GoI´s aggressive push towards solar has rejuvenated the solar market and given tremendous growth potential for upcoming clean energy eco-system, believe experts.
Renewable Energy (RE) has many unique attributes ´ rapid deployment, modular nature and environment friendliness ´ which make it a beneficial source of power in a country like India, which has a high energy deficit, growing demands and an inadequate grid infrastructure. The strong fundamentals are matched by the bold vision of the new government, which has already taken several decisive steps to grow RE power.
One of the first things, the new government did, was raise India´s RE target five-fold to 175 GW by end of 2022 (100 GW solar, 60 GW wind and the rest 15 GW of biomass, geothermal and small hydro projects). The country needs to invest about $200 billion to meet this target by 2022.
Opines Sanjay Agarwal, Managing Director, Fortum India, ´When GoI revised the earlier solar energy target of 22 GW by 2022 to 100 GW, their intent became clear. Political will and support has been amply demonstrated by this push.´ Further, the 100 GW solar target is split between 60 GW of utility scale projects and 40 GW of rooftop and other small grid-connected projects. Of the 60 GW, 15 GW is expected to be developed under the National Solar Mission (NSM) by 2019. ´The sector is expanding like never before.
We have also witnessed breakthrough technological innovations which will play a crucial role in the future of India´s renewable power infrastructure,´ observes Vineet Mittal, VC, Welspun Renewables.
Global companies including US RE firm SunEdison Inc, Japanese telecommunications company SoftBank Corp, Taiwan´s Foxconn Technology, and China´s photovoltaic module maker Trina Solar Ltd, have announced multi-billion dollar investments in Indian companies set up solar power projects.
Russia´s OAO Rosneft, the world´s largest publicly-traded oil company, is exploring a huge investment in India´s solar energy sector with capacity ranging between 10,000 MW to 20,000 MW, it has been reported.
The recent RE Invest summit held in New Delhi saw a host of banks, private firms and FIIs pledge large sums of investment for the solar and wind sectors in particular. ´Around 30 banks and FIs made a commitment of US$57 billion to the RE sector. I believe if the projects have necessary clearances in place and are bankable, targets can be realised within deadline,´ states Mittal.
Indeed, given the scale of ambition and challenge, many of these steps are understandably still work-in-progress. But there is little margin for error. The transmission grid needs strengthening and financing costs need to be reduced. Most important of all, the policy framework needs to become consistent, stable, predictable and business friendly.
´The government has a key role to play in the sector, particularly in the formative years, but its focus needs to gradually shift to enabling private business models. Fundamental reform of open access can unleash market forces by opening up private development and trading of solar power,´ points a recent Bridge to India report. India is perhaps the most exciting solar market in the world, helped by rapidly improving the commercial viability of solar PV technology, its huge need for power and of course, its social and environmental imperatives, according to the report.
Shares Agarwal, "The government is investing heavily in RE in order to meet the electricity demand. However, this may not be enough and they should instead also encourage investment in captive power generation, which will add to the national grid.´
In fact, according to a Deutsche Bank report, India´s annual solar investments is set to surpass those in coal by 2020, what with global companies announcing multi-billion dollar investments in Indian companies.
Falling tariffs would also help in aiding growth of RE adoption. Tariffs dropped about 60 per cent over last four years, from Rs 14.90 per kWh (kilowatt-hour) in 2010 to almost Rs 5.75 per kWh in 2015 for solar power, rivaling prices of conventional power sources.
India´s per capita electricity consumption reached 1,010 kilowatt-hour (kWh) in 2014-15, compared with 957 kWh in 2013-14, according to the CEA, but continues to among the lowest in the world with several households in the interiors of the country having little or no access to electricity.
India plans to award solar contracts for the supply of 15,000 MW this year. In 2014-15, the cumulative solar power capacity in India was about 3,744 MW, accounting for about 10.5 per cent of the total RE generated in the country. Economic fundamentals for adoption of rooftop solar in India are improving by the day. In 2015 itself, the market is expected to add a capacity similar to the entire capacity added in India till date, the Bridge to India report adds.
Apart from solar power, India´s wind energy sector is also set to attract $15 billion investment by 2020, a report by ratings and research firm CRISIL stated. CRISIL expects India to add 4 GW wind energy capacity every year over the next 5 years, translating into a total investment of over $15 billion. Indian Wind Turbine Manufacturers Association expects 3.5 GW capacity to be added this financial year.
