Getting Back on Track

Consultants’ perspective

The Indian renewable energy sector has been growing at a rapid pace over the past decade. This growth has been fuelled by falling prices and aggressive auctioning. While about 15 GW of capacity was auctioned in 2018, the subsequent two years saw a considerable slowdown. The Covid-19 pandemic, in particular, delayed the execution of projects and rocked supply chains. Since it is widely accepted that the transition to renewables is inevitable, the sector is expected to overcome these short-term barriers, provided domestic manufacturing is strengthened, there is access to cheap capital, and the industry moves beyond mainstream renewable energy technologies. Leading industry consultants discuss the sector’s journey over the past decade, the key issues and the way forward. Excerpts…

How has the renewable power sector evolved over the past decade? What have been the key learnings?

Balawant Joshi, Managing Director, Idam Infrastructure Advisory Private Limited

Balawant Joshi

India has seen strong growth in renewable energy installations at a compound annual growth rate of 21 per cent between financial years 2010 and 2020, with a current installed capacity of about 87 GW. This strong growth has been spearheaded by the solar photovoltaic (PV) sector, which has risen from almost nothing to about 37 GW at present. Further, projects with a capacity of about 35 GW are at various stages of implementation.

During the initial period, generation-based incentives (GBIs) and the accelerated depreciation (AD) benefit played important roles in both the wind and solar segments. These soon gave way to solar parks with dedicated evacuation infrastructure, which reduced a lot of uncertainty for private players. In the third phase of evolution, the e-reverse auction played a crucial role in bringing down costs. In several instances, such as the renewable ultra mega solar project, innovative payment security mechanisms were offered, which made projects attractive. At the same time, we have seen several state tenders not receiving enough subscriptions. The key learning here is that a well-structured project, an adequate payment security mechanism, and the availability of infrastructure are prerequisites for successful project development.

Vaibhav Singh, Associate Director, Energy, PwC

Vaibhav Singh

India’s installed renewable power capacity has increased considerably over the past few years, making it the fourth largest renewable energy market globally. The decade witnessed significant renewable capacity addition, with solar energy, in particular, making rapid strides. The capacity additions were made possible owing to measures such as the setting up of solar parks and interstate transmission system (ISTS)-connected projects. To support further capacity additions, more such innovations are needed. A conducive policy and regulatory framework, technology advancements, increasing economies of scale, and healthy competition have led to plummeting tariffs, paving the way for accelerated deployments. The competitive bidding guidelines for the procurement of renewable energy, primarily wind, have put immense pressure on manufacturers as well as developers. However, they have proved to be the bitter pill that has helped discover notably low tariffs and let the segment develop alongside solar.

The sector has seen its fair share of challenges including renegotiations, cancellation of allocated capacities, delays in PPA signing and issues in land procurement. This has dented investor confidence and was reflected in the poor response to subsequent bids. The phasing out of incentives such as GBI, AD (reduction to 40 per cent) and tax holidays, and the introduction of GST and safeguard duty had a temporary effect and the sector emerged stronger.

Dr Rahul Tongia, Senior Fellow, CSEP; Senior Fellow, Brookings Institution; and Adjunct Professor, Carnegie Mellon University

India’s renewable energy story over the past 10 years has, in some ways, mirrored the global rise, driven heavily by a dramatic fall in the price of solar power. There has also been an India policy focus in the earlier period, starting with support mechanisms such as GBI under the National Solar Mission, then moving towards aggressive deployment targets starting 2014-15.  Probably the biggest shift has been renewable energy moving from niche to mainstream. Stated another way, renewables are now the lowest-cost source for many applications and simply the new business as usual.

The two biggest drivers have been falling prices and a centralised push, which have led to extensive (and sometimes aggressive) bidding. The standardisation of bidding and then PPAs have been key factors, combined with interest from not just new entrants but even more entrenched incumbents such as NTPC. However, India’s current renewable energy targets are so ambitious that it is unlikely the earlier models will suffice.

What are the key challenges that the renewable energy sector is facing at present? What steps need to be taken to address these issues?

Balawant Joshi

The first, and probably the most important, challenge is that of the financial viability of discoms. While many projects are being signed through the Solar Energy Corporation of India (SECI) and NTPC Vidyut Vyapar Nigam Limited (NVVNL), several developers have already started questioning the long-term sustainability of this model given that ultimately, SECI and NVVNL are also dependent on the discoms for their cash flows. The second issue is the policy uncertainty surrounding the import of cells and panels. The government must bring in a long-term policy to support domestic solar manufacturing. The other challenges faced by large renewable energy projects include a mismatch in the completion of evacuation infrastructure and implementation challenges in the wake of Covid.

