Renewable energy developers in India have benefited from falling costs of technology, a policy impetus, an influx of foreign capital and the clean energy ambitions of corporate consumers, helping in the expansion of their portfolios. However, they continue to face some long-standing issues, such as lack of policy stability and clarity, regulatory bottlenecks, and outstanding dues from discoms. The disruptions caused by Covid-19 have further dampened the industry sentiment, which is hoping for some bold reforms going forward. Senior executives of leading renewable energy developers share their perspective on the evolution of the renewable energy sector, its fundamental challenges, the much-needed reforms, and their vision for the future. Excerpts…
What have been the key developments and policy decisions in the past 10 years that have created business opportunities for renewable energy developers?
In the last decade, falling solar PV tariffs, an aggressive policy push for the solar segment, and low entry barriers have led to an escalation in the growth of the solar segment. The use of the operating expenditure model for commercial and industrial (C&I) users, pioneered by Amplus, was a key development, as was the influx of a high volume of foreign investment in the renewable energy sector. Rooftop financing saw a steady growth. However, the availability of low-cost debt is still limited. Nevertheless, Amplus has been able to get access to debt. For instance, Amplus was the first developer in India to be awarded rooftop debt financing by the World Bank and the Asian Development Bank. Other highlights of the past decade include the increase in awareness regarding renewables, and various global companies committing to sustainability goals.
India’s achievements in transitioning to a secure, affordable and sustainable energy system to power robust economic growth have been outstanding. India is now the third largest market for solar in the world, behind only China and the US. The approximately 35 per cent contribution of renewable energy to India’s total electricity generation is significant. India’s current status shows that as one of the lowest cost solar power producers, its shift towards a dominant renewable energy market is imminent.
The growth of the solar segment has been driven by a gamut of factors such as falling costs, a favourable policy and regulatory framework, incentives and subsidies for faster adoption, a streamlined process for approvals and clearances with respect to land, regulatory and connectivity approvals, mandating solar installation for large customers and in government buildings, raising tax-free solar bonds, offering long-tenor loans, augmentation of the transmission and distribution network to accommodate renewables, and the development of solar parks.
Ten years ago, people acknowledged the potential of renewable energy, but large-scale deployment had yet to be demonstrated. Now, continuing technological advances and the rapid deployment of several renewable energy technologies have amply demonstrated the potential. Policy leadership has taken cognisance of the increasing share of renewables from the very start, and this was reflected in the National Action Plan on Climate Change, which is part of India’s commitment to fight climate change. There are eight missions under the action plan. The importance of solar is evident from the fact that unlike other renewable energy sources, a National Solar Mission was formulated to significantly increase the share of solar energy in the total energy mix. When the first National Solar Mission was enacted in 2010, solar was not considered a serious contender for contributing to the energy mix. The mission was launched with a target of producing 20,000 MW of solar power in three phases – 2010-13, 2013-17 and 2017-22. The target was revised further to 100 GW, and now the idea is to increase it to 300 GW. In 2010, the total installed solar capacity was a meagre 10 MW and in 2016, it reached 6,000 MW, a steep jump of 600 times in six years. Today, we stand at over 30 GW.
One of the most important policy decisions that created business opportunities for renewable energy developers was the introduction of the first feed-in tariff scheme in 2004. Tariffs over the past decade have plummeted by over 80 per cent, making solar the most cost-effective source of energy. These exponential growth numbers show the continued focus of the government and the positive response from solar developers, in addition to global market forces that have led to cost declines. The specialised bodies formed by the government such as the Ministry of New and Renewable Energy and the Solar Energy Corporation of India have played a crucial role in promoting solar and raising public awareness through campaigns, events and funding.
“Business models that lead to a win-win situation for all – developers, discoms and customers – should be used.” -Sanjeev Aggarwal
In the past 10 years, two major developments have created conditions for the explosive growth of renewable energy in India and around the world. First, and most important, is the ever greater cost competitiveness of wind and solar power. Ten years ago, we talked about achieving grid parity. Today, wind and solar power provide some of the cheapest power being generated. Questions like “when will solar achieve grid parity?” have been replaced by “will any private investor still finance a new coal power plant?” Similarly, a decade ago, the conventional wisdom was that renewable energy penetration would top out at something like 20-30 per cent, given the difficulties in integrating variable generation. More recently, the National Renewable Energy Laboratory concluded that an 80 per cent renewable grid is achievable in the US by 2050 with current technology, and this is consistent with other recent analyses.
