There is immense interest in the sector from domestic and international investors, but growth is limited by policy, approval and payment delays, besides grid curtailment, believes Sudhir Nunes, CEO, Orange Renewables.
Could you talk about the growth in the renewable sector over the last two years?
The RE sector has grown at over 10 per cent per annum over the last two years, driven majorly by the wind sector accounting for 4,300 MW new installations, followed by solar installations of around 1,900 MW in the same period. Viable wind feed-in-tariffs (FITs) released by certain states complemented by the return of GBI and AD benefits from the Centre drove sizable wind investments in Maharashtra, Rajasthan, Andra Pradesh, Madhya Pradesh and Karnataka.
Maharashtra alone added 1,400 MW, while Rajasthan and MP added over 600 MW and 490 MW respectively, in the past two years. Most importantly, wind growth has diversified geographically with seven states adding more than 150 MW each, for the first time in FY15. Rajasthan, MP and Punjab saw significant growth in solar capacity adding around 800 MW, 600 MW and 240 MW respectively.
Have initiatives and policies pushed this sector? Have you witnessed significant changes?
The Union government has made RE a high-priority sector and recently announced an ambitious target of 176 GW of RE installations by 2022. Over a period of time, fiscal incentives such as accelerated depreciation, viability gap funding and generation-based incentives have been provided by the Centre. Policy initiatives like Renewable Purchase Obligations (RPOs)/ state-specific policies for wind and solar have also been implemented, which had very significant impact.
Conducive Central Government policies have in the past played and still continue to play a significant role in the success of the RE sector. Central policy initiatives like GBI have improved viability of several wind power projects and viable FIT in different states have led to substantial capacity addition. Around 6,000 MW of wind power projects (25 per cent of the total installed capacity) have benefited from GBI with similar or slightly higher capacity built under the Accelerated Depreciation (AD) regime. One only needs to look at FY13, where RE installation dropped remarkably by almost 50 per cent of the CAGR, in absence of GBI and AD.
With current GBI period lasting only till FY17, we may witness a similar dip unless states increase FITs to compensate for the drop in revenue and introduce clear policies on wind and solar PPAs.
State RE policies are most crucial for investments. We´ve seen that in any state, periods with clear RE policy, viable FITs and willingness to execute PPAs coincide with increased investments and sharp increase in installed capacities, be it Rajasthan in FY13 and FY15, Maharashtra until till FY15 or MP from FY13 onwards. With investors and investments ready, what we need most is a clear, consistent and conducive policy environment for the investors´ intent to be translated into installed capacities on ground.
Which policies in particular have made a significant contribution? How well do you think they are being implemented?
Each policy and incentive has its own importance whether it´s Renewable Purchase Obligations (RPO), Renewable Energy Certificates (REC), Generation Based Incentive (GBI), FIT, or AD.
GBI, FIT and AD are fiscal incentives required during the nascent stage of the industry and are currently the major drivers for growth in RE installations. RPO and REC are key complementary policies which, if properly enforced and complied with, will generate clear and significant demand for renewables and ensure long term growth of the industry.
Central government incentives of GBI for wind and JNSSM for Solar have both been implemented well. Further IREDA´s initiative for providing working capital financing to the extent of GBI receivable should help RE projects service their debt.
Policy initiatives targeted at easing operational level issues, such as deemed conversion of land from agricultural to non-agricultural (NA) and Excise Duty (ED) waivers in states like AP have further helped implementation. Early execution of PPA with FIT locked in at PPA execution, as in Gujarat, would go a long way towards boosting investor and lender confidence. Such successful initiatives should be replicated as best practices across other states as well to encourage shorter project implementation cycle.
What is a realistic target of projects that can be fundable for 2022, as opposed to 176 GW?
The bulk of the RE target of 176 GW comprises of 100 GW of solar and 60 GW of wind. Currently, only around 3.7 GW of solar capacity is installed in India while Wind installations are around 24 GW. Thus, on an average around 14 GW per year of solar and 5 GW per year of wind installations are required for the next seven years to achieve the target. Historically, wind installations have been in the range of 2-3 GW per year. Solar is still in the nascent stage in India with only 3.7 GW installed; historical trends cannot be relied upon. Solar and wind projects can be developed much faster than any other conventional power projects. We also believe currently funding capacity and manufacturing capacities are also non-issues in the sector.
