Renewable energy installations in India crossed the 100 GW milestone this year, with solar and wind capacities reaching 46 GW and 40 GW respectively, as of October 2021. This is a significant increase from just 58 GW of total renewables in 2016-17, an achievement enabled by a conducive policy regime, big auctions and private sector investment. This massive growth can be attributed largely to the solar power segment, which witnessed about 34 GW of capacity additions in five years. Wind power has lagged, with less than 8 GW of additions, and bioenergy and small hydro notching up roughly 1 GW and 400 MW of capacity. However, the country has a long way to go with the new ambitious renewable energy goals announced by Prime Minister Narendra Modi at COP26 in Glasgow in November 2021. According to these new targets, India aims to increase its non-fossil energy capacity to 500 GW by 2030 and meet 50 per cent of its energy needs from renewable energy sources by 2030. Further, the country aims to achieve net zero emissions by 2070.
A long way to go
With roughly 46 GW of hydropower capacity installed till date, the new clean energy target of 500 GW by 2030 means that India must install more than 350 GW over the next decade. Thus, an annual capacity addition of 35-40 GW would be required each year between 2021 and 2030, which is quite significant considering the slowdown in both renewables and hydropower installations. India has successively added less than 10 GW of new renewable capacity since 2018-19 and thus, 35 GW of annual capacity additions seems like a tall order.
While the devastating Covid-19 pandemic and its related restrictions certainly impacted capacity additions in 2020-21, the fact remains that the sector continues to suffer from some critical challenges that need to be urgently addressed to improve growth prospects. These include:
Financially weak discoms: The discoms’ mounting debt levels have led to frequent delays in payment to developers, thus hitting project revenues. As of September 2021, the discoms are estimated to owe power generators Rs 220 billion in outstanding payments, according to data from the Central Electricity Authority. These unpaid dues pose risks for developers and impact investor confidence, thus impacting India’s renewable energy expansion plans.
Various government schemes have been launched in the past to aid discoms. The recent measures include mandating state discoms to offer bank letters of credit in power purchase agreements (PPAs) to ensure on-time payments and announcing a massive Rs 900 billion liquidity injection in May 2020 as a Covid recovery package, to be extended as loans by REC Limited and the Power Finance Corporation. However, these do not seem to have achieved the desired outcome and discom dues continue to spike. Discoms are the primary power offtakers and are responsible for procuring much of the renewable power generated. Their poor financial health and unpaid dues thus threaten the viability of the entire sector. The government is planning to focus on discom privatisation and competition in distribution in order to help improve the situation.
Lack of contract sanctity: Concerns regarding contract sanctity have been increasing amongst the developer community. There have been instances in the recent past of states trying to renegotiate tariffs for already-approved PPAs. Further, in hopes of lower tariffs, many states have also resorted to postponing or altogether cancelling awarded bids. This dampens confidence in the entire competitive bidding mechanism. To avoid such practices, strict norms need to be put in place, and tighter contractual conditions and standardised tender guidelines introduced. Further, contract renegotiations and bid cancellations to bring down tariffs should not be permitted by the regulatory authorities in order to restore confidence in the tendering process.
Land and transmission constraints: Resource-rich sites are limited, and with complicated land laws across states, they are also difficult to acquire. Projects often get stuck for months in the complicated land acquisition process, which delays the entire project schedule from construction to commissioning. There have been instances in the recent past of hundreds of megawatts of capacity getting stranded and tenders getting postponed or even cancelled due to land problems. Coordination between different state and local authorities and developers is, therefore, required to identify suitable land parcels for renewable energy development.
Another issue is the lack of adequate transmission infrastructure. Renewable energy projects have shorter gestation periods than transmission assets and thus often reach completion much before the grid infrastructure is ready. Such grid constraints, with projects waiting for months for connectivity, have also led to cases of stranded projects and bid cancellations in the past. In many cases, developers have had to bear heavy curtailment losses. The Green Energy Corridors project, which was being implemented to ease these transmission issues, has also met with delays. The government and transmission agencies need to work closely with developers to resolve these long-standing grid issues and plan investments to improve the transmission infrastructure. To support developers and ensure long-term visibility, the government has recently extended the waiver of interstate transmission system (ISTS) charges for the supply of power from solar and wind projects until June 30, 2025.
Lengthy approval process: There have been reports of PPAs and other permits getting stuck at the approval stage for many months. These long and complicated approval processes should be eased as they lead to unnecessary cost and time overruns for developers. In some cases, when approvals have come through after a long period, the technologies, regulations, or costs have changed, thereby impacting project plans and viability.
With so many critical issues hampering sustainable renewable power development, it remains to be seen whether the country will be able to expand its clean energy capacity to 500 MW.
