Mumbai: India was a pioneer in making renewable energy cheaper, thanks to capacity additions based on competitive bidding. Now, it’s falling behind.

Preliminary figures from Mercom India Research, an information services provider, show that solar capacity additions in the June quarter fell 14% from the March quarter, and 9% from a year ago, led by a decline in large-scale solar projects.

Note that average quarterly capacity addition had fallen to 1,662 megawatts (MW) in FY19, far below the average quarterly addition of nearly 2,500MW in FY18. In the June quarter, Mercom’s preliminary figures suggest additions of 1,510MW.

The deceleration is disheartening, especially keeping in mind that following in India’s footsteps, other countries have been adopting the reverse bidding auction process to benefit from competition and the resultant fall in tariffs.

More than 80% of solar procurement globally this year is expected to be achieved by reverse auction, up from just 10% in 2018, says a note from the Institute for Energy Economics and Financial Analysis (IEEFA). “Reverse bidding auction is a model that China has just begun to follow with a recent 23GW solar tender," says Kashish Shah, research analyst at IEEFA and co-author of the report. One gigawatt equals 1,000MW.

One major reason for India slipping behind is that the shift to auction-based capacity additions resulted in a steady fall in tariffs, leading to states reneging on some existing power purchase agreements (PPAs). This hurt the returns of developers, which had other projects where PPAs had been tied up earlier.

“The transition from feed-in tariff to auctions has disrupted the industry. After two and a half years, the new system has failed to bring material capacity on grid. Sales, project development and production cycles have become serialized, costs have increased, and the industry is fighting for its survival," says U.B. Reddy, managing director of Enerfra Projects (India) Pvt. Ltd, a project developer and independent power producer in the wind industry.

(Photo: Sarvesh Kumar Sharma/Mint)
(Photo: Sarvesh Kumar Sharma/Mint)

Further, as investments in renewable energy increased, transmission constraints surfaced, leading to a bottleneck for developers. The fragile financial health of state electricity utilities began to hurt as well, when they started delaying payments.

Besides, tariffs are capped irrespective of counterparty risks, execution and operational challenges. Developers may be happy to settle for low tariffs with, say, a state government with strong finances, but may demand higher tariffs in cases where counterparty risks are more likely to surface. However, the tariff caps rule this out.

“The two biggest issues hurting the sector right now are tariff caps and lack of financing," says Raj Prabhu, chief executive officer of Mercom Capital Group.

All of this takes away from the promise of low tariffs and high volumes that the auction-based system held. Project costs in India are the lowest in the Asia-Pacific region. The capital expenditure of a solar photovoltaic project in India is 25% lower than in China and 75% less than that of Japan, because of significant local scale, says research firm Wood Mackenzie. “Financing costs are significantly higher in India than developed countries, and land can be more expensive. However, the capex and utilization advantage is more than enough to offset this," says Alex Whitworth, research director of Wood Mackenzie.

However, erratic payments, transmission constraints and other factors are taking away the advantage of Indian renewable energy producers.

This has made investors wary, as seen in the under-subscription of recent capacity addition tenders. The central government has moved to resolve the concerns, advising states against renegotiating PPAs and issuing guidelines for payment security mechanisms.

Tendering activity accelerated in June, but much more needs to be done. Capacity additions are largely driven by central government-controlled entities and a few state governments. Small-scale capacity additions that support the local industry are few and are yet to see traction. Inconsistent policy actions such as the imposition of import duty on solar modules, a crucial component for solar projects, remain a challenge.

State governments are yet to fully align with the Centre’s renewable energy objectives, which are crucial for resolving the execution and operational challenges. The Andhra Pradesh government’s attempt to renegotiate PPAs is a case in point.

“To alter the scenario of slow capacity addition, there needs to be a better coordination between the central and state governments on resolving land acquisition and other related issues," says Shah. “The sluggishness in solar projects commissioning will continue for a while, until the anti-dumping duty on imported solar modules comes down."

The investment capital available globally at present exceeds the opportunities, says the note from IEEFA. International investors are looking at India to offer a robust policy environment. To ignore them in the current economic slowdown will be a mistake. “To get the sector back on track and restore confidence in the investment community, the government needs to facilitate lending to solar projects immediately and move away from tariff caps," says Prabhu.

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