Why The World Is Betting High On India’s Renewable Energy Sector

  • Adopting renewable energy is no longer a choice. The good news is that tariffs are falling; the not-so-good news is that the high initial costs require substantial finances, and then there are other hitches.With government going all out with policy support, subsidies and other incentives, the world is betting high on the Indian RE sector.

“Three countries are leading the renewable energy revolution”, said a headline on the World Economic Forum (WEF) website, and hold your breath – the flags of China, US and India follow on a graphic, titled with the caption, “These three countries will account for two-thirds of global renewable expansion to 2022”. One can’t help but feel a moment of pride.
The WEF article is based on a report by the International Energy Agency’s (IEA’s) Renewables Report 2017, which says that sharp cost reductions and improved policy support are paving the way for continued growth in the renewables sector in India.

The Palpable Energy In India

Sure enough, the energy has been palpable in the Indian Renewable Energy (RE) sector scene for several years now.

When the world decided – in the Paris Agreement – to make the world a better, cooler place, 162 countries gave in writing the steps they would take to contain the rise in Earth’s temperature. India, committed to sourcing 40 per cent of its electricity from non-fossil fuels. The country set itself the goal of generating 175 gigawatts (GW) of electricity from renewable sources by 2022 – with 100 GW of Solar, 60 GW of Wind, 10 GW of bio energy and 5GW of small hydro power. The major sources are energy and solar energy, and this article focuses on these two.

India benefits from alternative energy sources in many ways: energy security, countering pollution, decreasing greenhouse emission, lower prices, and so on. Going further, a report from International Labour Organization (ILO) even talked about how India’s target of RE had the potential to create close to 3 lakh jobs. Adopting RE is a totally win-win situation, for every agency in the economy – households, discoms, state governments and of course, the country as a whole.

Yet, we’ve been hearing about challenges and how the targets are lofty and unattainable. So, international acknowledgement of making good progress helps.

The Financing And Purchase-Uncertainty Hitches

According to industry experts, the biggest bottleneck to attaining targets is financing. As a report by IndiaSpend found out, there is a mismatch between commitments given by RE developers and RE financiers. Lenders and investors find it risky because of uncertainty about whether publicly-owned power distribution companies will purchase the power, and also fears related to grid management of the electricity, regulatory issues, and so on.

Purchase Obligations
Now, the Central government has been continually striving to make its RE plans and programme a success, and the latest in this is related to the purchase part referred to above. As this article in QuartzIndia informs us, government is pushing private companies to increase the share of renewables in their overall power mix.
The power ministry has increased its renewable purchase obligation (RPO) – which mandates distribution companies and other private companies to procure a part of their requirement from RE sources – target from 17 per cent to 21 per cent by 2022. To the extent that this purchase bit was causing financers anxiety, this assurance of a readymade market would allay their fears. Of course, enforcement of the RPO is key, and the Ministry of New and Renewable Energy is also taking steps to ensure this, as reported.

Cost-efficiency, Policy Support And Financing

Related to financing, Climate Policy Initiative had made a few suggestions in its research study on Reaching India’s Renewable Energy Targets Cost-effectively, in 2105. The project investigated how much it would cost the Indian government to reach its RE targets; this was important because the government’s finances are always constrained by its fiscal deficit and multiple development priorities.

The five authors of this study found that when using the levelised cost of electricity from imported coal (which is what RE seeks to replace, rather than domestic coal/natural gas) – that wind power was already competitive (see graph below), and the cost of solar power would be competitive by 2019. The authors concluded two things: that wind power already does not require any government support; and that by 2019 solar power is expected to be cheaper than imported coal-based power given that learning effects will drive solar costs down and fossil fuels will become more expensive because of transport costs and inflation.

The following figure illustrates the point:

The conclusion and recommendation based on the above findings was that: Wind power does not require government support, and solar power will require policy support till 2019. This works out to Rs 2.71/W under Indian accounting policies in this sector. The authors recommended that government provide debt at lower cost and higher tenor than market; this would lower the cost of government support by 96 per cent to Rs 0.1/W. Second, wind could be deployed starting right then, given its already competitive cost, and solar deployment could be scheduled such that the larger part of the target is met after 2019.

