Cover Story | January 2012
2012-13: Outlook for renewable energy sector
The combined efforts of the government and private sector will result in overcoming some of the barriers and result in an overall positive growth across each sector, says Amit Kumar.
Renewable energy can be an important part of India's plan not only to add new capacity but also to strengthen energy security since more than three-fourths of India's electricity production depends on coal and natural gas. Development of renewable energy sources, which are indigenous and distributed and have low marginal costs of generation, can increase energy security by diversifying supply, reducing import dependence, and mitigating fuel price volatility. Accelerating the use of renewable energy is also indispensable if India is to meet its commitments to reduce its carbon intensity. Renewable energy development can also be an important tool for spurring regional economic development, particularly for many underdeveloped states, which have the greatest potential for developing such resources.
Present status of policy and regulatory regime
Acknowledging the various positive attributes of renewable energy, and their abundant potential in the country, the Government of India has been actively promoting the sector by creating a conducive policy and regulatory environment. The beginning was a set of promotional guidelines issued by the then Ministry of Non-Conventional Energy Sources (MNES) in 1993-94. For the first time, an indicative tariff for renewable energy (RE) based electricity was announced. Besides, RE project proponents were also allowed to bank and consume energy from the grid as per their supply-demand pattern within a particular financial year. The ministry's guidelines and state-level incentives like sales tax exemption, infrastructure assistance, etc, resulted in commendable capacity addition during the following decade (1993-2002). However, the next transition in the policy and regulatory framework governing the RE sector was the enactment of the Electricity Act in 2003.
The National Action Plan on Climate Change (NAPCC) announced by the Prime Minister's council on Climate Change was notified in June 2008. As per NAPCC, renewable electricity injection into the national grid has to be set at 5 per cent at the beginning of FY 2009-10 and needs to be increased at 1 per cent per annum in the subsequent years to reach 15 per cent at the end of FY 2019-20.
Following stipulations prescribed under NAPCC, most SERCs have put significant emphasis on Section 86 (1) (e) of EA 2003, namely specifying a percentage of electricity to be procured by obligated entities from renewable sources of energy. As on date 24 SERCs, with jurisdiction over their respective states, have issued orders or regulations under this section of EA 2003, and have specified percentages for purchase of electricity from renewable sources of energy. These obligations are popularly referred to as 'renewable purchase specification' (RPS) or 'renewable purchase obligation' (RPO). While most SERCs have specified a single target for procurement of power from renewable energy technologies, some SERCs have specified separate targets for specific technologies. The prescribed RPO specifications for the obligated entities will provide visibility and resurrect confidence among prospective developers to install RE projects across the states and sell power under the preferential tariff route. Further, it has been also specified that RPO compliance can be achieved through transaction of environment bearing attributes like RECs.
Given the mandate for procuring renewable energy in order to fulfill the renewable purchase obligation by obligated entities, the availability of renewable energy has to be ensured. To meet the RPO targets, a tradable REC mechanism was put in place by the Central Electricity Regulatory Commission (CERC) in 2010. Under this framework, RE generators can trade renewable energy certificates (one REC is equivalent to 1,000 kWh) through a power exchange platform that will allow market-based price discovery. However, this price range is determined again by CERC and the price discovery can happen only in this range defined between the floor price and the forbearance price. The respective price ranges are defined separately for solar and non-solar RECs (wind, biomass and small hydro) to take care of the difference in economics. Therefore, on the demand side, the REC framework will allow the purchase obligated utilities to buy RECs through the national exchange irrespective of state potential and installed capacity. On the supply side, it will allow RE generators to get a base revenue income by selling power at the average power procurement cost and an additional market-determined revenue stream through the REC trading platform. Although the REC mechanism is evidently a new and developing market model in the renewable energy space, yet the option of "Selling power to host licensee" continues to be a reliable and time-tested market model for developers.
In this regard, the Central Electricity Regulatory Commission has come out with Draft Tariff Regulation 'Terms and conditions for determination of tariff for sale of electricity from renewable sources of energy' in November 2011. The aforementioned regulations specify the normative operational and functional parameters in order to determine the tariff for different renewable energy technologies for a trajectory of five years. The aforementioned regulatory dispensation will instill confidence among developers by guaranteeing them a fixed revenue stream for the entire useful life of the project. Also, it will encourage developers to increase their generation in the grid. The desired level of RE generation and its injection in the grid calls for adequate and proper scheduling of RE resources.
In this pursuit, recently, the CERC has notified 'The Indian Electricity Grid Code (IEGC), 2010' which has provided a special dispensation for scheduling of wind and solar generation in case of inter-state sale of electricity. The provision of inter-state sale of wind generation will come into force on 1 January 2012. However, the capacity of such plants connected to a 33 kV connection point should be 10 MW and above. The inter-state sale option is applicable for those who have not signed any PPA with states or others as on the date of coming into force of IEGC 2010 with effect from 3 May 2010.Such transaction will however attract unscheduled interchange charges as specified in IEGC 2010, if the actual generation is beyond +/- 30 per cent of the schedule in case of wind. In the case of solar electricity, these norms are applicable for solar projects of capacity 5 MW and above connected to 33 kV level and above. However, in the case of inter-state sale of solar generation, no unscheduled interchange (UI) charges are to be paid or earned by the developer till 2015. In light of the deliberations enunciated under the IEGC regulation for compensating the applicable UI penalty to state utility because of default of RE power schedules within the allowed limits, it is proposed to create a renewable regulatory fund. This fund is proposed to be created by the National Load Dispatch Centre (NLDC) on the lines of UI pool account at the regional level. Payments on account of renewable regulatory charges, as described in the Regulations, and interest, will be credited to this account. The fund will be subsequently used for strengthening and maintenance of the evacuation infrastructure for RE projects.
