With several fiscal boosts from the central and state governments, solar energy is growing phenomenally, but as Omkareshwar Pandey says, there is cause for caution.Increasing concerns about future energy supply and carbon emissions have made Renewable Energy (RE) sources a reliable solution for enhancing energy security and reducing carbon emissions. India’s current renewable installed capacity is 25 GW, with wind, small hydro and biomass being the most contributing technologies.Wind energy is the most sought after RE technologies and contributes around 70 per cent of the total renewable installed capacity in India. The installed capacity of Indian wind sector in 2012 is 17.5 GW. The sector registered a CAGR of 28 per cent during 2004-12, which exceeds the global annual growth rate of 26.5 per cent during the same period. Technological advancements and developer friendly policies have provided impetus to wind sector.Lately, solar energy has gained importance and is being explored and promoted by the government through Jawaharlal Nehru National Solar Mission (JNNSM) and other state policies. It is expected to become the next promising renewable technology, despite higher investments and not-so-attractive tariffs realised through a competitive bidding process. This trend was observed in 2011, which has been a remarkable year for the Indian Solar PV market. The market registered an unprecedented growth of over 2,000 per cent, with a capacity of over 750 MW added in 2011. This may mean that the country’s huge potential is finally being realised and the industry is rapidly growing and turning India into one of the world’s largest PV markets.In the 12th Plan, Ministry of New & Renewable Energy (MNRE) envisages a capacity addition of 30,000 MW through renewable energy wherein 83 per cent of the capacity addition is expected through wind (15,000 MW) and solar energy (10,000 MW). So wind and solar energy will be the flag bearers of RE growth in India.Solar following wind cycleThe wind energy sector, which registered an impressive growth over the last few years, is chiefly driven by technological advancements, fiscal incentives and supportive policy and regulatory environment. The first policy support was introduced as Accelerated Depreciation (AD) which provided for a tax benefit of 100 per cent depreciation on wind assets. This benefit resulted in the creation of idle capacity instead of increasing power generation. The government, in order to curtail this, reduced AD to 80 per cent in 2002. This reduction of AD did not make any significant improvements in the market.In order to overcome the shortcoming of AD, government then introduced GBI scheme in 2009 to provide incentives to the developers for generating wind power. Under GBI mechanism, the wind developers were offered an incentive of Rs 0.50 per unit on wind power generated over and above the FIT. Lately, the government has removed AD benefit to encourage only serious wind generators to sustain in the market. This may bring down annual capacity addition 500-1,000 MW. However, considering the experience and knowledge gained by the industry, there is a high probability that the sector will maintain its expected growth.Recently, solar energy has also gained traction with the introduction of various policies such as Solar Mission conceived under the National Action Plan for Climate Change and policy support from each of the solar-rich states. These policies helped accelerate generation capacity to over 980 MW by April 2012. The exceptional capacity addition in the solar sector in the last fiscal were largely driven by supportive policy and regulatory incentives cover such as Special Incentives Package Scheme (SIPS), generation incentives such as Generation Based Incentive (GBI), FITs and financing incentives (capital subsidy for certain products). This has been well illustrated in Gujarat, where high FITs of Rs 15 for first 12 years and Rs 5 thereafter were approved by Gujarat Electricity Regulatory Commission (GERC). This in turn had attracted an unprecedented interest from both national and international players for large capacity solar plants (PPAs for 979 MW signed) compared to competitive bidding process announced by National Solar Mission and other states like Karnataka, Madhya Pradesh and Orissa (PPAs for ~780 MW).Contrary to the recent development in wind sector, AD benefit of 80 per cent for solar projects is still being retained to help developers to build immediate capacities. In addition, a need for reliable measurement systems was felt by the government to strengthen the confidence of investors and financial institutions. In order to address this issue, MNRE initiated the establishment of 51 Solar Radiation Resource Assessment (SRRA) stations across 11 states, while it is being implemented by Centre for Wind Energy Technology (C-WET). The government also waived import duties completely for modules in 2012, which fostered investments in the solar market.Policy push neededDespite various challenges being faced, new opportunities are opening up in the sector. For instance, almost 10 per cent of the present wind installed capacity has wind turbine generators (WTGs) with lower ratings and operating life of more than 10 years. These WTGs are mostly located in areas with good wind profile. These areas offer WTGs a lucrative opportunity such as repowering to extract maximum power potential from them. Robust and encouraging regulatory environment needs to be created in order to encourage WTGs to take up more sites for repowering. The state and central governments should encourage the developers to take up repowering on a large scale, by providing financial incentives through a dedicated policy and regulatory framework.Tariff reforms need to be introduced in order to promote wind energy. Initiatives such as zone specific wind tariffs in wind rich states are to be adopted. States such as Maharashtra and Rajasthan have adopted such tariffs instead of uniform tariff for the entire state. In addition, a dedicated power evacuation plan needs to be developed for wind and other renewable technologies.Competitive bidding is expected to be another mechanism to procure power by utilities. Such mechanism is already in place for solar projects. SERCs are contemplating the introduction of competitive bidding to allocate future wind projects. However, according to the recent SERC order in Rajasthan, State Commission can introduce competitive bidding only after the introduction of such guidelines by the Central Government.To foster the growth of solar power projects which are largely subsidy driven, challenges in debt financing, alternative revenue streams like Renewable Energy Certificates (RECs) to overcome low returns realised from an unrealistic tariffs of competitive bidding process, ability of the state discom and its financial health to pay on time for expensive solar electricity (for example, solar projects under Gujarat Phase-1 and Phase-2 constitute ~Rs 3,600 crore) need regulatory and policy support at its nascent stage itself.The government has played a key role in promoting RE technologies especially wind and solar. It introduced GBI to the generators in order to protect their financial interests. However, now with the government not extending the GBI scheme in the 12th Plan and discontinuing the accelerated depreciation benefit for wind developers, the long term solar and wind capacity addition is expected to be driven by the IPPs through the REC and RPO framework, thus enabling states with lower renewable potential to meet RPO requirement through purchase of RECs in the market.Learning: Competitive bidding can attract unviable bids from project-anxious, sometimes non-serious layers.The author is Manager – Energy & Utilities Practice, PwC India.