For solar developers, the report also said that the government may need to provide more financial support to solar project developers. At present, solar energy is competitive only in the presence of policy support. A larger proportion of solar capacity will be commissioned only after 2019, when it becomes competitive – in the absence of policy support.

Why India Aabsolutely Needs Renewable Energy: For Its “Massive Deflationary Impact”

US-based Institute for Energy Economics and Financial Analysis (IEEFA’s) Energy Finance Studies Australasia director, Tim Buckley suggested substituting conventional energy with renewables, in an earlier study titled, ‘Indian Power Prices — How Renewable Energy is Cheaper than Coal’ that compared cost escalations.

The comparative costs arrived at as per their model are:

The cost of thermal power was arrived at by incorporating in the financial model estimated per annum increases in US$ coal prices, shipping costs, rupee depreciation.
The author had argued that India had one of the lowest retail electricity prices, much lower than that required for profitable generation of thermal power, which was dependent on expensive imported coal. Hence, it made sense for Discoms to go for renewables – both for the sake of their own profitability as well as lower tariffs.

In fact, the news on the solar tariffs front is very positive. Driven by scale, prices of solar power have dropped dramatically, from about Rs 17 per unit in 2010 to about Rs 2.50 per unit.

A mid-term update was provided in December 2017 by the MNRE, which revealed the following solar tariffs during recent times, in chronological order:

Source: PIB

Low-Cost Financing: Policy Recommendations In Niti Aayog Report

A Niti Aayog report – India’s Renewable Electricity Roadmap 2030: Toward Accelerated Renewable Electricity Deployment – says that RE technologies have high capital costs, but very low operating costs spread over 25 to 30 years. It suggests interventions that are sector (RE) specific, and to do it in multiple stages:
Stage 1: Reducing the risk perception of the sector by de-risking and hence managing/reducing investors’ return expectations (both debt and equity).

Stage 2: Increasing the quantum of money available and reducing the cost of such money (by)
• Allowing special green bonds — such as tax-free, and/or capital gains tax-exempt bonds — in line with infrastructure bonds;
• Bringing RE under priority-sector lending;
• Allowing pension funds, insurance companies, and sovereign funds with long-term horizons to invest in RE projects through securitisation markets;
• Lowering the sovereign guarantee fee for non-banking financial companies (NBFCs)/public-sectorentities involved in financing RE projects;
• Allowing tradable tax credits to be issued by developers who do not have corresponding set-offs against such tax benefits, so they can sell them to others who are eligible to do so;
• Allowing longer-tenure loans from the infrastructure debt fund to RE projects that meet well-defined criteria, even if they are not public-private partnerships (PPPs), or creating mechanisms that allow structuring of projects as PPPs.
Stage 3: An existing central government entity such as IREDA or PFC could pool various sources of funds including commercial (banks, FIs, MDBs’ lines of credits etc) and noncommercial (National Clean Energy Fund {NCEF}, grants, subsidies, corporate social responsibility money, etc) capital from domestic as well as international sources. This pool of funds could be administered and managed to lend debt (and even part equity, if possible) at lower interest rates.

Other Ifs And Buts

Of course, grid transmission efficiency – another big issue in India’s electricity scene – will still need to be sorted, even after cost efficiency is reached.

Then, the smaller issues: many of those suspicious of renewable energy say it is unwise to go for wind and solar power, given their inconsistency; for instance, solar is available only in the day. For this, the Central government has suggested to states to give power to agricultural and industrial users during the day, where the peak demand coincides with availability of solar energy. Many states were doing the opposite.

The Bottom-line: Renewables Require Renewed Thinking

The Niti Aayog report on India’s Renewable Electricity Roadmap 2030 says it well: “For India to capture the benefits of RE.… will require the rethinking and reengineering of institutions, the redefinition of policies, the re-tuning of power grids and systems, and the replacement of old habits with new ones.

“Renewables are different from the power technologies of the past. The enormous benefits they bring – zero fuel, electricity prices free from volatility and external influence, reduced imports, dramatically reduced pollution and water use – will not be had without significant effort…To capture the benefits, India would need to raise the necessary capital, and to get comfortable with managing the variability and uncertainty of renewable energy generation.” Enough said.