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Overview | December 2017

Remove Pitfalls on Way to Targets

Despite the Centre's thrust to renewable energy, state governments are not an active party to the renewable energy wave. If the Centre and states collaborate, things would be easier for achieving targets. <p></p> <p> India being one of the largest developing economies is faced with the challenge of a sustained economic growth while dealing with the global threat of climate change. In order to adapt to climate change and enhance the ecological sustainability of India's development path, the government introduced the National Action Plan for Climate Change. This led to a shift in focus from conventional sources of energy to sustainable and renewable sources of energy. As a result, as of September 2017, India has a combined renewable energy capacity of 58.3 GW and hopes to grow to 175 GW of RE power by 2022, with about 100 GW of this capacity to be added by solar. </p> <p> Renewable energy these days is the talk of the town, making headlines and national dailies keeping a track of its progress and achievements on a daily basis. India is making fast progress in the renewable energy space after having lagged to its counterparts for many decades and has surpassed the US to take the second spot on a list of the world's most attractive renewable energy markets released by Ernst and Young. A combination of strong government support and increasingly attractive economics has helped push India into second place. </p> <p> RE has made great strides in India, but it is driven more by targets, governmental support, and simple economics than a consumer push for being green and sustainable. Although the government has turned largely towards renewable energy to fix India's chronic power shortages, reduce dependence on coal and promoting solar energy as the 'ultimate solution' to India's energy crisis, the industry is experiencing a decrease in its growth trajectory. </p> <p> The good news is that the price for RE, especially solar power and wind power is falling dramatically and renewable capacity additions are touching an all-time highs. This allows the stakeholders to focus on the next set of challenges in making RE scale, sustainably.</p> <p> Wind and solar being the front runners of RE are rambling with some common issues of ground breakingly low tariffs (`2.44/ unit for solar and `2.64/ unit for Wind) and capacity additions not meeting targets. This is due to various reasons such as (a) withdrawal of fiscal benefits to RE, (b) reduction in solar PV equipment costs and (c) competitive-based bids. Although the first two have helped RE achieve grid parity and become commercially viable, the latter has created another set of concerns. </p> <p> After the first tariff based competitive bidding in wind post which all wind buyers (mostly state government owned power utilities) have stopped signing PPAs at fixed tariffs and there wouldn't be any further auction since the utilities are not yet fully equipped with the process thus leaving the wind industry stuck in the middle. Parallelly, solar project auction activity has also slowed down.</p> <p> The main reason for this is that state governments are not an active party to the renewable energy wave. If the Centre and states collaborate, things would be easier. For instance, in case of wind, competitive bidding is fine for larger projects and the state governments could sign PPAs for smaller capacities. In solar, state governments are not signing PPAs even after bid process completion. Hence, developers have become selective in their bids due to difficulties in Power Purchase Agreement (PPA) signing even after winning the bid and forced tariff renegotiation by states. This is despite the Central government's view that tariffs cannot be same everywhere. Solar prices depend on various factors such as solar irradiance, counter party risks, discoms involved, cost of capital, infrastructural development, solar equipment prices etc. and hence solar prices are different for different projects. </p> <p> Another perennial issue is the bankability of state-owned discoms and non-payment of dues to energy companies. Power distribution entities in various states have been dodging long-term off-take commitments made to generators. States such as Madhya Pradesh, Maharashtra, Tamil Nadu and Andhra Pradesh have been identified as key defaulters, with payment delays of 9-12 months to wind power producers. The total dues that discoms owed to wind energy players alone swelled to over Rs.2,000 crore till June 2017. State discoms in Andhra Pradesh, Karnataka and Uttar Pradesh are renegotiating or cancelling PPAs with wind and solar power developers (according to ICRA) putting 4,800 million ($7.5 billion) worth of approx. 7GW of solar projects at risk.</p> <p> State electricity regulators must be empowered and given responsibility to prevent generation or distribution companies from backing out of their commitments and penalise them for not honouring PPAs/ failing to meet their commitments. The Central government has recently passed a notification to block the state authorities' ability to cancel or negotiate any signed PPA tariffs and notified that a penalty of 50 per cent of the tariff would be imposed if PPA is arbitrarily scrapped by the state or the developer. Another key area of focus is lack of enforcement of Renewable Purchase Obligations (RPO) regulations and the absence of penalties when obligations are not met. Many of the state DISCOMs (distribution companies) are not complying fully with their RPO targets. In order to keep a check on this and to ensure better compliance, Indian government must pass a law to make RPOs under power purchase agreements (PPA) statutoryly binding and must cover 100 per cent of the RPO requirement.</p> <p> The above issues coupled with an increase in the cost of solar modules (recently Chinese module suppliers raised prices, reversing years of a downward trend and putting recent bids at risk as developers likely factored in continually falling prices), imposition of GST (leading to an increase in execution costs) and anti-dumping investigation (will lead to an increase in overall project costs) are further presenting new challenges for Indian developers.</p> <p> If falling prices are a reason for the growth of grid scale solar power, the same should apply to rooftop solar catering directly to end users, but is not entirely in line with projections. Rooftop solar is naturally insulated from market-related risks such as discoms' health, land acquisition and evacuation capacity and offer cheaper landed cost of power to the end consumer vis-a-vis conventional power. Rooftop solar is growing robustly but is mostly restricted to private commercial and industrial consumers and public sector has witnessed sluggish growth despite having a strong mandate. And hence, the target of 40 GW of rooftop installation by 2022 looks a bit unrealistic. </p> <p> Having said that, appropriate and timely measures should be undertaken to reduce financial and discom risks, standardise contract bids, and active promotion of solar with storage solutions to match the growing scale of RE deployment. </p> <p> Renewable energy has a very bright future ahead of it. Affordable supporting technologies such as storage and smart grids (which add real-time visibility, control, and flexibility) would scatter all these short-term clouds. Ultimately, improved frameworks in terms of regulatory, government, technology and markets and an overall collaborative environment will help renewable energy scale sustainably in India.</p> <p> <span style="font-weight: bold;">Author: Sanjeev Aggarwal, CEO &amp; MD, Amplus Solar </span></p>
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