The renewable energy sector has continued to evolve amid policy and regulatory developments, and fluctuations in financing. Meanwhile, the sector has been plagued by land acquisition issues, transmission constraints and administrative challenges. Leading consultants talk about the current state of the renewable energy sector, the key challenges and the way forward…
What have been the key developments in the renewable energy sector in 2019?
The year 2019 has been very eventful for the renewable energy sector. With the government repeating a second term, expectations were that the sector would get a big impetus. Instead, the year will be remembered for PPA renegotiations, rising payment delays by distribution companies, execution delays and undersubscription of multiple tenders. The only positive here is that the government is beginning to acknowledge investment risks and has made some material concessions in the latest amendments to project bidding guidelines.
The sector has witnessed its fair share of peaks and valleys this year and the road ahead looks potholed. However, efforts are being made by the government to ensure that we drive towards a sustainable ecosystem.
Solar, with a cumulative capacity of 31.7 GW as of October 31, 2019 and capacity addition of 3.5 GW during April-October 2019, is on course to surpass wind, which currently stands at 37 GW. The wind power segment witnessed a capacity addition of 1.5 GW during the same period. There was a shift from plain vanilla solar and bids were floated for peak power, round-the-clock power, manufacturing-linked capacities, floating solar, and solar with battery energy storage systems. The amendments to solar bidding guidelines and solar-wind bidding guidelines, aimed at bringing clarity and improving the quality of renewable energy plants, were welcomed by the sector.
With the uncertainties around GST, safeguard duties and competitive bidding for wind behind us, the sector was poised for growth this year. However, it has witnessed more cons than pros. Investor confidence was severely dented by the cancellation of PPAs, payment delays, renegotiation of contracts/tariffs, delays/postponement of tenders, lack of connectivity/infrastructure availability, delays in land acquisition, policy backflips, etc.
There have been positives and negatives for the sector. The positive is the stakeholders’ acceptance of the dominance of renewable energy in India’s electric systems and the firm stance taken by the central government in this regard. There is increasing focus on technologies, such as floating solar to address resource constraints and storage for enabling better renewable energy integration. Another huge positive is the focus on decentralised rooftop solar systems, which help reduce transmission and distribution losses and investments, address land resource constraints and ensure better grid management. In addition, the KUSUM scheme provided benefits of reliable daytime agricultural supply and new revenue streams for farmers.
A constant concern has been payment delays. The government is already working to address this issue through the payment security mechanism, which came into effect on August 1, 2019. This is a good move for the industry and, if implemented effectively, can help address some of the key risks related to payment issues. The efforts to bring in transparency and accountability for all outstanding dues through database creation are also laudable. However, investments are seeing a slowdown owing to issues such as tariff renegotiation, disconnect on ceiling tariffs, and land and transmission constraints, which have led to under subscription in recent tenders.
Dr Rahul Tongia
The year 2019 could be considered a period of consolidation or stabilisation for the renewable energy sector. The growth has been modest and below targets. This may be a reflection of the short-term equilibrium. Most of the headlines focused on select states as well as the issues of PPA renegotiations and delayed payments. The government has made progress on renewable energy monitoring, and the industry is stepping up to improve predictions. On the technical front, solar has seen a rise in capacity utilisation factors (CUFs) owing to the optimisation of DC to AC sizing ratios and deployment of new bifacial modules.
What are the key issues and challenges that the renewable energy sector is facing?
As noted above, the sector is facing very strong headwinds on the policy, financing and operational fronts. The financial condition of distribution companies has been deteriorating steadily, creating risk aversion and putting off financiers. First and foremost, the government needs to find an urgent solution to this problem as there is little time to lose. We have heard some suggestions on comprehensive policy reform and even some murmuring of UDAY 2.0, but concrete ideas are still missing. Second, the government needs to identify large parcels of land and expedite transmission capacity augmentation.
The government needs to gear up and take steps to implement and monitor activities to improve discom performance, especially AT&C losses and the ACS-ARR gap. If UDAY 2.0 is going to be implemented, then discoms should be held accountable and a transparent monitoring system has to be developed.
Delays in PPA signing or renegotiation, and the cancellation of tenders owing to high tariffs have hurt investor confidence. These tariffs have been discovered through a transparent competitive bidding (reverse auction) process and the sanctity of the process and mechanism must be maintained. On the payment front, the government has issued revised solar bidding guidelines emphasising the need for a mandatory letter of credit and state government guarantee. State government guarantee is a key proposal. It entails a risk premium provision of Re 0.10 per kWh to be paid by end procurers (discoms) to the intermediary procurer (SECI/NTPC). This will be credited to the payment security fund and maintained by SECI/NTPC to meet exigencies.