The second major development is the increasing seriousness and ambition of corporate users of electricity. While they represent only a subset of overall demand, corporates’ ambition to achieve 100 per cent renewables is important.
CleanMax was started a decade ago on the premise that there was an enormous, if unproven, appetite for clean energy solutions, provided that those solutions could be appropriately de-risked and structured. Initially, corporates were happy with very modest shifts towards renewable energy. These shifts have accelerated very quickly, and now one of the most common questions we get from clients is along the lines of “what we have done so far is great, but how can you get me to 100 per cent?”
India is making great strides in the renewable energy space by creating a conducive environment for power producers through innovative policy initiatives. Installed renewable power generation capacity has increased at a fast pace over the past few years, posting a compound annual growth rate of 17.33 per cent between financial year 2016 and financial year 2020. The country currently stands at an installed renewable energy capacity of 87 GW in financial year 2020. As of September 30, 2020, 36.17 per cent (including large hydro) of India’s installed electricity generation capacity is from renewable sources. A lot of factors have played a positive role in stimulating the renewable energy sector in India.
- As part of the Paris Agreement, the Government of India has committed to achieving 175 GW of renewable energy capacity by 2022. This includes 100 GW of solar capacity addition (which previously stood at 20 GW).
- The renewables’ sector has been witnessing a steady increase in the inflow of foreign direct investment (FDI) in the past few years backed by favourable policy initiatives such as allowing FDI up to 100 per cent under the automatic route. The sector received an FDI inflow of $9.22 billion between April 2000 and March 2020.
- The introduction of reverse bidding auctions brought about a certain level of transparency in terms of allocating projects to power producers. The auctions resulted in historic low bids due to the expectation of low price for capital goods such as solar modules, which further motivated consumers to switch to renewable energy sources and leverage the existing grid tariff differential.
- New innovative project models such as renewable energy service companies (RESCOs), open access models, group captive projects, etc. enabled both power producers and consumers to enter into tailor-made agreements as per their specific requirements.
- Falling solar module and inverter prices (comprising almost 50 per cent of the total project cost) and levellised cost of energy have also encouraged power producers to expand their margins and upscale their portfolios at large. Inverter prices in India are also low compared to other markets globally.
“The biggest challenge currently is policy uncertainty, fuelled by abrupt policy changes by the government.” -Pinaki Bhattacharyya
What are the biggest challenges faced by renewable energy project developers today?
Health concerns, supply chain disruptions, travel restrictions, delays in construction activity, disruption in O&M services, business growth challenges, worsening financials of utilities power and independent power producers, cautious lending practices, and regulatory issues are the biggest challenges, that have emerged due to the pandemic. Limited financing in the rooftop solar segment is another key challenge. Extension of safeguard duties and the likely imposition of a basic customs duty may further restrict the growth of the industry. With solar tariffs falling continuously, these duties may have a negative impact. Power utilities in India are already in debt; therefore, an increase in costs due to these duties may increase the burden on utilities. The other key challenge is that discoms are making it difficult to get net metering and other approvals, which is not favourable to developers. In the manufacturing space, India focuses mainly on polysilicon technology. The country needs to shift to the manufacturing of high-yielding modules. To become truly self-reliant in solar manufacturing, the government should not only focus on manufacturing but also support research and development.
The renewable energy sector has had its share of struggles and challenges. Although the government is committed to increasing the use of renewable energy sources and is already undertaking various large-scale renewable power projects and enthusiastically promoting green energy, the country still has a long way to go to achieve the renewable energy targets of 175 GW by 2022 and 450 GW by 2030. The government has, over the years, announced attractive policies to promote the sector, but these have had different impacts on different stakeholders.
