Market Upheaval

Consultants’ perspective

The renewable energy sector, like any other sector, constantly faces challenges on account of macroeconomic variables as well as administrative changes. Every year new challenges emerge, making old solutions redundant. Leading consultants talk about these challenges and suggest innovative solutions to tackle them…

What have been the key policy and technology developments that have shaped the renewable energy sector in 2018?

Dr Arunabha Ghosh, CEO, Council on Energy, Environment and Water

Dr Arunabha Ghosh

Some of the key policy and technology developments in the Indian renewable energy sector have been crashing module prices due to a shift in the Chinese policy, the imposition of safeguard duty, and the introduction of a cap on solar tariffs by Indian tendering agencies.

Vinay Rustagi, MD, BRIDGE TO INDIA

 

 

 

 

Vinay Rustagi

The year 2018 has been very eventful for the renewable energy sector. It has been especially challenging on the policy front. We saw a multitude of new proposals and changes, with safeguard duty on imported photovoltaic (PV) cells and modules being perhaps the most critical. Other notable announcements included the wind-solar hybrid policy, a floating solar programme, a new manufacturing-cum-project development tender, clarification on the allocation of interstate transmission system (ISTS) connectivity, changes in solar park and project development timelines, formal extension of the renewable purchase obligation (RPO) trajectory to 2021-22, revision in renewable energy certificate prices, and proposed amendments to the Electricity Act. Unfortunately, many of the proposed changes are still work-in-progress. As the sector is growing, technology is also evolving rapidly. Storage and floating solar have become increasingly mainstream. Various module technologies such as mono, mono-PERC (passive emitter and rear cell), half-cut cell and bifacial have gained a significant market share internationally. In India, ambitious schemes have been announced for floating solar, offshore wind and wind-solar hybrid. Some small floating solar projects and storage projects have already been tendered and they should start making concrete progress next year.

Anvesha Thakker, Executive Director, Power and Utilities, KPMG

Anvesha Thakker

Policy and planning have seen significant developments. Safeguard duty on the import of PV cells and modules, design of an integrated manufacturing and project development tender, formal extension of the RPO trajectory to 2021-22, and proposed changes to the Electricity Act have clearly been the major announcements on the policy front this year. On the technology side, the country has moved from an “exploratory” phase to an “initial implementation” phase in new technologies such as storage, floating solar, wind-solar hybrids and offshore wind. As technologies mature, a cost-benefit analysis becomes crucial to scale up technologies that offer a strong value proposition.

Dr Rahul Tongia, Fellow, Brookings India

Dr Rahul Tongia

There has been a sharpening of renewable energy targets and RPOs, and India has made good progress, especially on the grid-scale solar front. Even wind showed maturity in moving from a feed-in tariff regime to competitive bidding. There has also been some positive movement towards small-scale storage pilots and deployments. However, there was some negative sentiment regarding the safeguard duty while the falling forex rate also raised some concerns.

What are the key issues plaguing the sector today? What has been the impact of currency fluctuation on the solar and wind power segments?

Dr Arunabha Ghosh

The key issues surrounding the sector today include post-commissioning evacuation risks for renewable energy projects, unexpected swings in the interest rate, policy uncertainty due to the erratic auction schedule, and capping of tariffs in solar auctions. The increase in procurement costs for developers due to the depreciation of the Indian rupee has been neutralised by crashing module prices. The bigger question is whether developers hedged it at the time of bidding.

Vinay Rustagi

The sector is facing strong headwinds on a number of fronts. We can classify them broadly as policy, operational and macroeconomic environment. On the policy front, we are witnessing frequent changes and revisions in taxation, duties, quality standards, tender design and timelines. This is not desirable as investors need long-term policy stability. The second issue relates to the non-availability of land and transmission infrastructure, which is resulting in significant delays across tenders. The government’s flagship solar park programme is also facing teething problems. Finally, the macroeconomic environment has turned negative after many years of relative calm. Interest rates have climbed up notably in the past year, while debt financing has become far more difficult because of tighter liquidity and credit quality concerns. The fall in the Indian rupee has also had an adverse impact on project viability with almost 50 per cent of module price reduction benefits being wiped out by it.

Anvesha Thakker

The sector is facing challenges broadly in four areas. One, there are institutional and  implementation challenges with respect to power curtailment, land acquisition, delays in the signing of  power purchase agreements (PPAs) and demand uncertainties from the consumers. Two, there are policy and regulatory challenges. The uncertainty regarding safeguard duties and GST as well as the lack of consistency in open access charges are part of these challenges. Three, the sector faces financing challenges like interest rate and exchange rate volatility, limited financial instruments for small players and the general issue of non-availability of bank credit to industry players. And then we also have a limited number of labs for quality certification. Some of the issues have existed since the beginning and it is critical to address these to accelerate the deployment of renewable energy in the country. With a large percentage of modules being imported in the country, the devaluation of the currency increases the cost of setting up solar projects. It also increases the financing cost for the project funded using foreign debt.

Dr Rahul Tongia

Uncertainty over safeguard duties and PPAs has been one of the biggest negatives. The question over forex risks is that who is going to bear it? This risk can be eliminated neither by a pass-through mechanism nor by a change of law, but issues pertaining to GST and duties can be resolved easily. Probably, the biggest challenge remains the signing of PPAs for renewable-rich states, facing difficulty in managing the burgeoning growth. This has led to more projects being connected to the ISTS, which is a temporary solution.

How do you foresee the tariff trends in the next year? What needs to be done to ensure high project quality in this low-tariff scenario?

