As one of the world’s fastest growing economies, India will play a vital role in shaping the future of the global energy market. The government has made impressive progress in recent years, increasing access to electricity and clean cooking. Further, it has successfully implemented a range of energy market reforms and set up significant renewable energy capacity, particularly solar energy. The government has laid out an ambitious roadmap to bring secure, affordable and sustainable energy to all its citizens.
The International Energy Agency’s (IEA) report, “India 2020 – Energy Policy Review”, provides an analysis of India’s energy policy and gives recommendations in each area, with a focus on energy system transformation, security and affordability. The report includes an overview of the renewable energy sector and the targets set for each renewable source. It discusses the country’s policy and regulatory environment and the major challenges in the renewable energy sector.
Renewable Watch presents the key findings from Chapter 5 of the report, which focuses on renewable energy…
Overview of the renewable energy sector
The Indian government has set ambitious renewable electricity targets for the short to medium term. By 2022, the country aims to have 175 GW of installed renewable electricity capacity. In 2018, the government increased the target to 227 GW by 2022 and 275 GW by 2027. At the United Nations Climate Summit held in New York on September 23, 2019, the prime minister announced a new target of 450 GW of renewable electricity capacity, without specifying a date. At the end of November 2019, grid-connected renewable energy capacity reached 84 GW, with 32 GW coming from solar photovoltaic (PV), 37 GW from onshore wind and the remaining from small hydro.
Solar PV has been on a rapid rise. To increase investment in renewable energy in a cost-effective way, India introduced national competitive auctions for wind and solar PV. Following the abrupt change from feed-in tariffs to centrally run reverse auctions, the wind power sector has grown at a much slower pace than solar PV. The auctions complement other policy measures such as renewable purchase obligations (RPOs).
Renewable energy in India has long been dominated by the traditional use of biomass in the residential sector. In recent years, the country has rapidly expanded its use of other renewable power sources. However, the share of renewables in electricity generation has remained stable at around 16 per cent over the past decade. This is because the share of fossil fuels in total primary energy supply (TPES) and total final consumption has increased significantly since the 1970s.
Biomass, which is used for heating and cooking in households, is by far the largest source of renewable energy in India. Along with the population growth, bioenergy consumption has increased steadily for decades, albeit at a slower rate than overall energy supply. Thus, the share of renewables in TPES has been declining over time despite the recent increase in renewable power generation from hydro, wind and solar PV sources. In 2017, the total supply of renewable energy was around 200 million tonnes of oil equivalent, accounting for 23 per cent of TPES.
In the late 1970s, hydropower alone accounted for around 40 per cent of the total electricity generation. Although the supply of hydropower has increased steadily, its share in electricity generation has fallen to around 10 per cent.
Wind power generation has increased at an average annual growth rate of 14 per cent during the 10-year period 2007-16, accounting for 3.3 per cent of total electricity generation in 2017. Solar power has only started to grow in the past few years, supported by the 2022 target and auctions for new PV installations. During 2013-17, solar power generation increased by 64 per cent on average annually.
A minor share of electricity comes from waste-to-energy (WtE) projects using urban, industrial and agricultural waste and residue. These projects can provide energy at the point of demand and support the waste management sector in India. The increasing urbanisation and economic growth has resulted in pressing waste management challenges for cities and therefore created a potential for further development of the WtE sector.
Policy and regulatory scenario
The report also provides an overview of the policy and regulatory environment for the renewable energy sector. For utility-scale renewable (solar and wind) development, India relies on RPOs, renewable electricity certificates (RECs), accelerated depreciation (AD) benefit for commercial and industrial users, and now on competitive tenders. RPOs require discoms, energy producers and certain consumers to obtain a share of their electricity from renewable energy sources. In June 2018, the RPO requirement was raised from 17 per cent to 22 per cent by 2022, that is, 10.5 per cent from solar (up from 6.75 per cent) and 10.5 per cent from non-solar renewable sources, up from 10.25 per cent. The government approved a number of measures in March 2019 to promote the hydropower sector in the country, including declaring all hydropower projects as renewable energy projects and providing for hydro purchase obligations similar to RPOs.