The government has pledged continuation of critical incentives for the wind energy sector, such as accelerated depreciation and generation-based incentive. They are also planning to launch the National Wind Energy Mission and push utilities to procure more RE.
These initiatives have already started to reap results. Indian and international project developers have pledged to add over 47 GW of new wind energy capacity by 2022. GoI has set a target to install 60 GW worth of wind energy capacity by 2022. This means that around 37 GW capacity will have to be added by March-end 2022.
Concurs Mittal, ´Investor sentiment has improved and negativism towards financing RE projects has significantly reduced. I believe if all these regulatory approvals are in place then financing is not a challenge anymore.´
POWER TODAY suggestions
- Land acquisition legislation and transmission
- problems need to be fixed.
- Concurrency of power as Central and state subject
- to be streamlined to effectively implement reforms.
- Financing initiatives like priority sector lending, interest rate subvention, improving availability and cost of debt financing need to go hand-in-hand with ranging net-metering policies.
- Poor financial health of discoms needs to be looked at on priority basis.
2014 Fourth Quarter and Annual Wind Funding and M&A Executive Summary
- Investments in the Wind Energy sector in 2014 reached $31.7 billion, compared to $28.3 billion in 2013.
- VC funding in the sector for 2014 totaled $311 million, compared to the $455 million raised in 2013.
- The top VC funded company in 2014 was ReNew Power Ventures which raised $140 million.
- Public market financings in the wind sector totaled $3.7 billion in 16 deals in 2014, compared to 17 deals for $5.8 billion in 2013.
- There were three IPOs, including one Yieldco in 2014, which raised a combined total of $578 million.
- Debt financing doubled to $7.7 billion in 23 deals in 2014, compared with the $3.8 billion in 10 deals raised in 2013.
- Large-scale project funding deals announced in 2014 reached nearly $20 billion in 120 deals higher than the $18.1 billion in 114 deals announced in 2013.
- A total of 41.8 GW of new large-scale wind projects in various stages of development were announced globally in 2014.
- Wind M&A activity in 2014 amounted to $4.6 billion in 28 transactions, compared to $2.6 billion in 33 transactions in 2013.
- SunEdison´s $2.4 billion acquisition of First Wind was the biggest transaction this year.
- It was a record year for Wind project acquisition activity with $12.8 billion in acquisitions compared to $5.7 billion in 2013, a massive 126 percent increase YoY.
Strong potential for solar power is matched by GoI´s bold vision
- Solar capacity target revised upwards to 100 GW by 2022 and aim to provide power to all citizens by 2019.
- Amendments proposed to Electricity Act including open access reforms and enhancement of RPOs.
- Solar parks policy announced removing two key execution bottlenecks i.e. land and power evacuation.
- Setting up of dedicated transmission corridors.
- Rationalisation of Renewable Energy Certificate regime.
- Low cost financing support from bilateral and multilateral agencies.
Source: Bridge to India
A Dark Past
The power sector is pivotal to the growth of a country´s economy. Over the years, the Indian power sector has had its share of ups and downs. The Electricity Act 2003, was a watershed, giving much needed boost to the sector´s economic viability. However, key reasons highlighted below, have resulted in relatively poor performance of the sector:
- Lack of adequate power generation capacity addition for the last two decades that consistently missed out on planned targets.
- Delayed clearances ´ environmental, forests, etc.
- Land acquisition issues.
- Fuel shortage (coal and natural gas) domestically and issues related to fuel linkages.
- Dismal conditions and inappropriate maintenance of existing power plants and T&D equipment or infrastructure.
Progress and Achievements in 2014
With the new government in May 2014, expectations were high that power sector issues would be addressed. The topmost priority was approval of power projects which were on hold due to delay in clearances, and the miscommunication amongst the Power, Coal and Renewable Energy ministries was earlier seen as a major handicap. As a first step, a single person was given the charge for all three ministries, with the objective of an integrated approach to address challenges and issues.
