By Vikram V., Vice President and Co-Group Head, ICRA Limited
The energy transition goals set by the Government of India, along with the healthy demand growth and tariff competitiveness of solar and wind power projects, are leading the country towards a renewable energy future. Renewable capacity has increased at a CAGR of over 16 per cent over the past decade and this growth trend is expected to continue. The solar power segment remains the key driver of capacity addition in the renewables sector, with significant capacity additions over the past 10 years. This has increased its share in the overall renewable mix to 58.7 per cent as of September 2024, up from 8.3 per cent in March 2014.
The renewable capacity, including large hydro, required to meet the renewable purchase obligation (RPO) trajectory of 43.33 per cent by FY 2030 is estimated to be over 440 GW, considering an annual demand growth of 6 per cent till 2030. Given the installed renewable and large hydro capacity of 201 GW as of September 2024, the incremental renewable capacity requirement over the next 5.5 years is substantial at over 240 GW. This translates into an annual capacity addition requirement of approximately 44 GW. The healthy renewable project pipeline and favourable solar photovoltaic cell and module prices are expected to boost renewable capacity addition to over 26 GW in FY 2025, from 19 GW in FY 2024. This will further scale up to 32 GW in FY 2026, primarily driven by the solar power segment and the impending expiry of the waiver on interstate transmission system charges in June 2025. Apart from the utility segment, ICRA expects the rooftop solar and the commercial and industrial segments to contribute significantly to the capacity addition.
Despite the expected increase in FY 2025, renewable energy capacity addition remains short of the required addition and will need to increase significantly to meet the RPO targets by 2030. Capacity addition is constrained by execution challenges, including delays in land acquisition and transmission connectivity, which, if unresolved, could dampen the sector’s prospects. Going forward, an investment of over Rs 3 trillion is needed every year to reach a renewable capacity (including large hydro) of 440 GW by FY 2030. Assuming a debt-equity ratio of 75:25, approximately Rs 2.25 trillion of debt financing and Rs 0.75 trillion of equity funding will be required every year to achieve the RPO targets.
The rise in renewable energy capacity over the next five years is expected to enhance the share of renewables, including large hydro, in all-India electricity generation from 21 per cent in FY 2024 to over 35 per cent in FY 2030. In this context, the development of adequate energy storage projects remains crucial to integrate the growing renewable energy capacity into the grid, given the intermittent generation. ICRA estimates the energy storage capacity requirement at 50 GW by 2030, which will be met through a mix of battery energy storage systems (BESSs) and pumped hydro storage projects. The significant decline seen in tariffs for BESS projects over the past eight months, driven by the sharp decline in battery prices, is expected to improve the adoption of storage projects.
Further, central nodal agencies are placing increased focus on awarding renewable projects that offer round-the-clock (RTC) and firm and despatchable renewable energy (FDRE) supply, which can mitigate the intermittency risk associated with renewables. This can be achieved through the use of hybrid renewable projects complemented with energy storage systems. Central nodal agencies, along with Indian Railways, have completed auctions for close to 14 GW of RTC/FDRE projects. The tariffs discovered in these tenders remain competitive compared to conventional sources, with bid tariffs in the range of Rs 4-Rs 5 per unit, compared to Rs 6 per unit discovered in the recent medium-term bids for supply from coal-based projects. Apart from capital costs and plant load factors, these projects will be exposed to merchant market tariffs, given the surplus power generation expected from projects owing to the oversizing of capacity.
All in all, the outlook for renewable energy capacity addition is favourable, driven by policy support, tariff competitiveness and demand growth. However, execution challenges still persist and need to be addressed going forward.