Project developers have faced a number of challenges such as a lack of low-interest financing, policy uncertainty, lack of coordination between the state and central governments for a sustained focus on capacity deployment, delays in land acquisition and regulatory approvals, and an inadequate policy fillip to the rooftop solar segment.
Some of the new challenges being witnessed by developers are state discoms cancelling bids, inordinate payment delays, tariff renegotiations, curtailment of renewable energy in some states despite renewable energy plants having must-run status, and delays in the grant of connectivity approvals to open access projects. Such contradictions cascade and create negative ripples in the entire stakeholder ecosystem, dampen investor confidence, and diminish the economic attractiveness of the sector.
But the biggest challenge currently is policy uncertainty, fuelled by abrupt policy changes by the government. Take for instance the case of imposition of trade and tariff barriers, which is adversely impacting sector growth. The industry is at a stage where it should be striving for global competitiveness. However, it needs to first be competitive in the domestic market, which will happen only if the policy framework is clear and consistent, and focused on reducing manufacturing costs instead of creating trade barriers. A steady flow of funds, policy clarity, and ease of doing business will ensure that the renewable energy success story in India continues unabated.
Regulatory uncertainty is the biggest challenge, as it affects not only project financing but also project implementation and operations. There is no need to constantly introduce waivers or benefits as part of policy. Although policies need to be reviewed and revised to address prevailing issues, policy and regulatory certainty must remain intact till such time as a project is conceived, conceptualised and executed. Policies and regulations must explicitly define the sunset date, and developers must be pre-informed about any change in norms so that they can assess the risks and returns during the conceptualisation phase of a project. If developers had a wish list, the first item on it would be policy visibility of at least five years, along with a long-term vision or path laid out to guide policy direction. Naturally, mid-course corrections will happen, but as long as governments maintain continuity of direction, policies will not become a deterrent to investments.
A project is conceived based on prevailing regulatory benefits and policy guidelines, and if these benefits and guidelines change just before the commissioning of the project, cash flows and returns are affected, at times crippling the project or destroying asset value. This essentially impacts the country’s precious capital, reputation and infrastructure. Regulators and policymakers need to be aware of such pragmatic issues while designing and changing policies and regulations. The core objectives for solar developers are to install projects, serve customers and meet financial obligations while budgeting and building financial models for project returns. Competition serves as a natural check on these returns, beyond what policies can. There have recently been instances of retrospective revision of banking charges and provisions. Such cases develop apprehensions among financial institutions.
Amidst all the positive stories, one may find some odd events taking place in this business segment, and I believe these are part and parcel of every business segment. Sometimes, they are disappointing and reflect a short-term loss of faith. However, committed developers assess and evaluate the situation from a long-term perspective.
“The government should float a captive renewable energy policy, prioritising customers and their freedom of choice, within reason.” -Adarsh Das
As a B2B developer, our biggest challenge is to match our clients’ ambition for 100 per cent renewables with actionable solutions that can be deployed in our target markets – currently India, the UAE and Thailand. In every market, there are regulatory constraints – for example, caps on net metering for rooftop projects, and restrictions on open access supplies. Regulations can be slow to change, so the onus is on developers to create innovative structures to help clients achieve their renewable energy goals.
Despite achieving a modest growth rate in terms of capacity additions, the proliferation of the sector is being thwarted by a number of structural bottlenecks. Land acquisition has been one of the major issues for onshore power producers. The major prevalent challenges are lack of a proper land utilisation policy, poorly maintained land records, land ceiling limits, localised permissions, etc. Safeguard duties (SGDs) and uncertainty in basic customs duty on solar cells, which forms a major chunk of the total project costs, create complications in terms of project bankability as the industry still relies heavily on imports (majorly from China) for sourcing solar cells. The Ministry of Finance recently announced an extension of SGD on the import of solar cells and modules to India for another year, starting July 30, 2020.
Lack of centre-state coordination has been one of the major impediments in achieving renewable energy targets. Although targets are set by the central government, states are free to enact their own reforms and policies, which creates a certain divergence in achieving a common goal. Several state-level actions such as retrospective changes to policies, threats to renege on existing power purchase agreements (PPAs), delayed payments to renewable energy generators, and curtailment of power have dampened investor confidence in the sector.
