key states that have led the solar growth so far are Tamil Nadu, Rajasthan, Telangana, Andhra Pradesh and Karnataka. All these states have allocated more than 3 GW of capacity each under state and central policies. In addition, Madhya Pradesh and Punjab have floated tenders for 2 GW and 1 GW of capacity respectively. Other states continue to lag behind and the progress is expected to be slow because of an apparent surplus power situation in the country. The demand-supply deficit reduced significantly, from 8.71 per cent energy deficit and 8.98 per cent peak demand deficit in 2012-13 to 0.7 per cent and 1.63 per cent respectively in 2016-17. This is likely to go down further in 2017-18.

Another key concern pertains to the predictability of power demand, which has been volatile. As renewable energy capacity increases, it would be in the interest of the industry as well as the utilities to have forecasting and scheduling mechanisms in place so as to ensure demand predictability.

There is a material risk that some discoms may, under commercial or political pressure, renegotiate or back out of existing PPAs, particularly if demand does not grow sufficiently and/or if there are grid-related problems. This risk needs to be tackled at the regulatory end as issues pertaining to supply exceeding demand have already been initiated in the power sector.

Concerns over falling tariffs

Aggressive bidding and the sharp fall in prices have raised concerns regarding whether the solar and wind power segments will suffer the same fate as thermal power or the road sector, where irrational pricing led to many projects being abandoned or becoming financially distressed. From the past record, it seems likely that most of the recently won projects will come online given their short gestation period, credible sponsor groups and small project sizes. Delays are possible and some investors may bear the pain, but the banks are likely to be largely protected.

Another major challenge facing the sector is the slow pace of new tender announcements and completed auctions. The southern states, except Tamil Nadu, are bound to slow down in terms of allocating new capacity. Amongst the large states, Maharashtra and Gujarat have surplus power and remain unenthusiastic about new renewable energy capacity. That leaves mainly the northern states, of which Uttar Pradesh is the only state with reasonable growth prospects; however, developers are not very keen to invest in this state.


The long-term demand outlook for the sector is positive, aided by favourable policy support from both the central and state governments, as well as the improving tariff competitiveness of wind and solar power. Even with a conservative assumption of the overall RPO at 15 per cent by 2021-22, the incremental cumulative renewable energy requirement for 2017-22 is estimated at 63 GW. Given the ongoing transition from FiT-based PPAs to competitive bidding-based PPAs, wind energy capacity additions are likely to be affected in the current fiscal. As far as the solar segment is concerned, the utility-scale solar market will level out after 2017 until the power demand-supply situation becomes more favourable and storage technology becomes commercially and technically more attractive. However, rooftop solar will witness impressive growth in 2018.


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