A Long Way to Go

Challenges and next steps for renewables' growth in the new decade

The Indian electricity sector is expected to undergo a major transition with respect to its energy mix over the next decade. As per Central Electricity Authority (CEA) estimates, the share of renewable generation is likely to increase from 17 per cent at present to 39 per cent in 2029-30 while that of thermal will reduce from 79 per cent to 56 per cent in order to achieve the least-cost generation mix to meet the projected demand by 2029-30. The government has set a target to install 450 GW of renewable energy capacity by 2030 and India has made significant progress towards achieving this target, having installed 93 GW of capacity as of December 2020.

However, the country has a long way to go with more than 350 GW yet to be installed over the next 10 years. This translates into a requirement to add 35 GW of capacity on average each year between 2021 and 2030, which is quite significant considering the recent slump in renewables installations. In fact, in 2020-21, only 5.5 GW has been installed so far against the yearly target of 14.4 GW, with only two months left to achieve the remaining target. While low capacity additions in 2020-21 could be attributed to the devastating impact of the Covid-19 pandemic, even in 2019-20, the country managed to install only 8.8 GW of renewable capacity against the yearly target of 11.8 GW. Thus, with yearly installations not even reaching 10 GW, 35 GW of capacity addition each year seems immensely challenging.

This sheds light on a worrisome fact that despite the massive investments in India’s renewable energy space, the sector suffers from some critical challenges that need to be urgently addressed to reverse the slowdown in installations and improve growth prospects.

Renewable Watch highlights the major issues plaguing the country’s renewable energy space and the outlook for the future…

Discoms continue to be the weak links

The discoms’ significantly growing debt levels pose considerable risks to India’s renewable energy expansion plans as frequent payment delays from discoms are a major concern for developers. As of November 2020, the discoms are estimated to owe renewable energy generators Rs 119 billion in overdue payments (excluding disputed amounts) across 452 invoices, according to data from the Ministry of Power. This is despite the various government schemes to support the distribution segment. Thus, the poor financial health of the discoms, which are ultimately responsible for procuring much of the renewable power, is threatening the viability of the entire renewable energy value chain.

To safeguard developers to some extent, the government had mandated that the state discoms offer bank letters of credit in power purchase agreements (PPAs), effective August 1, 2019, to ensure timely payments to power producers. Further, recognising the adverse impact of Covid-19 on the revenues of these loss-making discoms, the government announced a Rs 900 billion liquidity injection in May 2020, which would be extended as loans by REC Limited and the Power Finance Corporation to help clear discoms’ liabilities to gencos. According to the recent budget announcement, there is going to be a greater focus on discom privatisation and competition in the distribution segment by allowing consumers to choose their discom. These measures are expected to enhance efficiencies, reduce the high levels of debt and improve the overall state of the distribution segment in the country.

Solar tariffs hit rock bottom

Solar power tariffs hit new lows in 2020. In November 2020, a record low tariff of Rs 2 per kWh was discovered in an auction conducted by the Solar Energy Corporation of India (SECI) for developing 1,070 MW of grid-connected solar power in Rajasthan (Tranche III). Then, in December 2020, the tariffs went down a notch further to Rs 1.99 per kWh in Gujarat Urja Vikas Nigam Limited’s (GUVNL) Phase XI auction for

500 MW of solar projects. The recent dip in solar tariffs can be attributed to the entry of a large number of international investors with deep pockets, a huge risk appetite and access to low-cost financing.

While low tariffs point to a competitive Indian solar market, this trend of steeply falling prices has created unrealistic expectations. Discoms are now tariff shopping and cancelling or postponing tenders in the hope of accessing lower tariffs. Many of these discoms are even unwilling to sign power sale agreements (PSAs) with intermediary procurers such as SECI and NTPC for their previously awarded projects at a comparatively higher tariff. Meanwhile, the discoms’ low tariff expectations have discouraged many developers from participating in auctions. For those that do agree to supply power at such low tariffs, there would undoubtedly be concerns regarding project viability. To address this concern, dynamic bundling of tariffs and measures to prevent postponement of tenders on account of high tariffs should be explored to sustain growth.

Question of contract sanctity

As of September 2020, renewable energy projects with a total capacity of 16.8 GW were yet to sign PPAs with discoms. There have been reports of PPAs and PSAs stuck at the approval stage for more than a year due to unwilling discoms. This backlog has become a major cause of concern for developers as by the time the approvals do come through, technologies or regulations or costs could change, thereby impacting tariffs and project viability.

Further, there have been instances of states trying to renegotiate contracts to bring tariffs down, thus bringing the entire contract sanctity into question. It is, therefore, of vital importance that these contract conditions are tightened and that approvals and payments are done in a timely manner. Moreover, contract renegotiation to bring down tariffs should not be permitted, and bidding documents should be standardised to the extent possible in order to prevent confusion in tendering.