On the positive side
Things have started to look up this year with roughly 7 GW of non-hydro renewable energy capacity having been installed in a span of seven months between April and October 2021. It is expected that the total capacity additions by the end of the financial year will increase by at least 5 GW, if not double of what has already been installed this year. Auction activity has gained pace across different segments, with competitive tariffs and appropriate policy and regulatory interventions. Supportive market dynamics have led to continued investments by both domestic as well as foreign investors. Further, there has been a strong impetus to solar manufacturing.
Enabling policy interventions: Policy and regulatory moves have not been limited to renewable energy sources such as solar and wind power but have also covered other emerging segments. For instance, in line with the global thrust to green hydrogen, a National Hydrogen Mission was launched with the aim of making India a global hub for green hydrogen. A mission document is being prepared in this regard and mandates are being proposed for energy-intensive industries such as refineries and fertilisers.
Similarly, rooftop solar, which has long suffered due to inconsistent policies, has received a renewed push with net metering being permitted up to the 500 kW level or up to the sanctioned load, whichever is lower. For loads beyond 500 kW, gross metering must be used. On the biomass front, 5 per cent co-firing has been mandated for thermal power plants from next year onwards.
On the manufacturing side, the production-linked incentive (PLI) scheme has been launched for solar cells and imports to promote the manufacturing of advanced high efficiency products. A successful auction was also conducted to award 10.5 GW of end-to-end vertically integrated manufacturing capacity development projects, with a total PLI amount of Rs 44.5 billion, to three bidders – Jindal India Solar Energy, Shirdi Sai Electricals and Reliance New Energy Solar. In addition, the Approved List of Models and Manufacturers has finally been released to ensure the use of quality products in solar projects. Finally, a basic customs duty of 25 per cent will be applicable on imported solar cells and 40 per cent on imported solar modules from April 2022 to curb imports and promote the adoption of local products. A similar PLI scheme has also been launched for advanced chemistry cell battery storage with an aim to achieve 50 GWh of advanced chemistry cell and 5 GWh of niche advanced chemistry cell manufacturing capacity.
Competitive tariffs: Successful auctions have been conducted and projects that had been delayed due to Covid are now also accelerating development and construction activity. The renewable energy pipeline remains strong in not only the solar space but also wind, solar-wind hybrids, and floating solar. The price of renewable energy has remained competitive with record low bids being registered. Solar power tariffs witnessed a steep decline in Gujarat’s December 2020 auction, falling to Rs 1.99 per kWh for the first time in the country. They have now stabilised at Rs 2.10-Rs 2.40 per kWh as witnessed in the recent Madhya Pradesh solar park auctions. Successful auctions have also been conducted in the lagging wind power segment, which witnessed the lowest tariffs of Rs 2.69 per kWh and Rs 2.77 per kWh in the Solar Energy Corporation of India’s (SECI) March 2021 and September 2021 auctions respectively.
Auctions in new segments have also seen encouraging results. For instance, the wind-solar hybrid auction (Tranche IV) in August 2021 witnessed tariffs as low as Rs 2.34 per kWh. The first-of-its-kind round-the-clock (RTC) tender for renewable energy blended with thermal saw tariffs of Rs 3.01 per kWh in October 2021. Such competitive tariffs across different renewable energy segments have brought in a new sense of confidence among investors and developers regarding the entire sector, which had been affected by pandemic-led supply chain issues and other sectoral challenges.
Improving financing conditions: Renewable energy investments have been rising, supported by commitments from lenders and investors to stop fossil fuel financing. Long-term government targets and 25-year bankable PPAs combined with a highly transparent competitive bidding mechanism have further helped shore up investor confidence in the sector. The lending situation has improved, with a number of credit lines being issued by leading banks and large Indian companies attracting massive investments through both onshore and offshore green bonds.
Indian developers with good quality assets continue to attract large equity investments from domestic as well as foreign investors. Merger and acquisition deals grew in number and size during the year, with low exit barriers and operational assets finding good purchase value. The intense competition to capture greater market share led larger players to acquire quality assets, especially with the slowdown in capacity installations. A testament to this fact is Adani Green Energy Limited, which acquired a 100 per cent stake in SB Energy India, essentially buying its substantial portfolio of about 5 GW from the SoftBank Group and the Bharti Group. The deal, with an enterprise value of about $3.5 billion, is the largest acquisition in the renewable energy sector in India. This trend is likely to continue as companies choose both organic and inorganic means to expand capacities backed by strong investors with deep pockets.
Perhaps the most interesting trend of all has been the growth in new areas of opportunity in the renewable energy space, as they will be the key enablers in sustaining the country’s renewable energy expansion.
Emerging areas of growth
Technology, cost and policy developments, a competitive market environment and the right financing climate have created an enabling ecosystem for the growth of many other segments linked to the renewable energy sector. The Indian renewable energy industry has finally matured and is transitioning from a singular focus on aggressive capacity additions and low tariffs to more sustainable and inclusive growth over the next decade. In line with this, steps are being taken by the industry as well as policymakers to diversify and promote a range of energy sources and business models as well as different aspects of the renewable energy value chain.
