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Green | August 2013

Where the grass seems greener

At a time when the conventional energy sector is grappling with various challenges, investing in renewable energy is a smart idea.

Even though the near-term investment scenario is challenging in renewable energy, the long-term prospects are brighter, as demand for power will remain strong and conventional energy sources are more dependent on regulatory reforms.

According to consultancy and rating agencies, global investment in the renewable energy sector is set to continue to decline in the short term. However, despite the recent decline in investment, renewables are becoming less alternative and increasingly mainstream with 118 countries now having renewable energy targets in place and the wave of public demand for clean energy increasing, Deloitte Touche Tohmatsu Limited (DTTL) says in its latest report.

'Global investment into the renewable energy sector is likely to remain subdued in the near time. Yet over the long term, the sector will be more attractive, as technology improves and costs decline. In the meantime, investors need to choose their spots wisely, because it's not going to get any easier anytime soon,' says Jane Allen, DTTL Global Leader, Renewable Energy.

The environment at home is very much in line with that global trend. In India, there is a short-term setback in RE investments due to lack of implementation of Renewable Purchase Obligation (RPO) by the distribution utilities and designated consumers. There is slowdown particularly in the wind sector, due to removal of Accelerated Depreciation (AD) and the continued confusion regarding generation-based incentive (GBI).

However, renewable energy investments' long-term potential remains intact in India. 'We expect that helpful government policy and regulation will encourage a ramp up in investment in renewable energy sector in the coming years,' says Debasish Mishra, Senior Director, Deloitte India.

According to ICRA, fundamental long-term demand outlook for wind energy is expected to remain strong, supported by large wind energy requirements to meet the RPO requirements in the country, and also given the fact that wind-based energy benefits from its increasing cost competitiveness against the conventional sources of energy, both due to spiralling fuel prices and persisting domestic fuel shortages in the country.

The DTTL analysis outlines five critical areas where planning and decision-making in the near term, including:

1. Bridging the cost disparity gap with fossil fuels: Fossil fuels received almost twice the amount of government-funded support than the total amount of public and private sector investment in renewable energy in 2012. This equates to a total of $523 billion in subsidies provided worldwide, in contrast to the $269 billion of total investment in renewable energy in 2012.

2. Enduring the 'shale revolution': The shale gas revolution has created new uncertainty for the near-term investment prospects of renewable energies. There is no easy answer to the question on how to mitigate this risk. Growth in the renewable energy sector is not likely to increase, while gas prices are as low as they are.

3. Weighing infrastructure investment: In many cases, the key deterrent to investment is the lack of regulatory frameworks suitable to ensuring economic returns. This leads to the question of whether it is more economical to upgrade the existing energy infrastructure, build new facilities on the foundation of the existing infrastructure, or invest in the new infrastructure of the 'Third Industrial Revolution'.

4. Navigating the subsidy environment: At least 118 countries had renewable energy tarĀ”gets in place in early 2012, according to the Renewables 2012 Global Status Report. 109 countries had renewable power generation policies, of which feed-in tariffs (in at least 65 countries) and renewable portfolio standards (in at least 18 countries and 53 other jurisdictions) are the most common.

5. Coming to terms with energy 'democratisation': Conventional energy companies will need to manage and sustain their businesses, whilst at the same time navigating their transition to a market were centralised power generation and distribution is less in demand, as consumers and businesses begin to generate their own energy.

'It is important for utilities, investors, developers and governments to understand the evolving renewable energy landscape, so that they have the long-term context for the short-term decisions they must make,' says Allen.

Sure enough, subsidies may not be the most reliable prospect for RE returns in the next few years. As solar cost gets closer to that of coal-fired power, with an estimated parity by 2016-17, states like Gujarat have already geared up to cut subsidies. Even on a national level, subsidies have been reported to be drying up. Companies like SunEdison have been awaiting rooftop project clearance for about six months now.

Still, rooftop holds the most promise in solar, as the sheer volumes are driving costs down.

Key Factors

  • The demand for renewable energy is further supported by the National Action Plan for Climate Control (NAPCC) set up by the government in June 2008. The plan recommends a target of renewable energy mix in the overall energy procurement by utilities at 10 per cent (minimum) by 2015 and 15 per cent (minimum) by 2020.
  • Going forward, the investment demand from IPP segment would remain a key growth driver, and the ICRA points that the share of IPP segment in the capacity addition to increase from 40-45 per cent to about 60-70 per cent over the next 2-3 years.
  • Untapped wind resource potential on all India basis (across the key states having windy sites) remains quite significant, as evident from the revision in estimates of gross wind energy potential in India from 49,500 MW to 102,800 MW by the Centre of Wind Energy Technology (CWET) in February 2012.
  • RPO levels put in place by SERCs across the states vary widely, i.e., in the range of 1 per cent to 10.3 per cent as applicable for FY 2013, as against the recommended level of 8 per cent by the National Action Plan for Climate Control.

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