Rewind 2018

Need for a step change

By Dolly Khattar

The year 2018 has proved to be an eventful one for the country’s renewable energy sector. India has moved up three spots to occupy the second position on the world renewable energy map, as indicated by Bloomberg New Energy Finance’s Climatescope 2018 report. Entrepreneurship has reached an all-time high with several new players backing renewables, even at the expense of coal. Meanwhile, tariffs are falling and have reached a record low, making renewables a preferred choice of power for discoms. The latest tariffs discovered for rooftop solar projects have broken the lowest record for utility-scale projects. New project designs and ideas such as floating solar and wind-solar hybrids have become a reality and are now being explored on a commercial scale. There has been some positive movement on the energy storage front as well, with greater attention being given to electric vehicles (EVs), which may drive down the cost of this technology.

All these trends have given an impetus to the country’s renewable energy goal of 175 GW installed capacity by 2022, which is no longer considered a tall target and may well be surpassed.

However, India’s renewable energy growth should be viewed not in terms of specific targets and numbers, but in terms of broader trends that impact the health of project developers and discoms, the appetite of investors and the plans of equipment manufacturers, among others. Some of these trends have slowed down the sector’s growth in 2018. Transmission constraints and the non-availability of land have become the biggest obstacles and led to solar tendering delays. The government’s flagship solar park programme is also facing teething problems due to issues such as access difficulties, the 25 per cent solar module import duty and GST complexities. These policy uncertainties have slowed down project implementation as developers have adopted a wait-and-watch approach. The lack of effective net metering implementation has kept the rooftop solar segment from growing at the desired pace. On the wind front, much of the manufacturing capacity is lying unutilised as the major original equipment manufacturers are in poor financial health. As far as payment risks are concerned, tariff guarantees by the Solar Energy Corporation of India (SECI) and NTPC are largely circumventing the lack of bankability of discoms for now, but the Ujwal Discom Assurance Yojana reforms must be completed in order to resolve this critical problem. Aside from these sector-specific issues that have been hurting investor sentiment, the macroeconomic environment too has turned negative after many years of relative calm. Interest rates have climbed, currency has depreciated and debt financing has become difficult due to liquidity constraints and credit quality concerns. While these macroeconomic factors will take their own course and stabilise sooner or later, the long-term growth of the sector is contingent on ensuring policy visibility and implementation, undertaking effective grid planning, improving the financial health of discoms, and devising a suitable design for the power markets.

In this article, Renewable Watch has summarised the broad sector trends witnessed in 2018, the prevailing challenges, possible solutions and the outlook going forward.

Sluggish growth

A total of 73.35 GW of renewable energy capacity has been installed in the country as of October 2018. This includes 34.98 GW of wind, 24.33 GW solar, 4.5 GW of small-hydro and 9.54 GW of bio-power.

The year 2018-19 has been a sobering one for the renewable energy sector with a slowdown in project development and a dampening of investor interest. According to investors, the sector is generating lower power and financial returns than they expected. A recent industry report has projected that solar installations in 2018-19 would fall to 7.4 GW from a decadal high of 9.36 GW in 2017-18. The project pipeline has weakened as well, with SECI cancelling bids for 2.4 GW of capacity this year as tariffs were above its expectations. The number of tenders that have been delayed is at its peak this year with SECI and almost all state agencies providing bid due date extensions across tenders. As a result, there has been a sharp decline in capacity addition, which may take some time to pick up pace. In the quarter ended September 2018, the country added 1,697 MW of solar power capacity. This is marginally higher than the capacity addition in the quarter ended June 2018, when the numbers fell to their lowest level since early 2017, but it is still far lower than the 4,130 MW added in the first quarter of 2018.