Energy storage: Solar and wind power are infirm by nature and, in greater volumes, could prove to be challenging for grid integration and stability. Energy storage systems can store excess renewable energy for later use and help in levelling out peaks or troughs in generation patterns. Thus, they can help create a stable energy stream throughout the day and at night and also help in regulating the frequency of generation. Battery storage costs are declining with increasing uptake and scale and slowly, a competitive market is coming up in India with improving lithium-ion technology and tendering activity. More tenders are expected in this space in the next few months, which, along with the focus on domestic manufacturing of energy storage systems, will help promote growth in this space.
Solar manufacturing: To curb exports, the government has been focusing on improving domestic solar manufacturing capacities under its Make in India initiative. Apart from measures such as the imposition of basic customs duty and the PLI scheme and tender, land parcels are also being identified across major ports to set up production units for local manufacturing. Consequently, over the past few months, many players such as Adani, ReNew, Reliance, Azure and Vikram Solar have announced manufacturing plans – some to venture into this space and others to expand their capacities. More such announcements are likely in the next year after the basic customs duty comes into force, bringing India closer to its aim of self-sustainability.
RTC power and hybridisation: Renewable power has become cost competitive and a preferred option over conventional power for many offtakers. However, solar and wind power sources are intermittent and prone to fluctuations. Meanwhile, conventional power sources can help balance the grid. Thus, blending of renewable and non-renewable energy sources is being tried so that not only is grid stability ensured but the existing conventional power assets are utilised. Meanwhile, wind and solar have complementary generation patterns and thus a hybrid of these two technologies can create a clean yet stable energy stream that improves further with the addition of a storage element. The past year has witnessed successful auctions, which have created a strong pipeline for such assets.
Green hydrogen: Green hydrogen, with its versatile applications, can play a key role in India’s renewable energy development plans. The current uptake of green hydrogen remains low, primarily owing to cost considerations. However, the declining costs of renewables, technology advancements in electrolysers, launch of government initiatives as well as growing interest from investors are expected to improve the growth prospects. The government, on its part, is formulating the formal hydrogen mission document and mandates for green hydrogen usage in industries. Meanwhile, several large energy companies such as Adani, Reliance and ACME have announced major projects, and oil and gas majors have set targets for hydrogen uptake. The outlook for the segment is set to improve in the coming months after the first few projects come online.
C&I solar: The commercial and industrial (C&I) solar segment is expanding rapidly owing to attractive cost economics for both buyers and sellers. Buyers can reduce their electricity bills as solar power is much cheaper than C&I grid tariffs. Further, corporate establishments are sourcing solar power as a part of their green strategies to attract customers as well as investors. Sellers prefer such C&I solar arrangements as they are assured of payments, and they get better tariffs in these PPAs than the ones they win in auctions. Regulatory interventions with attractive business models such as RESCO, captive and group captive have further promoted growth. Thus, consumers like major industries, large corporates and even institutions such as metro rails, airports and railways are increasingly switching to solar, and large specialised IPPs that service only the C&I market are fast expanding their portfolios. This momentum is likely to continue due to the largely untapped potential in the C&I solar space.
Automation and digitalisation: With the increasing scale, size and number of projects, effective operations and maintenance (O&M) of solar and wind power installations has become critical. In this regard, there is an overall focus on incorporating automation and digitalisation tools to save time and costs without impacting efficiencies and also reduce manpower dependence. The case for automation and digitalisation of O&M has only become stronger after the pandemic when restrictions prevented proper maintenance of projects. Thus, the use of drones and robots has gained traction across solar and wind projects to help in daily inspection and maintenance works. Further, advanced remote monitoring tools are being deployed to gauge project performance through the volumes of data collected and analysed. Project performance and quality are assuming importance to improve cost economics for developers and prevent faults and breakdowns. Thus, O&M is now transitioning from fault-based maintenance to predictive maintenance to help predict energy generation, identify likely faults, reduce O&M costs and enhance equipment life. This trend is likely to continue, with most projects expected to move to partial or full automation in this decade.
Overall, this was a year of opportunities in the renewables space with the focus shifting from low-tariff, discom PPA-based utility-scale solar and wind projects to quality assets across a diverse range of renewable energy sources and power procurement arrangements. Further, it has been realised that progress is not possible with capacity additions alone; equal importance has to be given to manufacturing. Investor confidence remains strong, and the country ranks third in EY’s recently released “Renewable Energy Country Attractiveness Index”, despite some lingering challenges on the contracts, payments and project execution fronts. However, these challenges are temporary and should be resolved soon, and India should soon be ready for large-scale integration of green hydrogen, energy storage and RTC renewables.
Net, net, this is an exciting time in the country’s clean energy transition. Players that can innovate, upgrade and capitalise on this massive opportunity will have a much bigger share in the renewables’ market as India moves towards its goal of 500 GW of clean energy by 2030.
By Khushboo Goyal