India’s renewable energy sector is undergoing a major transformation. Wind energy, which till a few years ago was the cynosure of all eyes, is now slowly losing traction. The government’s focus has now shifted to solar energy, which has the potential to light up millions of homes and power micro to large enterprises across the country.
As per its latest targets, the government is looking to raise solar power generation capacity to 48 gigawatts (GW) by early 2019, out of a targeted 100GW from solar by 2022. The big push will give a further impetus to the solar energy sector.
To ensure that there is a stable market for solar energy, the central government has already made it mandatory for state power utilities to buy a certain amount of this clean energy from independent power producers (IPPs). Also, the duty structure for equipment needed to generate solar energy is more favourable compared to that needed for producing wind power.
Lower tariffs is one of the reasons solar is finding more favour among state electricity distribution companies (discoms). Solar power helps discoms meet their peak power requirement. Also, the generation of solar energy can be forecast better, as compared to wind, which typically blows strongly at night and during the monsoon months, when the demand for power is low.
Hence, discoms prefer to purchase solar power rather than wind. However, in the rush to build market share in this exciting sector, some players have become very aggressive in the competitive auction process and are bidding very low tariffs with fairly low returns.
There is a fear that some of these projects could become unviable because developers will find it difficult to raise funds at attractive interest rates and contain high project costs. Tariffs may stabilize once this initial rush subsides. It might settle at somewhere between ₹ 4.75 and ₹ 5 a unit. However, for some of the state bids, it may be a bit higher. These are still very attractive tariffs and are fixed for 25 years.
Low tariffs can also negatively impact the government’s target of achieving 100GW by 2022. We need to attract more players and many more investors into this nascent sector.
India is trying to add the same capacity in renewable energy in seven years that we added in conventional energy in several decades.
To be able to sustain this growth, the solar energy sector will need $30-40 billion in equity investments in the next few years. This will come only if the returns are attractive for investors. Hence, it is important that every project remains viable from both aspects—tariff and profitability.
From the investment point of view, India is one of the most attractive markets in the world because of its sheer size: 10-12GW annually. This is even more relevant when one considers that the largest market, China, is virtually closed to foreign investors.
The environment needs to be conducive for both domestic and foreign players to operate. While several global players are making a beeline for India’s solar energy market, not many are aware of the challenges that lie ahead of them. From land acquisition to problems in grid evacuation, there are many issues that can derail returns on a project.
Several discoms, the ultimate buyers of power, are in a poor financial condition. Hence, payment delays and rising receivables can upset both financial plans as well as cash flow management. Financing a large number of projects that have been awarded will require debt of almost $10 billion every year. India’s banking sector is already facing its own set of challenges and there are only a few banks that finance such long-term projects. Add to this the potential problems in evacuation, transmission and distribution and you have a sector that is fighting hard to grow at a fast pace despite a host of challenges.
No wonder the industry is seeing a degree of churn. Going forward, there will be consolidation as some players look for an exit. However, the onus for giving a boost to the sector also lies with the government. The government could compensate bidders for delays in evacuation and land acquisition.
However, the ideal solution would be to announce a feed-in tariff mechanism, and let companies acquire land and build their own evacuation. There is also a need to invest in supporting infrastructure like transmission and distribution for evacuating power from solar projects.
The solar energy sector has a clear social impact and the potential to grow at a fast pace. All it needs is policy and infrastructure support from the government and a pragmatic approach from industry players.
Sumant Sinha is chairman and chief executive officer, ReNew Power.