Restrictive policies for distributed solar

Net metering, long considered the primary driver for rooftop solar growth, has suffered from policy inconsistencies and bureaucratic hurdles. The recent regulatory intervention to restrict net metering to 10 kW load levels and allow only gross metering beyond that has further dampened consumer interest in rooftop solar. Similarly, even after more than 15 years of policy introduction, developers are facing major challenges in the implementation of open access projects. Even here, discoms tend to hinder open access licences as they do not want to let go of their high-paying commercial and industrial (C&I) customers. Further, there is uncertainty across states on the provisions for group captive or third-party sale, cross-subsidy surcharges, scheduling requirements, and banking and treatment of excess power. Thus, it is critical to minimise bureaucratic hurdles, grant timely approvals and provide regulatory clarity for future growth.

Difficulty in accessing low-cost finance

A recent report by the Institute for Energy Economics and Financial Analysis estimates that India requires a further $500 billion in order to reach 450 GW of capacity by 2030. This includes the capital cost of adding more than 300 GW of renewables infrastructure, firming intermittent renewable power generation, and expanding and modernising grid transmission and distribution. However, debt financing for renewable energy projects has been drying up with large Indian banks declining to fund them, as they are concerned about the viability of projects with low tariffs. This trend is expected to continue with debt financing taking place mainly in the form of loans and equity funding becoming the leading mode of investment. Further, interest rates, which are the most significant determinant for tariffs in India, vary from 10 per cent to 12 per cent for renewable energy projects, with a loan repayment tenor of 15-18 years. This significantly increases the financial risk for domestic developers. In contrast, international investors are able to get loans at much lower rates and are less exposed to this risk. Thus, they are able to bid at much lower tariffs. Going forward, the Indian government along with the Reserve Bank of India need to take urgent steps to improve the lending situation and make finance available for greater investments in renewables.

Delays in land acquisition

Solar and wind projects are location dependent and sites with high resources are limited to a few states. Wind power projects need around 0.75 acres per MW while solar projects require 4-5 acres per MW. Limited availability of resource-rich sites, increasing land prices and complicated land transfer procedures have made the entire process of land acquisition cumbersome for developers and frequently cause delays in project commissioning. There have been several instances in the recent past of renewable power projects worth hundreds of megawatts getting delayed and of auctions getting postponed or even cancelled due to land issues. To resolve this long-standing issue, better project auction and development planning is required from the tendering agency along with coordination amongst all participants – regulatory bodies, transmission agencies, project developers, local governments and landowners – so that projects are not stranded, and developers do not suffer on account of delays.

Mismatch in generation and transmission timelines

Transmission infrastructure takes much longer to develop than renewable energy projects. This often leads to a situation wherein projects are built but do not have access to grid connectivity, leading to losses for the developer. There have been several instances of bids being postponed and projects getting stranded due to inadequate transmission infrastructure. Even the Green Energy Corridors project, which was aimed at enhancing renewable energy transmission infrastructure, has failed to keep pace with renewable energy project development. Inadequate grid availability has led to periods of heavy curtailment in renewable-rich states, leading to substantial losses for developers and putting projects at risk.

The government must take steps to attract investments to the transmission segment in order to drive wind power growth, particularly in wind-rich states. Further, although the government has extended the waiver of interstate transmission system (ISTS) charges on the supply of power generated from solar and wind power projects until June 30, 2023, further clarity is needed on the scenario post June 2023. This will provide developers long-term visibility regarding transmission costs and project viability.

Inadequate domestic supply of solar modules

India’s solar manufacturing industry has not kept pace with the large-scale capacity deployments taking place, and China still accounts for the majority of India’s solar cell and module imports. In the past, the government has introduced measures such as the imposition of a safeguard duty and issued large manufacturing-linked tenders to promote local manufacturing.

However, safeguard duty has been a point of much debate as it has not only increased the cost of modules but has also created confusion regarding its applicability and pass-through in contracts. Similarly, there is no clarity on the likely imposition of basic customs duty on solar module imports. Further, over time, the cost of goods manufactured in China may come down enough to absorb safeguard duty and still be lower than the value of solar equipment manufactured locally. Moreover, India has no capacity to manufacture ingots and wafers. Thus, overall, domestic manufacturing of solar equipment needs focused attention along with substantial incentives to make it price competitive with Chinese imports and achieve the scale that can bring costs down.

The way forward

As is evident, much needs to be done to sustain the renewable energy growth trajectory. Strict policy and regulatory interventions are needed to iron out the kinks in this space. These include penalties for non-compliance with contracts and delays in payments, incentives for manufacturing, minimal bureaucratic hurdles and speedy approvals. Measures such as a bidding trajectory for providing visibility to developers, state-specific bids, dynamic bundling of tariffs and planned auctions with assured land and transmission infrastructure need to be revisited and reworked to improve project prospects and minimise risks.

At a time when utility-scale solar projects with discom PPAs are witnessing a slowdown on account of transmission constraints, land acquisition issues, lack of contract sanctity and delayed payments, C&I solar projects can contribute significantly towards achieving the country’s targets and must, therefore, be promoted.

Finally, as the energy transition accelerates and the country’s energy mix changes, the next decade will require not just a clear policy direction but also flexible power systems with energy storage systems that can integrate high volumes of intermittent renewable energy generation.

By Khushboo Goyal

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