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Lighting the way forward

In order to feasibly meet the mandate for renewable energy, the government must implement suitable policies to finance and develop the burgeoning sector

Lighting the way forward

Energy Sector in India will soon be undergoing a paradigm shift if the Union Government implements two key announcements made by the Finance Minister. The first is to shut down all the thermal power units spewing out pollutants over the permissible limit and the second is installing solar plants along railway tracks. Focusing on Renewable Energy is a good idea but it must be translated into reality and must not remain an idea, as has been the case with many other great ideas, like doubling farmers' income, jobs to all hand and so on. Even in the renewable energy sector, we have been hearing big talks but witnessing a dismal performance, though India has committed itself to rapid and large-scale renewable energy capacity addition.

As part of its nationally determined contributions under the Paris agreement, India intends to achieve a 40 per cent share of installed power generation capacity from non-fossil fuel sources by 2030. In terms of megawatt capacity, this translates into around 450 GW. As a stepping stone to the longer-term target, the country has a shorter-term target of setting up 175 GW of renewable energy installed capacity by the end of the fiscal year 2022, including 100 GW of solar and 60 GW of wind energy capacity. While India's renewable energy generation capacity had grown rapidly to 75.8 GW by the end of December 2018, including 35.3 GW of wind and 26 GW of solar (both utility-scale and rooftop), the country still has a long way to go to meet both the short-term and long-term targets.

The last few years have seen a

significant decline in solar and

wind energy tariffs in India, making the business case for these

renewable energy sources considerably more robust. Per unit tariffs

for solar and wind energy were reduced to only 2.44 and 2.43 rupees by 2017, which has generated great hope for affordable energy access which is crucial for economic development. The equipment-related factors have been the major drivers of tariff reduction historically, accounting for 73 per cent of the solar tariff reduction between January 2016 and May 2017.

While the policy ecosystem in India has both supported deployment and created demand for renewable power, the increasing competitiveness of renewable energy tariffs, therefore, can greatly facilitate the uptake of renewable energy in the Indian context. However, for this to happen, India's future capacity addition must occur in a cost-effective manner compared to new and existing thermal capacity. The financing costs account for the largest component—over 50 per cent of the renewable energy tariffs. There could be a role reversal, finds a recent ADBI working paper which says that changes in financing costs could drive future decreases in both solar and wind tariffs which necessitate the de-risking of these sectors through suitable policy and market-led interventions in order to lower financing costs. However, a reduction in financing cost is a challenging task. According to the World Energy Council, the scope for reduction in unit module prices in absolute terms is limited.

The increasing operation and maintenance expenses are also going to put additional challenges. Costs of land, evacuation infrastructure costs and balance of system costs are also increasing. All these costs taken together are still around 20-30 per cent, which is considered low and therefore, India can take advantage of this situation, provided that the country speeds up the projects before these become more costly.

It may be worth mentioning that the renewable energy developers in India are almost exclusively from the private sector, who bid for the allocation of capacity, which is awarded to the lowest tariff bidders. Power procurement is primarily conducted through long-term power purchase agreements spanning 25 years. In the case of auctions conducted by central government entities, SECI or NTPC constitute the off-taker, which then sign a power sale agreement with state distribution utilities (discoms). However, the obligation for timely payments to renewable energy developers rests with the central government entity. The major challenge lies here because renewable energy developers are not paid in time which hampers the smooth development of this sector. State discoms in the country are heavily indebted as a result of the concessional sale of a portion of the electricity to retail customers and large aggregate technical and commercial losses.

Module costs and wind turbine generator costs are largely exogenous factors from the point of view of the Indian renewable energy ecosystem, given that they are dependent on technological changes and supply-demand dynamics at a global level along with supply chain changes and efficiency improvements in manufacturing hubs like the Peoples Republic of China. In addition, trade barriers such as safeguard duties could mitigate the decline in tariffs realised through lower module prices in the short to medium term. Based on petitions by domestic Indian module manufacturers, DGTR has imposed safeguard duties on module imports, which collectively account for around 90 per cent of modules used in India. Duties of 25 per cent are applicable for a year beginning July 30, 2018, before being lowered to 20 per cent in the first six months of the second year and 15 per cent for the following six months. The imposition of duties will mitigate the impact of declines in module prices. This leaves policymakers with the sole option of influencing financing costs.

The government needs to implement suitable policies to finance the cost of renewable energy project costs to develop this sector and lower the energy tariffs. These include explicit subsides or measures geared towards the de-risking the sector translating into lower return expectations for investors. Mitigating risks either by de-risking renewable projects or covering for the risks through de-risking financial instruments can help. While delays of 30-60 days between developers raising invoices and receiving payments are usually permitted, the average payment delays in India are over one year. Expectations of long payment delays could translate into higher working capital assumptions factored in renewable energy developers into tariff bids, translating into higher tariffs.

Additionally, financiers compensate for additional risk by demanding higher returns. Uncertainties generated by instances of renegotiation of power purchase agreements could also translate into higher return expectation increasing financing costs and tariffs. The planned renegotiation of PPAs by the state of Andhra Pradesh in the middle of 2019 is one such instance. If unchecked, such instances can translate into higher financing cost assumptions factored into tariff bids and thereby higher tariffs. There are off-take risks, problems of land acquisition and evacuation infrastructure risks, and also curtailment risks which must be addressed if India really wants to develop this sector.

Views expressed are strictly personal

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