According to BRIDGE TO INDIA’s estimates, during the third quarter of 2018, rooftop installations increased by more than 150 per cent year on year. So it is the large-scale utility projects that are dragging down the overall growth. The total utility-scale project capacity addition in 2018-19 is expected to be only a little over 4 GW, a significant decline of 55 per cent over the previous year and well short of the Ministry of New and Renewable Energy’s (MNRE) 16 GW capacity addition plan for 2018. The decline can be attributed to uncertainties around trade cases, module price fluctuations, and power purchase agreement (PPA) renegotiations after record low bids that contributed to a tender and auction slowdown in 2017. All of this resulted in a weaker solar project pipeline for 2018.

In the wind power segment, in contrast, a better project pipeline was set up in 2017, thereby brightening the outlook for this segment in the ongoing fiscal. Projects of over 8 GW of capacity were awarded by SECI and NTPC, as well as state distribution utilities between February 2017 and September 2018. Some of the first few wind projects allocated through competitive bidding have already been commissioned. However, the actual capacity addition in this space in 2018-19 will be short of target. Industry estimates indicate that 2.5 GW of wind power capacity will be commissioned in 2018-19, well below the government’s wind power capacity addition target of 4 GW for the year. The scenario is not very encouraging across other renewable energy segments as well.

In the small-hydro space, in order to achieve the 10 GW by 2022 target, a capacity addition of 1.4 GW is needed in 2018-19, which is far from being achieved. As of October 2018, only 21 MW of capacity has been added, taking the segment’s total capacity to 4.5 GW. Given the current scenario, even the 250 MW target set by the MNRE for this segment is unlikely to be achieved. The bioenergy segment has witnessed even lower growth this year. The segment is facing issues due to logistical challenges, unviable project economics and lack of adequate policy attention. Thus, despite its benefits and use cases, such as clean cooking and industrial heat, the segment is far from making a significant impact as a clean energy source.

Words of caution

India is the most exposed economy in the world when it comes to oil imports and prices. For a stable economy, it cannot remain continuously vulnerable to uncertainty in oil prices. Given that the cost of renewable energy is coming down and that of oil is going up, this is a great time to shift to renewables. However, a word of caution here – in a low-tariff scenario, some players have started compromising on project quality. To ensure the financial viability of developers at this time, the debt service coverage ratio of developers should be disclosed while bidding for projects. In fact, developers should keep a careful check on this ratio given the market expectation of an upward trend in interest rates that will adversely impact their profitability. Otherwise, there could be several IL&FS repeats in this sector as well. Notably, the sector faces challenges in financing, which are more due to public policy framework and institutional issues than to the stress faced by the banking sector. One, most renewable energy projects are not classified as investment-grade as the rating of the offtaker is poor. A guarantee mechanism will help compensate for the lack of credit rating of the offtaker and help in attracting large amounts of capital from various pension funds. Two, while the Central Electricity Regulatory Commission has issued the procedure for grid connectivity of renewables, the responsibility for securing grid connectivity for all projects, apart from those located in solar parks, lies largely with developers. This calls for the identification of spare capacity at the substation level prior to the call for bids. Only when the spare capacity is blocked for renewable power should an agency go ahead with issuing a tender. And bid evaluation should then be done on the basis of tariffs discovered at the substation level. Three, the uncertainty regarding the “change in law” clause in PPAs needs to be dealt with. Changes in tax structures and other duties can have an adverse impact on developers’ balance sheets and therefore need to be addressed in a timely manner.

New beginnings

Realising the many economic and natural benefits of clubbing wind and solar projects, the MNRE released the National Wind-Solar Hybrid Policy in May 2018. The country’s first commercial hybrid project was, however, commissioned before the policy came into effect. The 78.8 MW plant, owned by Hero Future Energies, seemed to have set the ball rolling in this space. But there are several issues that plague this segment. Clarity is needed on metering and grid connectivity arrangements, and the tariff determination mechanism for such projects. Owing to lack of clarity, along with the broader issues faced by the sector, SECI’s 160 MW solar-wind hybrid tender did not get the desired response from the industry. Other tenders in this space are also not doing too well. However, as soon as the clouds of uncertainty retreat, the segment should take off in a big way.

