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The energy landscape in India is being reshaped in fundamental ways. While this transformation had been happening gradually but steadily in recent years, it has now been accentuated by the covid-19 crisis, the ensuing lockdown and the more recent India-China border tensions. Cumulatively, as the energy mix shifts towards renewables, it presents a window of opportunity for India to act now by strengthening its domestic capability and, thereby, achieving energy security.

Several structural disruptions have been enabling the energy mix transition at a steady clip. First, there is a disincentive for thermal power with projects getting priced out due to low solar tariffs, as cheap as 2.5 per kilowatt hour (kWh). With solar tariffs expected to fall further and the emphasis on reducing pollution by thermal plants, there has been limited focus on new thermal capacity creation. This is, however, consistent with global trends.

Consequently, thermal Plant Load Factor (PLF), which is a measure of the power plant’s capacity utilization, declined from 60% in FY19 to 56% in FY20. In addition, the emergence of hybrid renewable-storage projects for round-the-clock (RTC) power at a levelized tariff, lower than thermal, is expected to further accelerate this trend.

Graphic: Sarvesh Kumar Sharma/Mint
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Graphic: Sarvesh Kumar Sharma/Mint

Recently, ReNew won a 400MW project at a levelized tariff of 3.55 per kWh compared to typical thermal tariffs of over 4 per kWh.

The lockdown has triggered approximately 20% power demand decline, driven by a slump in the commercial and industrial (C&I) segment as is evident from the PMI, which fell from 55.3 in January to 30.8 in May. As a result, coal PLF declined to 42% in April from 63% in the corresponding month last year, largely due to the lower position of thermal in merit order dispatch. In contrast, PLF of renewables remained unchanged at 16% vs 17% last year due to the must-run status, while gas PLF increased from 23% to 27% driven by low gas prices and the need to balance the higher share of renewables. According to Bain and Co.’s analysis, LNG prices in India will remain attractive for the next two years before demand comes back and low-cost supply sources dry out.

Further, we anticipate a significant slowdown in generation capacity addition over the near to medium term, as power demand growth is expected to recover only by the first quarter of 2022, at the earliest.

With increasing cost competitiveness, renewables are expected to respond fastest to power demand recovery. However, a continued growth in renewables beyond 20% of total supply from a current 11%, will necessitate substantial investment in transmission capacity for power evacuation as well as a smart grid infrastructure—both of which will be dependent on the health of power utilities. Renewables penetration should improve gas power plant utilization from the existing 25% levels, enabled by a fall in gas prices.

While EV penetration is likely to get somewhat delayed worldwide due to low oil prices, this may not impact the penetration rate of renewables in India as the government has not passed on the benefit of low global oil prices. In fact, we are already witnessing an acceleration in low-end segments like e-rickshaws driven by falling prices. However, the EV segment will introduce a demand-side variability into the grid, in addition to the inherent supply uncertainty caused by renewables, necessitating investments in smart grids and battery storage.

In addition to the pressures of a multipolar world, the recent India-China border tension could affect sourcing of solar modules and batteries over the medium term. Therefore, as a broad country strategy, it will be prudent to use the supply uncertainty as a push factor for Make in India to develop local capacities for solar cells and batteries, and limit dependency on China.

The time to act is now, given both the scale of opportunity and the urgency to redefine global supply chains. This will help India emerge stronger from the current crisis and achieve the government’s goal of Atmanirbhar Bharat.

Amit Sinha and Mahadevan Seetharaman are Partners at Bain & Company. Sinha leads the firm’s Utilities & Renewables practice in Asia-Pacific. Seetharaman is a leader in the firm’s Energy and Natural Resources practice.

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