Renewable energy (RE) today is synonymous with solar photovoltaic (PV) in India. Back in 2013, the UPA Government announced the new targets for all forms of RE – 175,000 mega-watts (MW) equivalent to 175 giga-watts (GW) of installed capacity in the Intended Nationally Determined Contributions (INDCs) submitted to United Nations Framework Convention on Climate Change (UNFCCC) (Refer to Table 1: Enhanced Targets for RE in India). Solar power shares the biggest burden of development of RE sector given that the potential for solar is estimated to be around 750,000 MW (refer to Map 1: Potential for solar development across states). The target given to the sector is of 100,000 MW by 2022. The 100,000 MW target has been further divided for utility scale within and outside solar parks and rooftop solar installations (Please refer to Table 2: Year wise target to achieve 100,000 MW by 2022).
India’s ambition of 100,000 MW is to be installed in a span of seven years (since its announcement). It was first of its kind across the globe. Such scale has never been achieved by any single country. The maximum solar capacity added in a year is 12,000 MW in 2012 by China. In 2014, the United States added 6,200 MW of solar capacity, its highest ever. The maximum India has installed in around 5,500 MW in the last financial year 2016-17 and this year, till October India had installed around 3,100 MW against the target of 10,000 MW. Mathematically, it seems next to impossible that the target for the year would be met (Refer to Table: 3 Year wise target to achieve 100,000 MW by 2022)
Map 1: Potential for solar development across states
Between all the announcements and targets, it is important to understand that there are still more than 200 million people in India that do not have access to electricity and many more who get few hours in a day. India also suffers from huge power shortfalls. There is an indisputable need for renewable capacity to meet not only the demand of the existing population and those who do not have access to electricity. The momentum is picking up with the new government’s push for RE at all fronts.
The sector is booming – the trajectory of growth
Declining prices of solar
The biggest boon to the solar sector has been the falling prices of solar PV modules across the globe. There is an oversupply of PV modules especially from the Chinese manufacturers and this oversupply has pushed the prices down to historical lows. According to PV exchange, just since Jan 2017, the prices of high efficiency modules have reduced by over 10 percent.
Graph 1: Declining prices of Chinese crystalline modules in €/Wp
Because of the steep decline in PV prices, the capital cost of the solar PV plant has also seen a stark fall. Central Electricity Regulatory Authority (CERC) has been releasing the benchmarks for capital cost of solar since the National Solar Mission was announced in 2010. This cost has also seen a decline of because of the fall in PV module prices. Since 2010 till 2017, annually the capital costs have fallen by over 21 per cent (Refer to Graph: CERC Benchmark – Solar Capital Expenditure (` lakhs/MW)). There were no benchmarks for FY 2017-18 because, it is hard to keep up with declining tariffs that are achieved through reverse bidding. The benchmark tariffs notification states, “Since tariffs for solar projects are determined through reverse bidding and the same has been initiated for wind, they do not need to set benchmark tariffs for all the projects and can take these cases up based on particular projects that come to CERC.”
Graph 2: CERC Benchmark – Solar Capital Expenditure (` lakhs/MW)
The plant and machinery specifically the modules make up for more than 60 per cent of the total cost in any solar project (Refer to Graph 3: Distribution of Capital Cost of Solar PV Project). The decline in the price of these modules has had signification impact on the tariffs quoted in the bidding process in the country.
Graph 3: Distribution of Capital Cost of Solar PV Project
The low tariffs of ` 2.44 per unit could be reached not just because of the declining prices, but because of the expectation of prices going down further (Refer to Graph 4: Lowest solar bid tariffs in India in 2016-17). One of the developers who one won the bids in the 2017 auctions explained that “The capital cost for the bids would have been estimated based on the projected module prices at the time of commissioning of the project, at least a year from now, since modules are the last equipment to be installed.” Since there was almost 20 per cent decline in module prices in 2016, a similar dip is expected in 2017 and 2018 as well.
Graph 4: Lowest solar bid tariffs in India in 2016-17
Removing the financial risks
Another advantage that was noticed in the Rewa auctions and now has been adopted as the norm for central government bids is protection from the risk of non-payment from the distribution companies. Rewa tried to solve the issues of non-payment by distribution companies by giving bank guarantees by state government and getting a third party buyer in Delhi Metro Rail Corporation. On similar lines, the Badla solar plants would be selling their electricity to Solar Energy Corporation of India (SECI). There is more security of payment because of SECI’s credit rating and backing of government of India.
SECI expanded role as a power procurer is primarily to insulate the developers from the ever fickle minded distribution companies. Discoms have had and continue to have structural and financial problems. UDAY, the programme that transferred the state discom debt to their respective state governments, was expected to improve their financial and operational health. With little signs of improvement and still hampered by political pressures, the outlook for discoms remains cloudy.
To keep the market going, SECI is becoming the sole buyer in the upcoming large scale RE capacity. It is expected to sign PPAs for the upcoming wind auctions as well.
Policy certainty
Another advantage that India has over other countries in solar sector is the government’s commitment to solar energy. The central government has started to create an eco-system for development of solar energy. The first step was the creation of National Solar Mission in 2010 and its enhanced target in 2014 only garnered positive response from the industry and financiers. The policies that were developed to increase installation like the solar parks scheme only added more confidence for investors to invest in the solar sector in India.
Solar Parks Scheme
Ministry of New and Renewable Energy (MNRE) introduced the scheme for “Development of Solar Parks and Ultra Mega Solar Power Projects” in December 2014 with the objective of bringing economies of scale in the solar sector to reduce the cost of generations for solar power. The scheme aimed to set up minimum 25 projects with a total capacity of 20,000 MW by 2020. Till now, 34 parks have been identified across 21 states with a capacity of 20,000 MW.