As the country moves towards a higher share of renewables, it is imperative for the grid to be aligned accordingly in order to handle a higher quantum of infirm power. In 2018, the challenges pertaining to grid access and availability of adequate transmission capacities started impacting the growth of renewables to a large extent. Aside from effective grid management and upgradation to smart grids, energy storage has been recognised as the key to large-scale integration of renewable energy into the system. During the year, SECI, NTPC, Power Grid Corporation of India Limited and a few other PSUs were on a mission to launch pilot-scale as well as commercial-level tenders for energy storage-based renewable energy projects. While they met with some disappointments initially, some progress has been made. Mahindra Susten emerged as the lowest bidder for Neyveli Lignite Corporation’s tender for a 28 MWh solar plus storage project. The results of SECI’s 160 MWh solar-wind hybrid project and two smaller tenders of 3 MWh and 2 MWh of capacity, with a battery storage system, are still awaited.

Efforts are also being made to promote domestic manufacturing of batteries and resolve the hurdles faced by manufacturers in early 2018. Several positive developments have taken place in this space since then. Notably, the world’s first thermal battery manufacturing plant was inaugurated in August 2018. The offshore wind power segment also witnessed some positive developments. The National Institute of Wind Energy proposed extensive studies to assess the segment’s potential. It also invited expressions of interest for the development of 1 GW of offshore wind capacity in the Gulf of Khambhat. As many as 35 developers expressed interest in the project development. Following this, the MNRE set an additional target of developing 30 GW of offshore wind capacity by 2030. A start has been made, but to persuade developers to set up more offshore capacity, the government needs to ease the process of setting up such projects by providing faster approvals among other benefits.

What to expect in 2019

The better half of 2019 may not see much dynamism due to the general elections. The industry, therefore, should not expect much action on the policy front during this time period. However, this does not mean that the renewable energy sector will not witness much growth. Given that thermal capacity growth has slowed down considerably, renewables, especially solar and wind, will continue to dominate the agenda of the power sector. Around 8 GW of wind capacity has been tendered since the competitive bidding regime was introduced, and most of this will be commissioned in 2019. As the safeguard duty expires, all the pending or in-line solar capacity will start getting commissioned as well. There are chances, however, that the industry may witness further petitions for anti-dumping duties as well as for the extension of safeguard duty. If that happens, the current slowdown in the solar power space will linger on through 2019 as well.

Rooftop solar may start gaining traction towards the end of the year, with industry players increasingly seeing value in customer-centric businesses. Several new and innovative business models are likely to emerge in this segment. That said, the highest paying commercial and industrial customers are among the biggest investors in rooftop solar. Thus, a bigger push towards renewable energy by these important customers could accelerate the downward spiral in discom finances.

A key area being looked at as a solution to most of the grid-related challenges of renewables is energy storage. Any breakthrough in power storage could prove to be disruptive for the sector, but this seems unlikely in 2019. Besides, the country’s power markets are in their infancy and the ancillary services market that storage can offer is not yet developed, leaving little scope for the “storage as a service” market to be established. Storage-based renewable energy projects may therefore receive lukewarm response in the near term. However, storage will be on the energy sector’s agenda next year. The final national energy storage mission is expected to be announced in early 2019. With growing renewable energy integration into the grid, there will be an increased push for storage for grid applications. As a result, several pilot projects based on energy storage will be launched.

Battery costs will start going down only after the country’s EV mission takes off, providing the much-needed scale to equipment manufacturers to offer better prices for grid-level energy storage. But large volumes in the EV market are still a few years away.

Looking ahead, the growing share of renewable energy generation will require significant institutional and regulatory interventions to reduce the cost of grid integration. New market incentives are needed to create the right type of supply based on location, seasonal or daily availability, and ramping capabilities. It is also important to focus on the discoms, which remain a weak link in the system and are quite vulnerable to disruption.

 

 

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