Road to 500 GW

India steadily marches towards its 2030 renewable energy targets

Renewable energy installations in India have crossed 113 GW, with solar and wind capacities reaching 56.95 GW and 40.71 GW respectively, as of May 2022. This is a significant increase from just 69 GW of renewable capacity as of March 2018, enabled by a conducive policy regime, big auctions and private sector investment. This growth has been largely driven by the solar power segment, whi­ch witnessed about 35 GW of capacity additions during April 2018-May 2022. The other segments lagged behind, with wind power recording less than 7 GW of additions while bio­energy and small hydro added 1.8 GW and 400 MW of capacity respectively. The country has a long way to go, with new ambitious renewable energy goals announced by Prime Minister Narendra Modi at COP26 held in Glasgow in November 2021. According to these new targets, India aims to increase its non-fossil energy capacity to 500 GW by 2030 and meet 50 per cent of its energy needs from renewable energy sources by 2030. Further, the country aims to achieve net zero emissions by 2070.

A long way to go

With roughly 47 GW of hydropower capacity installed till date, the new clean energy target of 500 GW by 2030 means that India must ins­tall more than 300 GW over the next decade. Thus, an annual capacity addition of 35-40 GW would be required between 2022 and 2030, which is quite significant considering the slowdown in both renewable and hydropower installations. India has added less than 10 GW of new renewable capacity each year between 2018-19 and 2020-21. Even in 2021-22, just 15.45 GW of new capacity was added. Thus, 35 GW of annual capacity additions seem like a tall order.

While the devastating Covid-19 pandemic and its related restrictions certainly impacted capacity additions, the fact remains that the sector continues to suffer from some critical challenges that need to be urgently addressed to improve its growth prospects. These include:

  • Financially weak discoms: The discoms’ mounting debt levels have led to frequent delays in payments to developers, thus hitting project revenues. As of end May 2022, the discoms owe Rs 204 billion in outstanding payments to power generators, according to data from the Ministry of Power. These unpaid dues pose risks for developers and impact investor confidence, thus delaying India’s renewable energy expansion plans as discoms are the primary power offtakers.
    Various government schemes have been launched in the recent past to aid discoms. These include mandating state discoms to offer bank letters of credit to ensure timely payments and announcing a massive Rs 900 billion liquidity injection as loans in May 2020 as a Covid recovery package. However, the schemes do not seem to have achieved the desired outcome and discom dues continue to spike. The government is now planning to focus on discom privatisation and com­petition in distribution in order to help im­prove the situation and also drive the liquidation of past dues.
  • Lack of contract sanctity: Concerns regarding contract sanctity have been increasing in the developer community. In the recent past, there have been instances where states have tried to renegotiate tariffs for already-appro­v­ed PPAs and even postponed or altogether cancelled awarded bids. This dampens inves­tor confidence in the entire competitive bidding mechanism. To avoid such practices, strict norms need to be put in place, and tigh­ter contractual conditions and standardised tender guidelines must be introduced.
  • Land and transmission constraints: Resour­ce-rich sites are limited, and with complicated land laws across states, they are also difficult to acquire. Projects often get stuck for months in the complicated land acquisition process, which delays the entire project sc­he­dule from construction to commissioning and even leads to tenders getting postpo­n­ed. Coordination between different state and local authorities and developers is, therefore, required to identify suitable land par­cels for renewable energy development.
    Another issue is the lack of adequate tra­ns­mission infrastructure. Renewable energy projects have shorter gestation periods than transmission assets, and thus, many wait for months for connectivity. In many cases, developers have had to bear heavy curtailment losses. The green energy corridors project, which was being implemented to ease these transmission issues, has also met with de­la­ys. The government and transmission ag­en­ci­es need to work closely with developers to resolve these long-standing grid issues. To support developers and ensure long-term visibility, the government has recently extended the waiver of interstate transmission system charges for the supply of power from solar and wind projects until June 30, 2025.
  •  Lengthy approval process: There have been reports of PPAs and other permits getting stuck at the approval stage for many mon­ths. These long and complicated approval proce­sses should be eased as they lead to unnecessary cost and time overruns for developers. In some cases, when approvals have come through after a long period, the technologies, regulations, or costs have changed, thereby impacting project plans and viability.
    With so many critical issues hampering sustainable renewable power development, it remains to be seen whether the country will be able to expand its clean energy ca­pacity to 500 MW.