`539.79 crore has been sanctioned by ministry for implementation of these solar parks as part of the MNRE financial support through viability gap funding (VGF) of `20 lakh per MW, or 30% of the cost of developing the park whichever is lower. MNRE also announced plans for Phase II of the solar park development with increasing the capacity to 40,000 MW in 25 states and also include storage capacity for 200-300 MW.
Developers like the idea of solar park development because procurement of land is one of the toughest tasks with the developer at this moment and solar parks eliminate the task completely. The park also ensures that the transmission and distribution lines are already set up.
Solar rooftop
13 states have come out with solar policy supporting grid-connected solar rooftop systems and State Electricity Regulatory Commissions (SERCs) of 20 states/union territories have notified regulations for net metering/feed-in-tariff mechanism. Net metering makes solar rooftop help reduce the electricity bills and make these systems more financially appealing. Guidelines have been issued to include solar rooftop under housing loan and 9 banks have issued specific instructions regarding the same.
Apart from the benefits available to solar sector in general, financial assistance of 30 per cent of the benchmark capital costs which increases to 70 per cent for special states is also available for rooftop solar installers especially for residential, institutional and social sectors.
Still challenges persist
Even though the government has tried to increase investments in solar sector more and more appealing, there are few challenges that still make the leapfrog of solar sector challenging:
Transmission infrastructural bottlenecks
Development of essential supporting infrastructure such as transmission lines for evacuation of power should go hand in hand with developing RE and solar sector in particular. And this development should be dependable in all states equally. Many developers have complained that there have been instances when projects is commissioned within 6 to 8 months of winning the project however; the corresponding power evacuation architecture lags behind and leads to delay in commissioning of the project. This also causes revenue losses for the developers.
The Indian national grid has an installed capacity of around 330,860 GW, as on November 30, 2017. There are always questions on what would be the capacity of renewable energy that power systems operators estimate that the grid can handle. Typically, their estimates are in the range of 20-30 percent, with more significant investments required in transmission or peak plants. Power Grid Corporation needs to develop green corridors for the upcoming solar and wind power projects. German bank KfW has announced providing soft loan of Euro 1 billion for “green energy corridors” to facilitate integration of large scale renewable capacity. The progress of the same is still not clear.
Distribution companies (DISCOMs) – buying RE power
Given the financial health of the DISCOMs, default in payment to developers is seen as a critical risk by financial institutions. It is imperative that necessary steps are taken for alleviating the fears of the bankers in the sector. Investors and developers seek full payment guarantee facility which will allow more money to flow in the sector.
Unfortunately, the states of Discoms haven’t improved even after the Ministry of Power ordered the scheme for the financial restructuring back in 2012. The outstanding debt of the seven state discoms – Rajasthan, Uttar Pradesh, Tamil Nadu, Haryana, Jharkhand, Bihar, and Andhra Pradesh amount to `2,75,400 crore in 2014-15. All these Discoms had their debt restructured, and ended up with debt that grew by 23.3 per cent over 2012-13. “I had said to the states very loud and clear that the government of India cannot be considered as a bailout bank. The states would have to find the solution,” Piyush Goyal, the then Minister of State (IC) for Power, Coal and New & Renewable Energy said at a Fortune India event held in New Delhi in 2015. If that is the case, how would the change to Discoms take place? What will the impact of these debt ridden discoms on the development of RE in the country?
Despite having a “must run” status, many RE developers including many solar developers have complained that many discoms have asked them to stop supplying power to the grid when there is excess power. Because there is no guarantee that goes along with buying solar power, this leads to revenue losses for these installers.
SECI, by being the purchaser of power, is a move to curtail this problem. Involvement of SECI provides a government guarantee that the power that is produced by the solar projects would be bought and this has given confidence for developers and has led to a race to win projects. In recent auctions, there has been aggressive bidding to win projects that had the support of central government and very few off takers for the state government bids.
The aggressive bids in recent auctions have created another disruption in the market. The distribution companies are often reluctant to sign long term PPAs, citing lower tariffs in other auctions such as the Bhadla park (of `2.44 per unit). In certain state auctions, after awarding the projects, regulators and discoms are trying to renegotiate tariffs.
Apart from solar tariff seemingly high in their opinion when compared to other states, they also have a large amount of PPAs signed with thermal power plants with two-part tariffs. In these tariffs, fixed costs have to be paid even if discom doesn’t purchase power from these thermal power plants. This means that even renewable power is bought and coal power curtailed, the discoms end up paying part of the tariffs to thermal power generators, which means higher expenses for the distribution companies.
What does the future hold?
2018-19 would be same for solar energy, focus would be on large scale and the distribution companies would prove to be a hindrance in the development. The government has promised that every village would be connected to the grid by August 2018 and every household by May 2019. However, role of solar energy is very limited. The role solar sector would have to play in providing access is only supplying more electricity to the grid.
Given the government push, solar energy sector has made strides in achievement. Given the current installed capacity of around 15 GW, India is capable of installing 100 GW, we might not be able to achieve it by 2022, may be in another 10 years from that, but we can certainly achieve it.. The economies of scale had made solar tariff to be competitive with any thermal power plant, but going from a small base to the heights that have been set, would be difficult for the country.
Decentralised or distributed generation is not being promoted – energy access has become about grid extension and not about decentralised mini-grids. Rooftop solar targets are being curtailed because of the slow progress. LPG is being pushed for cooking energy, another foreign produced fossil fuel.
The western world looks at renewable energy as consumption at source of generation. Individuals producing and consuming electricity at the same place with highly efficient products that causes little damage to the environment. But, the conversation of renewable energy has become large giga-watt scale projects only. Electricity is being fed into the same leaking grid and we are losing electricity in transmission and distribution. We are not taking advantage of the modular nature of solar for instance.
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