The cost of debt has been increasing and debt financiers have been shying away from projects with low tariffs citing concerns over their performance and ability to service the debt. Private IPPs backed by foreign funds have been able to continue exploring innovative ways to finance the projects even after taking a hit. However, small players and MSMEs still find it difficult to find cost-effective funding to fuel their growth. The wind segment has been struggling due to a slowdown in capacity additions owing to reduced participation in the ongoing bids. OEMs are facing a financial crisis due to low volumes and high inventory, reverse auction bidding and stiff competition. In the solar segment, the emphasis should be on rooftop solar, which at an installed capacity of 2.3 GW presents a huge shortfall vis-à-vis the stipulated target under the 100 GW solar plan. We are witnessing an alarming trend, where several state utilities are now discouraging net metering. Rooftop solar is already facing several issues in terms of financing, scale, implementation/local challenges, and the U-turn on net metering will do little to support the sector.
Dr Rahul Tongia
The 175 GW of targeted renewable energy capacity is likely to be absorbed without any major changes to the grid or the need for large storage, but after this we will simply not be able to absorb such energy easily. Even if all pump sets shift to solar, we will still have the net demand (demand minus renewable energy) with an evening peak. With solar diurnal and wind seasonal, this is a major challenge. The short term is manageable (economics are a distinct discussion), but what about the medium and long term? These will be the fundamental issues going forward, where we will no longer be able to rely on the low-hanging fruit of variable renewable energy. Location also matters. Most of the renewable energy is concentrated in selected regions, which also happen to be far from coalfields.
How will the solar and wind energy segments perform in terms of capacity addition in the coming year?
Although better than the current year, we expect the next year to be fairly slow for new utility-scale capacity addition. Our estimate is about 12 GW, of which 9-10 GW would be solar and the balance wind. The first half of the year is expected to be particularly slow as safeguard duty is in place until July 2020. Developers will be keen to delay their projects to avoid this extra cost. Wind is likely to continue to grapple with challenges on the land acquisition and transmission fronts.
The tendering pipeline this year has been bleak and hence commissioning during this financial year and early next year is not very promising. In wind, around 23 GW needs to be added in the next three years to meet the government target of 60 GW by 2022, which is an uphill task considering that capacity addition in the first seven months of 2019-20 has been only 1.7 GW. With an optimistic outlook (irrespective of challenges and market perspective), we can expect a capacity addition of 8-12 GW per year for ground-mounted solar, which should be enough to help achieve the 60 GW ground-mounted solar target.
Currently, India has around 83 GW of installed grid-connected renewable energy capacity, with wind and solar accounting for an 82 per cent share. In the first nine months of 2019, around 6 GW of renewables capacity has been added. As per market estimates, around 20 GW of renewable energy capacity is under implementation.
Dr Rahul Tongia
The targets will likely be high, and may or may not be met, but targets should not be viewed as sacrosanct. Some of these may be aspirational. At the same time, a sufficient overall supply is vital. The country cannot afford to slip back to power supply-deficit scenarios. This may require new capacity of some type (not necessarily coal) to come online in a few years for the evening peak. Rooftop PV (also known as behind-the-meter PV) should see continued growth, but the business model issues (and impacts on distribution companies) cannot be ignored forever.
What will be the tariff trends in the next year? What needs to be done to ensure high project quality in a low-tariff scenario?
There was some divergence in wind and solar tariffs in 2019 and that trend is likely to gather pace next year. Module prices are likely to stay soft, resulting in a downward impact on solar tariffs. Meanwhile, wind tariffs may stay flat or even go up marginally.
Tariffs have stagnated in the range of Rs 2.60-Rs 2.65 per kWh for solar and Rs 2.70-Rs 2.90 per kWh for wind. A few exceptional cases do show low tariffs being discovered (such as GRT winning 150 MW at 2.53 per kWh), but fluctuations are there because of factors like offtaker, state, land prices, infrastructure availability and plan sizes.
It is true that due to low tariffs developers may tend to push the contractor for competitive prices, which will, in turn, lead to substandard quality. Developers and tendering authorities need to keep this in mind while bidding and tendering as developing sub-standard plants would lead to a loss the industry cannot handle in the future.
Dr Rahul Tongia
The bidding processes are driving down tariffs, but industry consolidation and a recognition that Rs 2.44 per kWh may not be replicable always should lead to a more practical equilibrium of about Rs 2.75 per kWh or even higher in some locations. One big missing gap when we consider quality is CUF. Although limited data is available to make any definitive claims, anecdotal information indicates practical CUFs are lower than aimed, more so for the rooftop PV segment.
