India has taken rapid strides in the area of renewable energy. As of September 2019, the installed capacity in the sector has reached 84 GW (excluding large hydro). Generation too has increased considerably. But does this mean the country is well on track to meet the 2022 target?
Recent trends suggest, no. The year 2019 has been characterised by large payment dues from discoms to renewable IPPs, land and transmission constraints, and regulatory and policy uncertainties, leading to huge delays in project development. Liquidity in the market is low due to large outstanding payments and generation curtailment in many states. The advantage of continuously falling global market prices no longer exists. The safeguard duty imposed on imported cells and modules has done little to support domestic manufacturing, but driven up project costs and slowed down commissioning. On a macro level too, a weak economy marked by the depreciation of the Indian rupee vis-à-vis the dollar has exacerbated the liquidity crunch. Banks are wary of lending to the sector owing to concerns about project viability in a high-risk, low-return regime. A number of mid-sized companies and large business groups have either exited or are looking for a way out, worried by the stiff competition, weak bond market, low tariffs and high debt prevailing in the sector.
While the earlier private sector optimism about India’s clean energy prospects has been clearly missing during the year and all attention has been focused on the challenges weighing down the sector, it is important to focus on the big picture as well. And the big picture is that, with renewables continuing to increase their share, the country’s power generation mix is more diverse now. Renewable energy capacity addition, although below target, has been surpassing the conventional power capacity added over the past two years. A large number of global funds and private equity (PE) firms have floated their renewable energy entities targeted solely at the Indian market. The biggest positive of the year has been that the government has acknowledged most of the investment risks and has been working towards resolving them. For instance, it has made material concessions in the latest amendments to the project bidding guidelines in order to overcome the roadblocks leading to project delays. The centre has also assured the developer community that it will resolve the issues pertaining to PPA sanctity, transmission bottlenecks and discom dues.
However, given the severity of the challenges, the industry is unsure whether the government can move fast enough to deliver on its promises. In the following section, Renewable Watch analyses the performance of the sector, outlines the highs and lows in the past one year, and presents the way forward…
Reduced target, slow pace of implementation
At the recently concluded United Nations Climate Action Summit in New York, the prime minister committed to increasing India’s renewable energy target to 450 GW as part of a stronger climate action plan. The announcement comes at a time when the renewable energy sector is beset with challenges and has lost its growth momentum. In fact, for the ongoing fiscal, the Ministry of New and Renewable Energy (MNRE) has revised the capacity addition target to 11,802 MW. This is a scaled-down target compared to what was indicated earlier for this period and is 23 per cent lower than that set for the previous fiscal.
In terms of actual addition, the solar segment added 5.4 GW of capacity in the first nine months of 2019-20, down 19 per cent from the 6.7 GW added during the same period in 2018-19. In comparison, the wind segment added 1.3 GW, up 35 per cent from the 840 MW added in the corresponding period in 2018-19.
The rooftop solar market continued to be weak owing to lack of financing and regulatory issues. The country’s cumulative solar installations stood at 33.8 GW as of September 2019, of which rooftop installations comprised only 12 per cent or 4 GW. While it could be argued that this is a reasonable figure for a segment that did not feature in the renewable pie at all a few years ago, in reality, the 4 GW of cumulative rooftop solar installations comprises only 10 per cent of the 40 GW by 2022 target. In terms of growth as well, the rooftop solar segment witnessed a decline of 44 per cent year on year in the quarter ended September 2019 to stand at 245 MW compared to 435 MW in the quarter ended September 2018. Owing to the liquidity crunch and worsening economic conditions, commercial and industrial companies are struggling to finance rooftop projects.
Including hydropower as a renewable source
A major positive for the sector during 2019 was cabinet clearance for a slew of measures for the hydropower segment, including giving large hydropower projects the renewable energy tag. The power ministry also announced that hydropower obligations would be notified separately within non-solar RPOs. According to industry observers, this will give a boost to the market for operational hydro projects with uncontracted capacity. It would also facilitate the signing of PPAs and enable financial closure for upcoming projects. However, there were no announcements for interest subvention for stalled projects, a measure that the industry was awaiting.