Delays in payments from debt-ridden discoms have also become a major concern over the years. Their poor financial performance has been weighing down the entire sector, with their inability to pay power generators on time, manage their losses, and iron out other inefficiencies. As of May 2020, discoms have accumulated massive overdue payments to generators of Rs 1,163.4 billion, creating an immense liquidity crunch across India’s entire power sector.
Moreover, the lack of a robust transmission infrastructure capacity has always been a pressing issue for renewable energy developers. For a number of mega solar and wind tenders, developers have attributed their low participation to the lack of power evacuation and grid transmission capacity.
Financing constraints also impede the growth of the fledgling sector in the country. In addition to policy issues specific to renewable energy, the magnitude and unresolved nature of India’s many non-performing assets in the thermal power and distribution segments have undermined the integrity of the Indian financial sector as a whole. This, in turn, has had a ripple effect on financing in the renewable energy sector.
“Regulations can be slow to change, so the onus is on developers to create innovative structures to help clients achieve their renewable energy goals.” -Andrew Hines
What are the key reforms needed from policymakers and regulators to transform the renewable energy sector, going forward?
In addition to net metering for residential rooftop consumers, gross metering, wherein feed-in tariff is not linked to the utility scale (size of the project), will ensure that distributed solar remains economically viable. Business models that lead to a win-win situation for all – developers, discoms and customers – should be used. Also, the fading out of subsidies from discoms and transitioning to direct transfer of subsidies to beneficiaries will ease the burden on discoms. Moreover, reforms in open access policies are needed to make more states amenable to these policies. Going forward, policies to aggressively promote electric storage and electric mobility will also transform the renewable energy sector.
The government must notify policies that are favourable to the ecosystem at large and not just to a few companies, in order to encourage holistic growth. Although a lot of effort has been directed towards building utility-scale solar plants, one market segment that has tremendous potential but has remained derelict is the C&I segment.
In India, corporate businesses consume almost 50 per cent of the country’s energy generation and have a potential of about 25 GW of renewable energy adoption by 2023. However, currently, only 3-4 per cent of companies use renewable energy to meet their energy needs. Corporates have to buy renewable energy directly from generators to meet their renewable energy obligations. However, this route is currently being restricted. By procuring some renewable energy directly from generators while buying the balance from discoms, corporates in key manufacturing segments such as automobiles, fast moving consumer goods, pharmaceuticals, cement, telecom, data centres, and heavy industries are able to reduce power costs. This has been even more beneficial during the pandemic, when these companies have been looking to reduce their operational expenditure. The development of this segment will also promote manufacturing in India and will be a step towards an “Atmanirbhar Bharat”.
India can become the largest corporate PPA market and thus attract huge investments in generation, subsequently boosting manufacturing by introducing certain reforms. These include streamlining the open access regulatory and connectivity approval framework across the states, implementing the draft amendments to the Electricity Act, providing low-cost debt financing options, imposing no restrictions on operating expenditure models for rooftop plants, and allowing virtual PPAs or merchant plant agreements.
First, the central government should float a captive renewable energy policy, prioritising customers and their freedom of choice, within reason. The duty on solar panels should be lowered, as the higher price causes a cascading increase in capital costs and reduced deployment of solar, while not significantly enhancing highquality production capacity. While true “cost to serve” may be a bridge too far, cross-subsidy should be reduced to a minimum over time, given that even policymakers have in the past mentioned that the resulting higher tariffs put our industries and job creation at a disadvantage. Net metering policies should be standardised across India, even if the actual numbers vary from state to state. Removal of priority sector lending limits for solar projects could ensure higher credit financing and give a much-needed boost to the sector. Additionally, specialised lenders such as the Power Finance Corporation, Indian Renewable Energy Development Agency Limited and REC should be encouraged to lend not just for government offtake but also for other creditworthy projects. Improving the financial health of discoms, updating the Electricity Act and formalising renewable purchase obligations with enforceable mechanisms across the country would be significant reforms that could boost sector growth. These steps will help increase the supply of renewable energy to match rising demand, ultimately leading to higher GST collection for solar and wind energy equipment, creation of jobs, and reduced outflow of foreign exchange.