The challenges faced by distributed project developers are far more complicated due to the policy and regulatory variations prevailing in each state. The Ministry of New and Renewable Energy needs to actively intervene in the process. Discoms must be forced to support rooftop solar projects by imposing targets. Further, many state regulators have ordered the levy of charges such as grid support charges on behind-the-meter systems. Discoms must take into account the benefits of rooftop systems, such as a reduction in technical losses, voltage profile improvement, and the potential for capex deferral while determining these charges. Unfortunately, no standard methodology exists to quantify these benefits.

“A well-structured project, an adequate payment security mechanism and availability of infrastructure are prerequisites for successful project development.” -Balawant Joshi

Vaibhav Singh

Land remains the single biggest roadblock in the implementation of large-scale renewable energy projects, despite several proactive steps taken by the central and state governments to make it easy for solar developers to acquire land for their projects. The issue is further exacerbated with ISTS bids requiring land parcels close to central transmission utility substations.

Manufacturing is a pertinent question as capacity addition is largely supported by imported cells and modules. The extension of safeguard duty and the announcement of the levy of basic customs duty on imported solar cells and modules come amidst the government’s push to ramp up domestic manufacturing and reduce India’s dependence on imports. However, these may lead to increased tariffs and reduced interest from discoms to procure power at such tariffs.

The falling cost of renewable power and increasing retail tariffs had created a business case for various consumers to deploy renewable capacities. Discoms in several states have been reluctant to support the installation and integration of projects because of a potential revenue loss for each unit of power generated. The constraints in regulations, the tedious net metering process and prohibitive charges clubbed with limitations in the distribution network have been impediments to sector growth.

There is a need to create a conducive environment by ensuring policy certainty, supporting domestic manufacturing, favouring quality products, offering financial support, inculcating a culture of timely payments, and raising consumer awareness.

Dr Rahul Tongia

A major challenge has been the lack of domestic manufacturing; the same worry for solar cells is now translating into concerns over battery technologies. The biggest need is for a shift in planning to move away from energy (kWh) instead of balancing capacity (kW) at the right time and place. Fixing this will require changes in power grid operations – not just through grid strengthening and improved interconnections between states and regions, but also time-of-day signalling. While a power exchange exists, the volumes it carries are small, and PPAs that do not distinguish between the time of day still dominate.

Compounding this challenge is a surplus of coal capacity due to dramatic expansion between financial years 2011 and 2016. What all of this has led to is resistance by states, or the purchasers of such electricity, to new renewables, citing oversupply, more so given the existing PPAs and concerns over peak power. Storage-integrated renewables are still years away from being cost competitive, especially when we consider locational differences. At the pithead, coal-based power has a marginal (fuel) cost that is measurably lower than the average cost of variable renewable energy (which has no fuel cost).

“We foresee the next wave of installations being supported by storage integrated tenders and hybrid tenders.” -Vaibhav Singh

Which emerging technologies have the most growth potential? Do you foresee greater uptake of distributed energy projects in the near future, enabled by the growing commercial and industrial market?

Balawant Joshi

New technologies are emerging in practically every sphere of energy. In the renewable energy space, offshore wind energy technology is evolving very fast. Similarly, high efficiency hetero junction solar cells, static compensators, battery energy storage systems (BESSs), green hydrogen, etc. are a few other technologies that are emerging rapidly. Digitalisation and internet of things (IoT) devices are revolutionising the consumption space with smart energy management systems, peer-to-peer trading platforms, blockchain-based systems, etc.

However, in my view, the decade of the 2020s will belong to BESSs. Prices have already dropped by more than 80 per cent over the last decade. If we go by the latest SECI VII tender, battery storage is viable even for grid-scale batteries in India. Further, BESS is already viable in many distributed applications in the commercial and industrial (C&I) sectors. The government has recently announced a production-linked incentive scheme for advanced chemistry cell batteries and solar manufacturing, which will further reduce the prices of both. As a result, the cost of energy generated and stored at the consumer end would be cheaper than discom tariffs.

Vaibhav Singh

Energy storage represents one of the most promising avenues of growth, given that its prices are falling even more steeply than those of solar cells/modules. Storage finds a multitude of applications across the stationary segment, consumer electronics and electric vehicles, with an estimated cumulative deployment potential of more than 500 GWh by financial year 2030. The recent tenders for peak power, round-the-clock power, solar plus storage for islands, etc. are all targeted at mainstreaming energy storage in the coming years. A production-linked incentive scheme has also been approved to help develop the manufacturing value chain and ensure self-sufficiency for advanced-chemistry batteries. We foresee the next wave of installations being supported by storage integrated tenders and hybrid tenders to help address the intermittency issues of renewable energy and improve the penetration of renewable energy.