What steps should be taken to drive growth in the renewable energy sector?
There is a huge mismatch between the centre and state goals (such as the centre versus the Andhra Pradesh government), leading to confusions and unnecessary delays. Some suggestions – RPO compliance needs to take the front seat, bidding guidelines need to be developed to protect the interests of investors, land acquisition across the country needs to be streamlined, a process for transparent monitoring and tracking the progress of the Green Energy Corridors (GEC) needs to be in place.
While the Approved List of Models and Manufacturers order, revision of solar bidding guidelines and hybrid guidelines, and innovative tenders nudge the market forward, a combined effort is needed from all ends to make sure the plants we develop generate efficient power and sustainable returns.
While the renewable sector has maintained a decent growth over the years, an integrated planning approach needs to be adopted to achieve the ambitions set by the government. There has to be much better sector planning with large-scale projects awarded under the plug-and-play model, which addresses the land and transmission issues. Further, efforts to integrate renewable energy have to be made.
Further, opportunities offered by battery storage, pumped hydro and emerging technologies such as hydrogen need to be explored simultaneously. Above all, stability with regard to regulatory terms and non-negotiation of contracted PPAs are needed. The industry also needs to invest in digitalisation to bring in efficiencies as well as forecasting technologies to enable higher accuracy in generation scheduling. More than 80 per cent of the components for wind-based generation capacity are manufactured in India. However, for solar, there is a need to further encourage domestic manufacturing through a phased subsidy approach with a focus on research and development.
Dr Rahul Tongia
Policies need to focus on clarity, consistency and coordination. Renewable energy is not a drop-in solution. It operates in an ecosystem with multiple generation forms, transmission systems, jurisdictional roles, etc. One school of thought believes, “aim for the stars, and you’ll reach the moon”. The downside is this may crowd out alternatives, or lead to outcomes that are not the most cost effective at a holistic portfolio level. For example, energy efficiency may have more bang for the buck when it comes to reducing carbon.
How are the energy storage and EV segments expected to evolve in the coming year?
We expect progress to be slow, driven mainly by cost and technology evolution. The Indian market is extremely price sensitive and the government does not seem willing to provide financial support through incentives or subsidies. There are some large tenders that are currently at the bidding stage and their uptake will give us some critical insights into the immediate prospects of storage technology.
The evolving technological landscape of the energy sector coupled with effective cost-cutting strategies across the supply chain has made the application of battery storage in the grid a reality. Storage can play a vital role in ensuring better integration of renewables in the grid. The application of storage is envisaged for smoothening the renewable energy output, shifting renewable generation to the time of requirement, and utilising the power generated for a long period. We have also seen various tenders on integration.
We see two- and three-wheeler EVs gaining uptake over the next few years. In the four-wheeler EV segment, the ownership economics is not favourable for EVs, especially in the non-commercial segment. Further, lack of charging infrastructure is still a roadblock in mass-scale EV adoption. Efforts are being made by the government as well as private players to create charging infrastructure. It is expected that once a charging infrastructure network is set up in India, commercial four wheelers in the EV space would see a significant increase in uptake.
The battery storage market will be driven both by the electric mobility segment as well as stationary storage applications. With the increasing penetration of renewable energy, there would be an increasing need for grid balancing services. Energy storage can play a vital role in grid balancing, thereby enabling higher grid penetration of renewable energy. With storage support, it will be possible for many states to achieve renewable energy penetration levels of 30-40 per cent by 2025. Amongst various storage options, batteries have the potential to serve many useful functions at the transmission, distribution and customer levels. They need to be promoted with a firm policy directive as the cost curves decline.
Dr Rahul Tongia
Both storage and electric vehicles (EVs) will grow. Most people think of storage as capable of time-shifting. Its initial value proposition includes grid stabilisation and niche applications such as ancillary services. The EV segment needs new vehicle options, which are expected in 2020. Much of the uptake will be from fleets and public transport, which are not held back by public charging stations or lack thereof. It is also important to plan for EVs from a grid and time-of-day perspective. The energy needs of EVs are modest, but the grid instantaneous load implications may be very high, especially in selected geographies at the local level. If most charging is done overnight, the carbon savings will be small or near zero. Potentially, these may even be negative, if we compare the with state-of-the-art hybrid EVs. n
(The views of Anvesha Thakker are her personal views and not those of KPMG.)