• Renewable energy capacity additions in India were relatively sluggish in 2018-19, 40% below their peak in 2016-17.
• The major reasons for the performance are policy uncertainties and poor grid infrastructure.
• However, the long-term forecast remains bullish, with India projected to exceed its renewable energy target of 275 GW in 2027.
• The sector presents an investment opportunity of US$ 500 billion by 2028, with an additional US$ 250 billion for grid upgradation and modernization.
After four years of brisk growth when it doubled its renewable energy capacity to 70 GW, India saw a relatively sluggish growth in terms of power capacity additions in 2018-19. The slowdown was actually visible in thermal power as well, but for an entirely different set of reasons.
According to a report by the Institute of Energy Economics and Financial Analysis (IEEFA), net new power generation capacity during the year was just 12 GW compared to an average addition of 22 GW between FY 2012-13 and FY 2016-17. In FY 2017-18, net power generation capacity addition stood at 17 GW.
In the thermal segment, 5.8 GW of new capacity was added, but simultaneously, 2.4 GW of end-of-life plants were also shut down. This left the total thermal capacity at 226.3 GW by the end of March 2019, a net increase of 3.4 GW. In comparison, the new on-grid capacity additions in renewable energy were recorded at 8.6 GW, with solar at 6.5 GW, wind at 1.6 GW and 0.5 GW from other sources. This was a drop of 40% from 2016-17, when renewable energy capacity additions were at their peak.
Thermal power companies are facing loss of competitiveness (vis-à-vis renewable) and financial stress. But the renewable sector was also impacted by policy uncertainties and sub-par grid infrastructure. Around 22.5 GW of renewable energy projects were awarded in 2018-19 through auctions, but they are yet to come on-grid. Furthermore, 37 GW of projects are at various stages in the bidding/tendering process.
Implementation challenges and conflicting priorities
The government set a highly ambitious target of 40,000 MW of solar capacity in solar parks by March 2022. But till date, the government has only approved 42 solar parks with capacity of 23,449 MW. Further, according to government sources, only around 5,835 MW has been commissioned. Each MW of solar power requires 5 acres of land, which is why acquisition of large contiguous tracts of land is a major problem for companies.
Note: Renewables excludes 2.4 GW of behind the meter rooftop solar
A similar challenge also confronts wind energy players, and Fitch has cited grid bottlenecks and land acquisition issues as factors constraining the sector. It projects wind energy capacity at 54.7 GW by 2022, compared to the target of 60 GW set by the Government of India.
Another challenge facing solar companies in 2018 was tender cancellations. Various government agencies cancelled 8 GW of solar energy tenders since 2018, primarily due to lack of agreement on tariffs even after the L1 was announced.
Factors like rupee depreciation and import restrictions increase input costs for solar power developers, thereby affecting their ability to keep prices low in tenders. The government imposed a safeguard duty of 25% on solar panel imports from China and Malaysia in July last year. The duty would remain at 25% for 12 months, 20% for the next 6 months and 15% till the end of the duty period on July 29, 2020.
A number of developers postponed module imports to pay the minimum safeguard duty of 15%. Domestic solar module manufacturers are unable to match the prices offered by the Chinese. India imports around 90% of its solar cell and module requirements from China, Taiwan and Malaysia. Therefore, the government faces a dilemma between the conflicting objectives of spurring solar energy capacity additions and promoting the development of the domestic solar cell and module industry. According to Mercom Research estimates, the imposition of safeguard duties has improved market share of domestic manufacturers of solar cells and modules.
However, it brought down the installed solar capacity by 15.5% yoy in 2018. IEEFA expects a flat FY 2019-20 with around 7-8 GW of solar power commissioned by March 2020. Developers have also complained about lack of clarity on the tax classification under GST for solar modules, inverters and construction contracts.
Long-term outlook stays positive
Despite the short-term challenges, solar and wind energy have achieved grid parity in India and are proving to be a strong competition to thermal power since 2017. During 2017-18 itself, a number of auctions awarded renewable energy projects at prices below Rs 3/unit.
Source : Ministry of New and Renewable Energy
Raj Prabhu, CEO and co-founder of Mercom Capital Group, comments, “To succeed in the Indian solar market, companies need to play the long game. For the first time in India’s history, solar accounted for over 50% of new power capacity in 2018. We will continue to see a steady shift toward solar as prices continue to drop. This is going to be the new normal as coal plants continue to shutter.”
IEEFA projects that India will reach a renewable energy capacity of 144 GW by 2021-22, as compared to the target of 175 GW. But the institution is confident that given the run rate, India will exceed its target of 275 GW by 2027.
The sector presents an investment opportunity of US$ 500 billion by 2028 for generation of new renewable energy capacity. Furthermore, grid modernization and expansion offer an additional investment potential of US$ 250 billion.