Dr Arunabha Ghosh

Renewable energy tariffs are expected to mostly stay in the range of Rs 2-Rs 3 per kWh in the next year. Conflicting variables are at play. While rising interest rates, the depreciating rupee and the safeguard duty will nudge tariffs upward, the slump in module prices and lower return expectations (thanks to continuous de-risking in the sector) will push tariffs downward. Efficient risk allocation among manufactures, developers and reinsurance companies is the best way to ensure high project quality in this low-tariff era.

Vinay Rustagi

We expect tariffs to remain stable over the next year. The sector is getting concentrated and access to financing is getting tougher. As a result, return expectations will go up. We also expect quality concerns to be addressed as large developers with better technological expertise now dominate the market.

Anvesha Thakker   

Going forward, the tariff is likely to be driven by three major factors – module prices, access to cheap finance and the tender pipeline. Any significant drop in tariffs over the next year is not foreseen.

Dr Rahul Tongia

The uncertainty over forex and duties may prevent tariffs from reaching Rs 2.44 in the near term. The focus should be not on lowering prices (let alone forcing them to be lower by imposing ceilings on bids), but on making sure that such power is absorbed and paid for. To this end, an enabling framework is needed. At present, even Rs 2.75 per kWh is cheap if we compare it with the tariff of new thermal power projects. It is essential to ensure project quality in the low-tariff scenario, but the lack of publicly available data on plant load factor and generation output makes it difficult to differentiate between good and bad quality. More importantly, we want to analyse the performance of plants over time, which seems impossible due to the lack of data. For now, the developer is bearing the risks.

What should be done to encourage the renewable sector to take the next leap of growth?

Dr Arunabha Ghosh

Better RPO compliance and management of evacuation risks will help the sector on the generation side. Liberalising the energy market by introducing ancillary services, etc. will lift the sector to a higher orbit.

Vinay Rustagi

Fortunately, there are some easy wins possible. Problems pertaining to GST, safeguard duty and change in law procedures can be dealt with quickly if decisive, coordinated action is taken. Fixation on prices leading to undersubscription and tender cancellations is also completely unwarranted and can be remedied relatively easily. There needs to be more thoroughness and coordination between different state agencies for the development of new schemes and tenders. Frequent extensions are not desirable. Finally, the long-term growth of the sector is contingent on grid planning and a suitable design of the power markets. The growth will stall if adequate attention is not given to these areas.

Anvesha Thakker

The country needs to focus on anticipating and addressing problems that are likely to arise due to the integration of renewable energy into the grid. We already see high penetration in certain seasons in many states. However, these states are struggling to integrate renewable energy. Therefore, grid integration should be the government’s key focus area now. Both supply-side measures, such as contracting for flexible capacities including gas and storage, and demand-side measures, such as demand response, need to be explored to bring flexibility into the grid.  Apart from that, policy and regulatory certainty will always remain key for the industry to take a leap of faith. For solar parks, which have the ability to accelerate renewable energy growth in India, land acquisition remains a concern and needs to be addressed.

Dr Rahul Tongia

India needs to focus on the supply portfolio that will be required to handle the high renewable energy capacity. We shouldn’t just focus on the renewable energy versus coal debate but rather think how both can play a role in meeting India’s energy needs. Also, at some point (not for a few years, but afterwards), India will need viable storage solutions at low cost. Moreover, a better policy framework and innovative business models are required to ship renewable energy across states. Going forward, we have to work out business models for the rooftop solar segment that will not put financial pressure on utilities.

Power storage, EVs, green bonds and more. What will be the most noteworthy develop- ment in renewables in 2019 and why?

Dr Arunabha Ghosh

The first half of 2019 will not see much dynamism due to the general elections. While the penetration of electric vehicles (EVs) and green bonds will increasingly go up, any breakthrough in power storage could prove to be disruptive for the sector.

Vinay Rustagi

Storage is going to dominate the agenda next year. A national storage mission is expected to be announced early next year. As costs continue to decline and grid stability challenges mount, storage will begin to be seen as a critical component in the renewable energy value chain. Many of the early schemes have been cancelled this year, but many large projects should finally start making formal progress next year onwards. Some large EV schemes may also be announced, but volumes in this market are still a few years away in our view. Finally, we expect domestic manufacturing-related uncertainty to linger in the solar sector. We are not hopeful of significant progress in integrated tenders, and we may see further petitions for anti-dumping duty as well as for the extension of safeguard duty.

Anvesha Thakker

The solar and wind energy segments, considering their scalability, will continue to dominate the agenda. However, I see rooftop solar gaining centre stage with industry players increasingly seeing value in customer-centric businesses. I expect 2019 to be pivotal for the rooftop solar segment, when players will use innovative solutions and business models. Digital technologies will play an important role in business strategies and will help players achieve scale, bring down the cost of acquisition and operations and help manage dispersed assets effectively. Storage and EVs, like this year, will continue to generate significant interest owing to their ability to disrupt the future energy scenario. With falling costs, increasing adoption of EVs and setting up of charging infrastructure the growth levels would be higher than ever. Still, a rapid growth phase may not be seen. With growing renewable energy integration into the grid, we may see an increased push for storage for grid applications with substantially more activities around pilot projects.

Dr Rahul Tongia

The proposed amendments to the Electricity Act, 2003 and the National Tariff Policy, once they take shape, will change the landscape of the sector. We should see limited roll-out of storage and standards for EV charging stations. The trends, however, will not substantially increase the sale of EVs in the short term. Things to look out for in the next year include more action from the states and also a major rise in rooftop solar. It could grow at a good pace, but we need to make sure this does not happen at the expense of the discoms.

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