Outlook for RE in 2012-13
The next FY presents a promising future for the growth of renewable energy technologies in general. This perception is borne out of predictions regarding various policy and regulatory incentives that are likely to influence the sector's growth. Take for example, the wind sector, which is by far the most commercially successful renewable energy technology in India till date. However, the policy and regulatory support structures that helped the industry grow to its current size are likely to be rolled back in 2012-13 with the advent of the direct tax code (DTC). The DTC will not permit the wind (or any industry for that matter) to enjoy the benefits of accelerated depreciation (AD). Long cited as one of the primary incentives supporting large-scale installations in wind, the impending withdrawal of AD benefits has seen a slew of developers racing to get their projects registered under this scheme before its expiration at the end of 2011. Similarly, the continuation of generation-based incentives for wind is uncertain once 4,000 MW of wind capacity is reached. However, withdrawal of certain benefits is compensated by the introduction of certain others.
The proposed Wind Mission is likely to provide a huge impetus to old and inefficient wind farms that were installed way back in the early 2000s. The proposed mission will re-power the ageing turbines at these high potential sites, allowing them to generate significantly more energy without the need to develop newer sites or extend the grid. The mission is also likely to provide an impetus to domestic wind manufacturing and servicing industries, which will be well placed to offer re-powering services at a cost competitive basis, compared to their international counterparts. In addition, the REC scheme, which is at present a nascent market, can be expected to provide an alternate and progressively attractive market for selling energy for newer wind farms in the near future.
The future of the solar industry in India needs no introduction. The Jawaharlal Nehru National Solar Mission, and the various state solar policies, like Rajasthan and Gujarat have established a firm launch-pad for the sector. With the conclusion of the latest round of bidding under Batch 2 of the NSM, the discounts on benchmark tariffs offered (as high as 51.33 per cent), as well as the appearance of repeat bidders from Batch 1, are clear indications of the positive outlook in the investor community. In addition, the domestic content clause in the NSM, and the overall rapid development of the solar sector, will contribute to domestic manufacturing and technical know-how development in the near future. However, achieving financial closure for off-balance sheet projects is still an important concern. The government is also keen to step up its commitment to support the mission and the brand new Solar Energy Corporation of India (SECI) is likely to play a pivotal role in providing financing, technical hand-holding and a dedicated policy environment for the industry. Under the aegis of the MNRE, and expected to be operational in early 2012, the SECI will be an important driver for the industry in the near future.
The biomass sector displays a mixed growth outlook for 2012-13. The sector has traditionally been plagued with problems of feedstock getting diverted to other more profitable sources like bricketting, and more seriously, the prices of feedstock not being aligned with the prices permitted in tariff orders. In addition, as prices of conventional fuels rise, more and more biomass may be diverted to lighting and cooking, further aggravating the issue of affordable availability. However, the government is mindful of the problems facing this sector and is in the process of considering a 'Biomass Mission', which will provide the same kind of concerted support enjoyed by solar energy. The proposed mission may target installing 16,000 MW of biomass power and can result in formulating policy and regulatory directives to address several issues that are plaguing the industry at present. These could include provisions such as developing dedicated energy plantations, or promoting smaller, more efficient plants - leading to a spur in domestic equipment manufacturing etc. It is interesting to note that a large part of the overall biomass sector comprises of cogeneration. The growth of the sugar industry will thus, to a large extent, determine the growth of the co-generation industry and eventually, of the entire biomass sector. At present, due to revocation of the blanket ban on sugar exports, and the government's close watch on domestic sugar prices, the high demand (even if artificially bolstered, and potentially unsustainable in the long run) is going to translate into a positive outlook for cogeneration, especially in light of the ever increasing prices of conventional fuels. 2012 will thus play a crucial role in determining the future course of this already-near-mature technology in India.
While there is no obvious big ticket incentive programme in sight for the small hydro power (SHP) sector, the sector as a whole has historically been well established in high potential regions in the hilly states of Himachal Pradesh, Uttaranchal, Jammu & Kashmir and the North-East states. However, a majority of the SHP installations have been the 'low hanging fruit' - easy accessibility, close proximity to the grid, relatively easy construction etc. In order to further accelerate the sector, the government will have to provide assistance and incentives to the industry to explore other sites that have till date proven to be prohibitively expensive or technically inaccessible. Initiatives such as expanding the approach road and other connectivity infrastructure, and providing enhanced grid evacuation will be critical in promoting the sector. In addition, akin to the wind industry, the REC regime will be an important motivation for SHP developers, if REC prices stay buoyant.
Waste to energy (WtE) is among the newest renewable energy technologies to enter India. It is also the smallest contributor to the total renewable energy pie, with a mere 73 MW installed till date. However, the sector has tremendous potential to grow in the near future. The largest driver for this expectation is the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) which pledges to support installation of 200 MW of WtE projects. In light of this policy thrust, new technologies that are till date not available in India, are likely to be introduced in India in the near future. While capital intensive, these technologies will also be highly efficient with low operating costs.
In light of these generic and sector specific considerations, the consolidated verdict for the sector as a whole is positive. Drilling down to specific technologies, at the outset, it's not premature to say that major challenges likely to affect specific sectors in the near future have been identified. With this premise, it's likely that the combined efforts of the government and the private sector will result in overcoming some of the barriers highlighted, and result in an overall positive growth across each sector. With this expectation, the graph (alongside) highlights the major policy and regulatory interventions that have contributed to the sector's development, and an estimate of the trajectory that the technologies are likely to follow in 2012-13, given the future interventions.
The author is Associate Director, Energy and Utilities, PwC India. With inputs from Jawahar Shah and Abhishek Kaustabh, Consultants, PwC India. Views are personal.