Nowadays front pages of all newspapers appear to be incomplete without news on another first being achieved by Renewable Energy (RE). On one hand, renewable energy tariffs have been touching new lows, at the same time, renewable capacity additions are touching all-time highs. In the twelve-month period ending March 2017, India added close to 11 GW of new renewable energy capacity. As a result, renewable energy installed base has risen to nearly 60 GW or 1/6th of India’s total installed power generation capacity.
Rise of Renewable Energy
This is a result of industry changes spanning one and a half decades. Renewable power capacity additions till the recent part were largely driven by fiscal incentives extended by the central and state governments. These incentives included excise duty exemptions and income tax benefits.
In the early stages, wind power was given incentive to promote the industry. The industry and scale of operations changed post 2004 as wind manufacturers expanded vertically and provided a turnkey solution to the asset owners seeking tax breaks. As a result, annual wind installations grew to 2,000-2,500 MW by 2014.
The next major milestone was the introduction of the National Solar Mission (NSM) in 2010. Solar power which was the smallest component of the Indian energy mix before that is now on track to becoming one of its main constituents. The credit for this drastic transformation goes to the supportive regulatory framework and favorable investment climate created by the Government of India coupled with the global drop in solar module prices.
At the same time, Renewable Energy tariffs have fallen dramatically so much so that latest bid tariffs (INR 2.44 / unit for solar and INR 2.64 / unit for Wind) are equal to or below even conventional sources of power generation. This reduction has come about largely due to three key factors. Firstly, as fiscal incentives were withdrawn or were phased out, the industry has seen a change in the nature of project owners. Project owners no longer invest solely for tax shelter purposes but rather view RE as the core business itself. As a result, whereas the renewable energy industry was extremely fragmented 5-6 years back, there has been a visible consolidation. The largest renewable energy owner has moved from 250 MW of operating capacity in 2009 to 1,500 MW+ as of today. Individual plant sizes have also gone up from 10 MW to 500 MW+. These larger players have been able to tap efficiencies of scale across cost of capital as well as project costs.
The latest renewable energy bid tariffs (INR 2.44 / unit for solar and INR 2.64 / unit for Wind) are equal to or below even conventional sources of power generation.
Secondly, in the case of solar PV equipment especially, prices have decreased as installations have picked up pace. Solar module prices have fallen as much as 80 percent over the last six years. With solar modules constituting nearly 70 percent of the overall project cost, solar PV installation costs have come down in a dramatic manner. And lastly, the introduction of National Solar Mission also brought with it competitive bid based capacity award for renewable projects.
Earlier this year, Government of India initiated its first wind auction which allowed states without wind resources to procure wind power through competitive bidding. Competitive bidding freed up market forces allowing the off-takers to discover the most optimum pricing at the time of bidding.
Going forward, Government of India has set an ambitious target of achieving 100 GW of solar capacity and 60 GW of Wind capacity by 2022. This is equivalent to adding one-third of the current total power generation capacity in a short span of six years. 100 GW of solar power would require investment of roughly US$94 billion, 1,214 sq. km of land area, 650 sq. km of rooftops, 15 GW of annual additions. While market dynamics are positive there are dark clouds on the horizon.
One of the key success factors for this mission to succeed will be the financial health of government distribution companies (‘DISCOM’), the largest consumer of the RE projects. The Government has initiated the Ujjwal Discom Assurance Yojana (UDAY scheme) wherein state governments take over DISCOM’s existing debt while the DISCOM itself is obligated to implement operational improvements. Having said that, the benefits of the scheme are likely to take time to percolate through and unless the scheme succeeds India is unlikely to be able to achieve the ambitious target.
Additionally, the infirm nature of RE capacity translates to large capacity augmentation requirement and an imperative for developers to ensure accurate and on time scheduling and forecasting.
Another key area of focus is the depth of the debt market for RE projects. Currently traditional project financing sources are struggling with legacy balance sheet issues. As a result, there are select sets of lending institutions that are actively lending to renewable energy projects. Due to a lack of depth, RE projects are often unable to secure the most optimum financing.
As may be noted the Government of India target can be achieved provided there is concerted action from all market participants across policy makers, project owners, investors, lenders as well as power off-takers. Without a firm action plan, these targets would remain only an aspiration.
The Silver Lining
Having said that one market segment offers a ready solution – Rooftop solar. Rooftop solar is naturally insulated against market related risks (including land acquisition, DISCOM health and evacuation capacity). In fact, despite relatively higher capital costs, rooftop solar systems are a cheaper source of power vis-à-vis grid power for Commercial & Industrial users making it an economically viable alternative for these power consumers and makes the unused rooftop spaces productive.
Rooftop Solar’s ability to drive capacity expansion is most evident in Germany. Germany is the leader in solar PV installation with 1.5 million photovoltaic systems (majority installation on residential and commercial rooftops) and 78 percent of its energy demand coming from renewable energy and this despite its sunniest regions receiving only 1,600- 1,800 sunny hours per year.
As a comparison, India receives on an average 3,500-4,000 sunny hours per year. According to a market study by TERI, the estimated realistic market potential for rooftop solar PV in urban settlements of India is about 124 GW. This is significantly higher than GoI’s targets of 40 GW. Considering these estimates, the annual market for rooftop / off-grid is expected to reach anywhere between 5-7 GW.
Although the economic imperative is in place, the government needs to sustain the focus on rooftop solar and ensure it draws up a long-term strategy outlining and implementing regulations (compulsory utilisation of rooftop space) and incentives (net metering and feed-in tariff etc.) for distributed (rooftop) solar.
With increasing focus on efficient operations of the power market, promoting rooftop solar may well be the key to India realizing its solar power potential and emerge as the largest rooftop solar market in the world.
Mr. Sanjeev Aggarwal, CEO & MD, Amplus Solar writes this piece for the latest edition of FICCI’s Economic Watch.