Growing share of renewables
In terms of installations, the total capacity addition from all power generation sources during the first nine months of 2019 was 13 GW. Of this, renewables (excluding hydro) accounted for nearly 56 per cent of the installations, with solar representing 41.4 per cent of the new capacity and wind 13.6 per cent. If hydro is included, the total installed renewable energy capacity in the country as of September 2019 stands at 130.68 GW. This translates into approximately 35.7 per cent of the total installed power capacity of around 366 GW. At around 45.4 GW, large hydropower projects account for a significant 34 per cent of the total renewable energy capacity installed and 10.1 per cent of the total installed power capacity. The share of solar in the total power capacity has grown rapidly to reach 9.2 per cent while that of wind power has reached 10.09 per cent as of September 2019.
States renege on renewable PPAs
In a move that significantly dented investor confidence in the renewable energy industry, the Andhra Pradesh government, in July 2019, announced its decision to review and renegotiate PPAs signed during the previous government’s regime under the feed-in tariff mechanism. The state government sought to withdraw 21 PPAs with renewable energy companies and form a high-level negotiation committee. In September 2019, however, the Andhra Pradesh High Court struck down the controversial decision that had put nearly Rs 210 billion debt of renewable energy companies at risk of default. Amidst these developments, the prime minister recently announced at the UN Climate Summit that India would double its renewable energy target to 450 GW, a move that has been cautiously welcomed by the industry.
Policy changes have been sudden and unpredictable in other states as well. Taking a cue from Andhra Pradesh, Uttar Pradesh made an attempt to renegotiate old renewable energy tariffs. Gujarat decided last year that only projects that supply power to state discoms could use land within the state, flouting a central procurement agency’s rule for setting up projects under the interstate transmission system. Rajasthan, one of the most sought-after states for solar plant installations, recently announced its decision to impose a charge of Rs 0.25 million-Rs 0.5 million per MW on all projects that sell power outside the state.
The sustainability of discoms has become an elusive goal for the power sector. Despite UDAY, the financial position of some state-owned discoms has deteriorated significantly in the past few years, with the cost-revenue gap widening, in addition to lower or delayed subsidies from the state authorities. According to the Central Electricity Authority, as of July 2019, distribution companies across India owed renewable power producers Rs 97.36 billion. Around three-quarters of that was owed by four southern states – Andhra Pradesh, Tamil Nadu, Telangana and Karnataka.
Formation of a national discom
Power Grid Corporation of India Limited (Powergrid) and NTPC came together to form a joint venture (JV) for undertaking distribution operations. The JV, National Electricity Distribution Company (NEDC), has been set up on a 50:50 equity participation basis. While its role is still unclear, reports indicate that instead of functioning as a distribution utility, NEDC may have a similar role as that of Energy Efficiency Services Limited and will serve as a contractor to help improve the performance of the existing discoms.
Ratio of auctioned-to-awarded projects declines
In a recent report, Crisil pointed out that despite an increase in tendering volumes, project allocations have slowed down, while undersubscription and cancellations of awarded bids have increased. According to the report, the ratio of auctioned/ awarded projects-to-tendered projects plunged to 34 per cent in 2018-19 from 77 per cent in 2015-16. In the wind power segment, in particular, auctions were conducted for 5.2 GW of capacity until August 2019, but only 2.9 GW was awarded because of lack of developer interest. Recent tenders, too, have seen tepid participation, leading to repeated postponements. In the latest wind auction conducted by the Solar Energy Corporation of India (SECI), only two developers participated. While the original size of the tender was 1,800 MW, the allotment was reduced to 440 MW.
Transmission remains a major constraint
Historically, transmission infrastructure has been the better performing link in the entire power sector value chain. But today, the situation is quite different. During the past one year, SECI has come out with a number of tenders, without any clarity on whether adequate transmission projects are under implementation and spare capacity is available at various substations for generators to plan their projects. Lenders are also wary of funding such projects that have evacuation risks. As a result, there has been a subdued response to the tenders floated. The gestation period of transmission projects is much longer (24-36 months) than that of solar generation projects (12-18 months). Hence, there is a need for greater synchronisation among different stakeholders to ensure transmission planning is aligned with generation capacity addition and transmission planning.