For the 12th Plan, India set a target of capacity addition of ~88,500 MW. At the end of FY2014-15, the country´s cumulative power generation capacity stood at 271.7 GW (Source: CEA, MoP). A capacity addition target of ~61,000 MW has been achieved, which indicates ~69 per cent of the targeted capacity addition for the 12th Plan. For FY2014-15, a capacity target of 17,830 MW had been set, of which ~22,500 MW has been added for FY2014-15, reflecting an over-achievement of ~26 per cent. While the capacity addition achieved for the year was substantial, it was majorly due to the fact that many power plants which were to be commissioned during the 11th Five Year Plan (2007-2012 period), were delayed and commissioning spilled over to the 12th Five Year Plan. Of India´s total generation capacity, thermal (coal, gas, oil) based contributes close to 70 per cent, indicating heavy dependence on fossil fuel-based generation.
The Fuel Crunch Coal and natural gas being prominent fuels used for electricity generation, it is imperative to assess their strategic importance to the future of India´s power sector. Share of coal-based generation capacity was 60 per cent and gas-based capacity contributed 9 per cent at the end of December 2014. Over the last 12-15 months, the sector has been marred in controversies like ´Coal-gate´, insufficient coal production within the country or the rapidly decreasing natural gas output from the KG-D6 basin.
Shortage of coal and natural gas is having an adverse impact on the country´s power sector, with new capacity build-up being affected. Additionally, existing power plants are running on low PLF, due to this shortage. At the end of December 2014, PLF of coal-based thermal power plants stood at just about 63 per cent, whereas PLF for natural gas based power plants reduced to 22 per cent.
This dwindling supply throws light on the resource crunch within India. The sector contributes a major chunk of consumption of both fuels ´ 75 per cent of total coal consumption and 53 per cent of total natural gas consumption. Shortage of these has an adverse impact on new power plant build program.
The deficit scenario has resulted in developers relying on imported coal and imported natural gas (through LNG/R-LNG). Difference between imported coal and domestic coal is approximately US $40 per tonne, whereas difference between domestic and imported natural gas (LNG at spot prices) is close to US $10 per unit. Because of high import prices, developers using imported fuel are severely affected and entire projects become economically unviable.
The Supreme Court order in September 2014, cancelling 214 coal block allocations hit the sector further impacting the supply of domestic coal.
Also, the shortage of natural gas availability in the domestic market further hurt investor sentiments. With no significant ramp up in production, the deficit is expected to substantially increase.
Renewables ´ A Big Push
India is increasing its focus on RE due to depleting reserves and prevailing domestic shortage. The country is now increasing focus on reducing GHG emissions and its dependence on fossil fuels. Under the aegis of NAPCC, the RE share is expected to gradually increase in the coming years.
Besides, there is significant focus of the government on RE, given that capacity build-up of renewable-based plants is quicker (12-18 months) as compared to 60-65 months for fossil fuel-based ones.
At the end of March 2015, the total RE capacity was ~36.8 GW, of which wind energy contributed a major chunk (~64 per cent). Solar energy with a cumulative installed capacity of ~3.98 GW at end of March 2015, contributed close to 11 per cent. Over the last 2-3 years, solar energy capacity addition has picked up pace significantly, backed by several regulations including subsidy-based support and feed-in-tariff announced by various states. JNNSM, has been a major initiative to push for building up solar energy capacity in the country.
While wind energy has historically captured a lion´s share of the RE mix, there is tremendous focus on solar-based capacity addition. For FY2014-15, the total RE capacity addition was targeted at ~3.8 GW, while ~4.1 GW was achieved. Recent announcements in the Budget 2015 clearly emphasized the government´s focus on building RE capacity. The targets were revised to 175 GW by 2022 (from earlier planned 75 GW), which would comprise 100 GW solar, 60 GW of wind, 10 GW of biomass, and 5 GW of small hydro power.
Capacity addition targets for solar seem to be very aggressive with approximately 14-14.5 GW of average annual addition required to meet the target of 100 GW by 2022. With the current set of challenges, especially funding and land acquisition issues, it remains to be seen how well the country gears up for aggressive addition of solar energy.
Conclusion and the Way Forward
India´s power sector is at the crossroads; the next 2-4 years will redefine the sector. Although constraints and challenges exist, most of these (viz. project clearances, fuel shortage etc.) have been magnified. Gradual but fundamental changes are expected to occur, with the government making all efforts in the right direction, through policy and regulation support. A recovery is likely to occur in the mid to long term, by which time the sector is expected to be on a path of sustainable growth with reasonable returns.
By Amol Kotwal, Director, Energy & Environment Practice, Frost & Sullivan