The positive side

Things have started to look up this year with roughly 3.5 GW of non-hydro renewable energy capacity installed in a span of just two months, between April and May 2022. It is expected that the total capacity additions by the end of the financial year will increase by six times or more. Auction activity has gained pace across different segments, with competitive tariffs and appropriate policy and regulatory interventions. Supportive market dynamics have led to continued investments by both domestic and foreign investors. Further, solar manufacturing has received a strong impetus.

  • Enabling policy interventions: Policy and regulatory moves have not been limited to renewable energy sources such as solar and wind power, but have covered other emerging segments as well. For instance, in line with the global focus on green hydrogen, the Green Hydrogen Policy has been released. Similarly, open access, which has long suffered due to inconsistent policies, has received a renewed push with the notification of the Green Energy Open Access Rules, 2022, which reduce the limit of open access transactions from 1 MW to 100 kW for green energy. Further, a trajectory has been announced, according to which bids for offshore wind energy blocks of 4 GW would be issued every year for the next three years followed by 5 GW of annual capacity auctioned till 2029-30.
    On the manufacturing side, the first auction under the production-linked incentive (PLI) scheme for solar modules awarded 10.5 GW of development projects for end-to-end vertically integrated manufacturing capacity, with a total PLI amount of Rs 44.5 billion. The capacity was awarded to three bidders – Jindal India Solar Energy, Shirdi Sai Electricals and Reliance New Energy Solar. In addition, the Approved List of Models and Manufac­turers has finally been released to ensure the use of quality products in solar projects. Fin­ally, a basic customs duty of 25 per cent is now applicable on imported solar cells and 40 per cent on imported solar modules from April 2022 to curb imports and promote the adoption of local products.
  • Competitive tariffs: Successful auctions have been conducted recently and projects that were delayed due to Covid are now accelerating development and construction activity. The renewable energy pipeline remains stro­ng in not only the solar space but also in the wind, solar-wind hybrids and floating solar segments. The price of renewable energy has remained competitive with record low bids being registered. Solar power tariffs have now stabilised at Rs 2.20-Rs 2.40 per kWh as witnessed in the Gujarat and Solar Energy Corporation of India (SECI) solar park auctions held in the past four months. Successful auctions have also been conducted in the lagging wind power segment, which witnessed the lowest tariffs of Rs 2.89 per kWh and Rs 2.77 per kWh in SECI’s May 2023 and September 2021 auctions respectively.
    Auctions in new segments have also seen encouraging results. For instance, the wind-solar hybrid auction (Tranche V) in May 2022 witnessed tariffs as low as Rs 2.53 per kWh. The first-of-its-kind round-the-clock (RTC) tender for renewable energy blended with thermal saw tariffs of Rs 3.01 per kWh in October 2021. Such competitive tariffs across different renewable energy segments have brought in a new sense of confidence among investors and developers regarding the entire sector, which had been affected by pandemic-led supply chain issues and other sectoral challenges.
  • Improving financing conditions: Renewable energy investments have been rising, supported by commitments from lenders and investors to stop fossil fuel financing. Long-term government targets and 25-year bankable PPAs combined with a highly transparent competitive bidding mechanism have further helped shore up investor confidence in the sector. The lending situation has improved, with a number of credit lines being issued by leading banks and large Indian companies attracting massive investments through both on­shore and offshore green bonds. Indian developers with good quality assets continue to attract large equity investments from domestic as well as foreign investors. Merger and acquisition deals grew in number and size during the year, with low exit barriers and operational assets finding good purchase value. This trend is likely to continue as companies choose both organic and inorganic means to expand capacities backed by strong investors with deep pockets.

Outlook

Technology, cost and policy developments, a competitive market environment and the right financing climate have created an enabling ecosystem for the growth of many other segments linked to the renewable energy sector. The Indian renewable energy industry has finally matured and is transitioning from a singular focus on aggressive capacity additions and low tariffs to more sustainable and inclusive growth over the next decade. In line with this, steps are being taken by the industry as well as policymakers to diversify and promote a range of energy sources and business models.

There has been a noticeable shift from low-tariff, discom PPA-based utility-scale solar and wind projects to quality assets across a diverse range of renewable energy sources and power procurement arrangements including energy storage, solar manufacturing, RTC power and hybridisation, green hydrogen, commercial and industrial solar with a greater focus on automation and digitalisation. Investor confidence remains strong despite some lingering challenges pertaining to contracts, payments and project execution, which are temporary and should be resolved soon.

Net, net, this is an exciting time in the co­untry’s clean energy transition. Players that can innovate, upgrade and capitalise on this ma­ssive opportunity will have a much bigger share in the renewables’ market as India mo­ves towards its goal of 500 GW of clean energy by 2030.

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