Renewable Energy— A Conundrum in the making

By Rajiv Theodore

New Delhi, Dec. 3, 2018: Renewable energy came in as a whiff of fresh air.

India is today the world’s largest renewables auction market and ranks 2nd after Chile in the 2018 Climatescope. Beside promising cheap energy, renewables was also seen as a weapon to lift millions of poor from crushing poverty.

Maximizing green energy was an answer to not only help tackle poverty but also provide in rural communities steady incomes, healthcare benefits, and skill-building opportunities. India’s target of adding 160GW of solar and wind energy capacity by 2022 is expected to generate more than 330,000 new jobs over the next five years. These jobs were proposed to be in construction, project commissioning and design, business development, and operations and management.

It is common knowledge that the Narendra Modi government in India had set an ambitious goal of reaching 175GW of clean energy generation by March 2022. BloombergNEF’s research shows that in June 2018, renewables accounted for 71GW of India’s installed generating capacity.

India’s renewables auctioned capacity has also increased by 68 percent since 2017, and clean energy investments, mostly related to solar power projects, added up to $7.4 billion in the first half of 2018, the report said. Renewable energy installations surpassed those by coal power plants for the first time in 2017, BloombergNEF added.

But the whole scenario is becoming a conundrum today. As India boasts of 100 percent electrification especially of its villages yet some 163 million Indians — roughly the population of Bangladesh— are still are living without electricity. A closer look at the sector that began on a promising note will give us a basic insight into what went wrong and how it could jeopardize efforts to help bring millions out of poverty and that of bringing in cheaper electricity to all.

According to latest estimates generated by the World Poverty Clock, a model created to track real time progress against poverty India had 70.6 million people suffering abject poverty in India.

Besides, poor policies have sparked uncertainty over the duties on imported solar panels, causing a sharp decline in new solar capacity additions in 2018. Of the 175GW target for 2022, 100 GW of renewable energy was slated to come from solar power but analysts have warned that the way things are going, this goal is looking extremely unlikely.

The pipeline of new projects has weakened compounded with the Solar Energy Corp. of India Ltd, which is implementing the national solar mission, partially cancelling bids received for 2,400 MW capacity in a 3,000 MW tender, citing high tariffs quoted by developers this year. Many solar players are resorting to divesting too. Essel Infra is in talks with various investors to sell its solar power plants. It concluded a deal to sell four power transmission lines to Edelweiss-backed Sekura Energy for 60 billion rupees. Macquarie is in talks to buy assets from ReNew Power Ventures Ltd and from Canadian Solar. Acme is planning to raise around 30 billion rupees through an infrastructure investment trust (InvIT) as it needs funds to set up over 2,500 MW capacity in a little over two years. Today there is too much money chasing too few projects.

The subdued performance of the sector has also been cited as reasons for senior executives in the sector to quit –Sanjay Chaturvedi, chief executive officer of renewable energy at Macquarie Group; Vinay Kumar P., managing director and chief executive (renewables) at Brookfield Asset Management; and Rohit Modi, CEO at Essel Infra and Smart Utilities. Brookfield is currently on the lookout for a new head of India’s renewable practice.

Not long back investors had swarmed the renewables sector expecting a quick Ebitda, a measure of profitability (earnings before interest, taxes, depreciation and amortisation) but the wait for the goodies has been painfully slow and investments have yet to earn the returns. Today, a sense of caution among renewable industry players have set in. Project developers, bidders and lenders have increasingly become wary due to the steep fall in tariffs since the start of the auctions in the sector. Untoward government actions, such as imposition of import duty, cancellation of tenders (in solar) and proposal to cap tariffs, have collectively hit investor sentiments.

Although the Indian government had set the ambitious target for 2022 but at the same time tariffs for electricity produced at utility-scale solar farms are at an all-time low of Rs 2.44 per kilowatt-hour. The government had also set a set a target of auctioning 34 GW of solar energy projects and 10 GW of wind energy projects for FY March 2019.

But this auction target could also hit an air pocket and hence could be missed on account of frequent changes in the implementation of safeguard duty, apprehensions about grid connectivity and land acquisition-related bottlenecks compounded by a depreciating rupee vis a vis the US dollar, India Ratings and Research pointed out.

Moreover, India’s installed renewables capacity is threatened to get stranded, as states are not keen on purchasing solar power even at the lowest rate of 2.44 rupees (0.03 US cents) per unit. States have been reluctant to buy more renewable power since they already have surplus contracted power while demand has been little this year. The country still has more than 40 GW of excess thermal capacity.

Additionally, renewable power is variable and needs to be blended with other power sources to provide reliable 24×7 power to consumers. Solar power tariffs have become a major point of contention in India’s solar industry. This rapid decline in solar tariffs has been generally attributed to factors like policy flip flops, declining cost of technology, reduction in cost of capital for renewables and market innovation by developers.

Most developers claim that the current cap set by the government at Rs. 2.5 per unit will make solar projects unviable. Recently, the power minister called a lenders’ meet after concerns were raised around Indian banking institutions being reluctant to fund renewable energy projects. Non-performing assets in the thermal sector, currency risks, and low solar tariffs were cited as reasons behind lenders shying away from funding clean energy projects.

The financing environment for solar projects has become altogether more challenging and investors are beginning to hold back. Yes, it is a tough time for developers with banks reluctant to fund projects, interest rates spiking and Rupee plunging. Then there are other downsides like steel prices going up and uncertainty owing to GST (goods and service tax), and safeguard duty. There has been no respite from 18 percent GST on modules while interest rates are on the rise leading to squeezing margins for developers.

According to Mercom, the market intelligence and research reports for clean energy markets–in July-September, solar installations were at 1,599MW, a 52 percent decrease when compared with 3,344MW installed in Q1 2018. Installations were also down about 21 percent year-on-year (y-o-y) compared with 2,025MW installed in Q2 2017. Solar capacity installations in the country is at 25,000 megawatts (MW), or one-fourth of the 2022 target of 100,000 MW, according to Mercom.

Module price fluctuations, power Purchase Agreement (PPA) renegotiations and auction slowdowns contributed to the slowdown. Mercom forecasts a decline in solar installations in the second half of 2018, compared to the first half, due to lack of a strong project pipeline. Installations for 2019 were also projected to be flat compared to 2018. The wind energy sector which was expected to grow this year is increasingly looking unlikely as it is reeling under the new bidding regime and enhanced execution timelines.

Even in a best-case scenario when solar energy will pick up and wind energy may follow suit, it will saturate at some point in time due to infrastructure constraints. So, what is critical as of today is ushering in new technology that can balance the grid—that can balance generated power and storage of electricity. Unless technological disruptions take place. the relevance of fossil fuels-based energy sources will continue and renewables will not be able to substitute conventional power.

To offset such a scenario renewables need not wait for supporting technologies to mature, but instead seize cutting-edge technologies to pull ahead of conventional sources. And if implemented properly, India’s renewable energy push could do more than just slow down global warming. It could help pull millions out of poverty, especially in rural communities.

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