Floating solar technology has also gained traction and is here to stay as a solution to land constraints while offering significant cost reduction. Another segment with potential for disruption is offshore wind, which has garnered traction after the issuance of a 1 GW expression of interest, attracting the attention of both domestic and international players. Ascertaining the economic feasibility of such projects through the development of a prudent business model will lead to a lower landed tariff and large-scale implementation in the future, in line with the vision of 30 GW by fiscal 2030.

As far as the decentralised or distributed solar segment is concerned, this technology solution remains a lucrative one for C&I consumers, who have a higher landed cost of electricity. Not only are these solutions cost effective compared to traditional conventional sources, but they also ensure a substantial reduction in transmission and distribution losses owing to their proximity at the tail-end of distribution feeders.

Dr Rahul Tongia

At the technology level, there has been a steady change in specific technologies that have proven cost effective. Tracking is now becoming the norm, and bifacial cells are becoming mainstream. Thanks to optimisation between the AC and DC sizing, the average plant load factor of solar farms is now closer to 25 per cent. The real improvements needed will come from system level optimisation, as well as the use of artificial intelligence and IoT to squeeze every last drop of efficiency out of the system. Storage technologies will become paramount, as well as smart grid technologies that enable more nimble operations at a system-level, including demand response. Solutions for reducing operations and maintenance costs (cleaning) and water usage are also key requirements, especially in hot Indian conditions.

Distributed solar will certainly grow, but one has to be extremely careful in setting up pricing and incentive schemes because discoms are already resisting losing sales to their so-called “paying customers”. Renewable energy has grown to a maturity where it does not need many support mechanisms, and rich renewable users should not treat the grid like a battery without paying for the privilege.

“If planners do not embrace renewables and new technologies, they may find such solutions bypassing the incumbents and the status quo. Either way, renewable energy will be a key part of the future.” -Dr Rahul Tongia

What has been the impact of Covid-19 on renewable energy projects in India? What is your short-term and long-term outlook for sector growth post-Covid?

Balawant Joshi

Due to the Covid-19 outbreak and the subsequent lockdown by the government, project execution came to a standstill. This is reflected in the capacity commissioned during the first half of the year. Given the strong pipeline of projects under execution (about 25 GW as of December 2019), the impact was far higher in the solar segment than in any other segment. Further, the imports of solar cells and modules got delayed owing to the shutdown of factories in China, as well as delays in the release of import containers and cargo across major ports in India.

However, this is a short-term impact and projects will get back on track once the situation improves. Further, the government relaxed the timelines for commissioning projects by declaring the Covid-19 situation a force majeure event. The longer-term impact will be in terms of a loss in energy demand. Many industrial undertakings have shut down forever and many people have lost their jobs. As a result of work-from-home policies, several commercial establishments, such as office complexes, have shut down. This is going to have an adverse impact on energy demand and discom finances. This will certainly impact renewable energy growth in the medium and long terms.

Vaibhav Singh

Renewable energy projects, given their must-run status, have witnessed an increasing share in the country’s total electricity mix. Even during the lockdown period, when economic activity came to a standstill, renewable generators were able to sell their power to distribution utilities uninterrupted. Covid-19 has affected the project development timelines of existing projects and one of the difficulties faced by project developers has been getting the workforce remobilised at site. One of the immediate issues that have slowed down the development of renewable energy projects is the impact of reduced financial liquidity. Adding to the stressed financial situation of the power sector, new investments have also faced challenges. Given the extraordinary situation, the ministry has provided the necessary relief through an extension in project commissioning timelines, and further financial assistance and relaxations.

The long-term project outlook is positive, as a significant amount of India’s recent energy generation investments have been in renewables and this trend is likely to continue going forward. A rebound in solar PV and wind deployment is expected from the first half of fiscal 2021, with capacity additions exceeding the 2019 level as delayed and new projects become operational.

Dr Rahul Tongia

Covid-19 has hurt logistics and supply chains across the entire energy landscape and slowed down demand growth for energy. Ignoring what many hope is just a blip, the long-term prognosis for renewables remains very bullish, for several reasons. India is still seeing a growth in overall demand, and renewable energy is well poised to meet much of this growth. The costs of renewables are falling, and the same trend is thus far  visible for storage technologies. Environmental concerns will more likely be driven by local issues in the short term than carbon, which is implicitly factored into renewable purchase obligations and other targets.

The single biggest need is access to cheap capital. Global capital will come when they find it worthwhile, not merely in terms of returns, but also risk (predictability and governance). Lowering these risks will require improvements in how discoms can credibly contract. If planners do not embrace renewables and new technologies, they may find such solutions bypassing the incumbents and the status quo. Either way, renewable energy will be a key part of the future.

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