Churn, consolidation and new entries
The ongoing period of turmoil has impacted several companies’ ability to raise funds, keeping them away from participating in project auctions, restricting their growth and crippling their capability to refinance loans. A number of business groups are reportedly looking for a way out, worried by the stiff competition, weak bond markets, low tariffs and high debt prevailing in the sector. Among the stressed renewable energy players, a major company is wind OEM Suzlon Energy. The heavily leveraged company recently defaulted on a $172 million bond repayment and is struggling to find takers for its debt restructuring and stake offloading plans. Among other strategic investors reportedly looking to exit the Indian renewable energy space are Engie and Fotowatio Renewable Ventures. However, as is said, one person’s loss is another’s gain. At current valuations, renewable energy companies are beginning to seem like attractive takeover targets for companies looking to expand their portfolio or enter this market. CLP India, which is backed by Canada’s second largest pension fund, Caisse de dépôt et placement du Québec, has emerged as one of the major buyers of infrastructure assets in recent times.
In yet another development, in May 2019, the Piramal Group tied up with the Canada Pension Plan Investment Board to co-sponsor India’s first renewable energy-focused infrastructure investment trust. More recently, Singapore’s Temasek announced that it is teaming up with Swedish PE group EQT to launch a renewable energy platform for India that would build wind and solar farms, ground up, and acquire assets to bulk up. The two sponsors have promised an initial equity commitment of $500 million as seed capital. The decision of two of the largest private asset managers in the world to enter India’s clean energy space comes as a positive development after months of uncertainty in the sector.
Focus on renewable energy storage
During the year, policymakers as well as industry made a strong push for energy storage. Storage can play a vital role in ensuring better integration of renewables in the grid. The application of storage is envisaged for time shifting of renewable generation, smoothening of renewable energy output and utilisation of the renewable generator for a longer period. There have been various tenders for integration of solar with storage, including a 1,200 MW ISTS-connected renewable energy project with assured peak power supply, a 400 MW project for supplying renewable energy to NDMC, New Delhi, and Dadra & Nagar Haveli, on a round-the-clock basis (RTC I), and a 20 MW (AC) floating solar photovoltaic power plant with a 60 MWh BESS at Lakshadweep. However, the viability of these projects is yet to be established.
Clean mobility push
Giving an impetus to India’s e-mobility plans, the government, in March 2019, approved the Faster Adoption and Manufacturing of Electric Vehicles II (FAME II) initiative. FAME II, an extension of FAME I, entails a much larger financial outlay of Rs 100 billion. It proposes the establishment of 2,700 charging stations in the metros, smart cities, Tier II cities and hilly regions. Earlier, in December 2018, the Ministry of Power (MoP) released policy guidelines for electric vehicle (EV) public charging infrastructure. Recently, in view of the need to accelerate EV adoption, the GST on EVs and charging stations was reduced to 5 per cent, a move welcomed by the industry. A number of states drafted and notified their EV policies last year, including Tamil Nadu, Himachal Pradesh and Delhi.
India may have achieved 50 per cent of its 175 GW renewable energy target (excluding hydro) so far, but setting up another 38 GW of rooftop solar, 32 GW of solar utility and 23 GW of wind power capacity in the next two and a half years is a tall task in the ongoing policy and market environment.
According to a recent statement by the MNRE, by end September 2019, India had around 31,150 MW of capacity at various stages of installation. Thus, by the first quarter of 2021, India would have installed more than 113,000 MW of renewable capacity. This would constitute nearly 65 per cent of the targeted capacity. Besides this, around 39,000 MW of renewable capacity is at various stages of bidding and would be installed by September 2021, taking the share of installed capacity to over 87 per cent of the target. The MNRE has further stated that with only 23,000 MW of renewable power capacity left to be auctioned, the industry is confident that the target of installing 175,000 MW of capacity will be not only met, but exceeded.
Renewable energy developers have several reasons to be upbeat, despite the headwinds, and gear up for a mid-course correction. The pipeline of projects due to be commissioned in 2020 looks a lot stronger and the industry should see the solar industry resume growth. New segments such as solar-wind hybrids, floatovoltaics, energy storage and EVs offer considerable promise. But a lot will depend on the economy getting back on track, which will affect lending and power demand.
The ministry clearly has its work cut out, not just in terms of meeting the scaled-up targets but also for urgently restoring investor confidence. There are plans to bring out a stronger standard PPA for wind and solar projects that will introduce stringent penalties for defaulting state. Letters of credit are planned to be made mandatory for procurement of power. The ministry is also looking to go back to the plug-and-play model of project development, ensuring land and grid availability before projects are tendered. Swift and decisive action will be vital. Strong goals have and will continue to play a crucial role in pushing renewable energy growth in India, but the growth will hinge crucially on how policies shape up and how effectively development risks are mitigated.
By Dolly Khattar