The RECs are used by the obligated entities to meet their RPO requirements. The Central Electricity Regulatory Commission introduced RECs in 2010 and allowed their trading in March 2011 to address the discrepancy between the availability of renewable electricity across regional markets and the demand from obligated utilities and customers to meet their RPOs under the Electricity Act, 2003. However, the REC markets have not been successful in attracting large investments because of demand and investment uncertainty due to the absence of long-term targets and poor compliance.
In 2014, after a two-year gap, the AD tax benefit for renewable energy plant developers was re-established at 80 per cent, effective till March 2017. In April 2017, the benefit was lowered to 40 per cent.
In order to achieve the 2022 target, the government launched competitive auctions for solar PV in 2010 and wind in 2017 with long-term power purchase agreements. The Ministry of New and Renewable Energy (MNRE) plans to tender 25-30 GW annually until the end of 2021 to achieve the solar PV target of 100 GW by 2022. The Solar Energy Corporation of India (SECI) conducts large-scale central auctions for solar parks and has awarded contracts for 47 parks with over 25 GW of combined capacity. The MNRE has recently amended guidelines for competitive bidding with provisions to reduce offtake risk, address revenue shortfall from curtailment, and minimise delays related to land acquisition. However, land acquisition, grid integration and connectivity concerns have caused delays in the SECI auctions.
Moreover, renewable generators are granted must-run status under the Indian Electricity Grid Code, 2010, and the Electricity Act, 2003. Curtailment is only allowed for reasons of grid security by the state load despatch centres and compensation rules are in place. Meanwhile, renewable projects that are commissioned through competitive auctions and connected directly to the interstate transmission power network by 2022 are exempt from transmission charges for 25 years.
Key challenges and recommendations
The report mentions that besides permission and network expansion delays, the key barriers to investment in renewable energy projects in India are the small transaction size of distributed projects, the credit rating of offtakers and the absence of clear business models for rooftop solar projects. Moreover, the financial viability of discoms as offtakers has come under pressure because of poor payment discipline, high commercial and technical electricity losses and consequent financial losses, cross-subsidised electricity prices that do not cover costs, and limited metering and billing.
The impact of the Ujwal Discom Assurance Yojana (UDAY) varies considerably across states. According to the report, at least 40 per cent of capacity additions needed to meet India’s 2022 solar PV target are allocated to states with discoms that have below average to very low operational financial performance, according to the ratings given by the government.
The financing of decentralised projects, such as solar irrigation pumps, rooftop solar and mini-grids, is more difficult than funding utility-scale projects even though there are large markets for these products. This is because local banks have limited capacity and tend to prefer the larger transaction sizes associated with utility-scale projects. Moreover, there is a lack of frameworks for evaluating the creditworthiness of small companies and consumers.
The sector is still grappling with project development risks pertaining to land acquisition, right of way, grid connection and availability of local infrastructure for power evacuation, among other things, which delay project commissioning. There is a lack of clarity, land titles, with outdated records and fragmented landholdings, particularly in Jharkhand, Uttar Pradesh, Bihar and Odisha.
The IEA has given recommendations to the Indian government to address the challenges facing the renewable energy sector. It recommends a holistic strategy on renewable energy, which includes both supply of electricity and its use for heating, cooling and transportation. It also recommends changes in the design of the tenders floated by SECI. These include setting annual procurement trajectories, strengthening pre-qualification criteria, adjusting price caps to ensure the commercial viability of high quality projects and mitigating all project-related risks. To give the necessary fillip to the rooftop solar segment, The IEA recommends incentives to implement innovative business models for the development of standardised solar PV rooftop systems. Further, to improve the financial viability of discoms, The IEA recommends the proper implementation of UDAY.
Going forward, the report recommends substantial improvements in auction design, grid connections and the financial health of discoms to ensure continuous progress in the country’s renewable energy sector.