“Storage is going to be a major breakthrough that will lead to a dominant share for renewable energy in the power sector.”- Kapil Maheshwari
Power consumers, large and small, are keen to adopt renewable power for a combination of cost and sustainability reasons. However, governments have taken only limited steps to enable them to do so.
One example in India is the open access regime. While it was very progressive when introduced in 2003, it is limited to consumers with a minimum demand of 1 MVA. On top of this, there are many constraints at the state level for projects set up to supply open access power. The end result is that open access customers across India are able to source only a fraction of their demand for renewables through open access.
Broadly, enabling the end consumers of power to choose their energy source while compensating transmission and distribution companies for their infrastructure and services can expand opportunities for renewable energy adoption. This will benefit all power consumers, who are currently paying an inflated cost of power for electricity, much of which is generated from polluting and increasingly uncompetitive coal plants.
A well-defined long-term policy framework is unequivocally going to be the first major stepping stone in creating an attractive sector for both domestic and foreign investors. This is essential for the economy to achieve net carbon neutrality.
The only way to circumvent the current SGD on imported solar modules is a well-entrenched domestic manufacturing market, ensuring good quality and efficiency. In order to achieve this, significant R&D investments are required for streamlining manufacturing processes by leveraging at par technologies, which will unlock economies of scale in the long run.
The erratic implementation of tariffs and duties will have to be done away with in order to gain investor confidence and bring huge inflows of long-term capital into the sector. The implementation of the draft amendments proposed in the Electricity Act can strengthen the sanctity of power supply contracts and bring reforms in the distribution segment.
What is your vision for the evolving role of renewable energy developers in the next 10 years?
One, the share of renewable energy (especially rooftop solar) is expected to increase. Two, battery storage technologies will be developed further in a bid to make them viable. Three, there will be integration of electric mobility with the electricity industry. Four, there will be greater digitisation in the energy sector with the use of internet of things, artificial intelligence and blockchain. Five, new energy generation sources such as hydrogen fuel cells will see an uptake.
The project development landscape of renewables has evolved, with the market being consolidated and a few key players driving capacity deployment across segments. Project developers in the coming years will be more experienced and the technology more established, and this will give lenders/investors more confidence. However, with technological innovation and competition disrupting the existing market paradigm, the change in the renewable energy market will ride on the adoption of innovative technologies such as wind-solar hybrids and battery energy storage systems for flexible and despatchable round-the-clock power. Going forward, the adaptability of developers to the rapidly changing market dynamics will determine their position in the market.
With energy storage costs declining, renewables, coupled with storage, will achieve grid parity in the coming years, leading to greater energy independence. We also expect the convergence of solar, storage and energy management in the mid-term future for corporates. This transition will not only help India achieve its climate goals, but also generate around half a million new employment opportunities in the solar segment alone in the next 10 years. We foresee India being amongst the first few countries to replace ageing, inefficient thermal assets entirely with renewable energy sources.
As sustainability has become increasingly important to corporates’ planning for the future, their needs have become both deeper and broader. This has given rise to opportunities for developers to not only build larger portfolios of projects, but also to work closely with clients to co-create solutions that meet their goals. As renewables continue to scale up and dominate the global energy landscape, there will be no shortage of opportunities for developers. Competition will also increase, requiring developers to keep an intense focus on cost and financing. At the same time, opportunities will increase for developers that can find innovative solutions to match their customers’ needs.
As the sector is constantly growing, renewable energy developers will play a pivotal role in ensuring the demand-supply balance, given that more consumers will be shifting from conventional to renewable energy sources. Renewable purchase obligations and net carbon neutrality commitments will be the initial drivers for growth in the market share of renewable energy sources. In addition, storage is going to be a major breakthrough that will lead to a dominant share for renewable energy in the power sector. Assurance of 24×7 power from renewable energy sources will provide confidence to consumers, which will impact the growth of the thermal power sector in the long run. Several other innovations such as green hydrogen and electric vehicle charging powered by renewable energy sources will further boost the growth of the renewable energy sector.