The key issue is transmission, which should be developed much before renewable installations considering the relatively longer time span required to develop it. This is where India is lagging behind. Initiatives like the Green Energy Corridor must be implemented at the speeds witnessed in China.
How much of the amount pledged during the RE Invest summit do you think will be realised?
The pledges at RE Invest were symptoms of immense interest in the sector from domestic as well as international investors. Companies like ours are merely at the beginning of our wind and solar investment platforms, but our growth is limited by policy delays, approval delays, payment delays and grid curtailment. In addition to stable long term policies, we need to witness explosive growth of the intra-state and inter-state electricity grids, the much talked about Green Corridor. If investors find that in addition to the risks of wind resource, rupee-dollar volatility and payment delays, we will also face 3-4 years of curtailment in high wind season, this will quickly bring the RE movement to a grinding halt.
What financial options are available for funding of RE projects in India?
Currently, the financing scenario is very healthy in India both in terms of debt and equity. Several IPPs have entered the RE market. Interest in the wind sector is symbolised by entry of big international names like Sun Edison and SembCorp in the past year through major acquisitions. Soft bank with its JV companies is set to invest $20 billion to develop 20 GW of RE projects. Indian private sector giant players like Reliance and Adani have also signed up several MoUs for solar projects across the country. Private equity investment has also grown immensely. So, as such there is no dearth of equity.
Over the past two years, debt availability has also improved. Public sector banks are funding RE projects aggressively, with SBI committing to finance 15 GW of RE projects at RE-Invest. Non-banking financial corporations like PFS, IREDA and L&T Infra are also very active in the RE space now.
Big players like PFCs and multi-national institutions such as ADB and IFC have also started funding projects in India. Thus, there is very big appetite for investments in the sector and availability of funds should not be an issue to achieve targets set by the ministry.
How much of the current crop of projects are actually bankable?
Currently, the only projects bankable in the power sector are RE projects. Considering how the highly commodity dependent technologies like thermal/ gas-based power plants have fared over the last five years, RE projects will continue to lead the market in terms of bankability.
The fact is that once a wind/solar project is developed, the risks related to cost of generation are extremely minimal. Thus, if resource assessment studies done at the initial stages of the project is of good quality, there is no reason for the project to fail. With better technology and increased sophistication, assessment studies have become better over time and will continue to improve.
How do you see renew developing over the next 3-4 years?
I think the RE sector will definitely become a much bigger part of the installed power capacity in the country in the next five years or so. The growth of renewables would be lot more than what it is right now, while the growth of conventional power projects is expected to lag behind due to issues related to growing commodity prices like coal/gas and issues related to environmental clearances. Today, renewables represent only 12-13 per cent of the installed capacity and 5 per cent of the total energy consumption. This is expected to increase significantly in the coming few years. Further, more new efficient technologies are likely to come in, which would continue to lower the cost of RE. Energy storage and load balancing is an important space where developments should happen to handle the increase in RE capacities.
What policies need to be adopted for India to meet or exceed these expectations?
With the growth of Tier II and Tier III cities, the emphasis on ´Make in India´, and the need to provide rural electrification, it´s clear that India must increase access to reliable, efficiently used electricity. In this sense, the RE sector in India is driven by sheer electricity demand and not just by political will as in several western countries. However, as recent studies have shown, India has 13 of the 25 most polluted cities in the world in terms of air quality and the majority of surface water is already contaminated. We are following in the direction of China but we aren´t reacting as fast as China to halt this alarming trend. The majority of this electricity access must come from RE and energy efficiency, if we are to protect the health of our people and natural resources. It is up to the Centre and states to capitalise on RE investor interest with stable long term policies that must at minimum, level the playing field with non-renewable power subsidies. We must take bolder steps to limit carbon emissions and water pollution from coal and natural gas power plants and not simply repeat the mistakes made by other countries. Every possible effort must be made to promote and protect investments in renewable energy and energy efficiency.
Specific measures that the Government should focus on are:
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