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The promising policies of the government have paved the way for growth, but there are funding, capacity, and manufacturing related challenges to brave before the ambitious targets can be realised.
The electricity sector in India is going through a period of significant growth and change. Among other aspects, the government is focussed on providing universal access and 24X7 supply. The primary fuel sector has been revamped with the auction of coal mines; energy efficiency in sectors across lighting to transport is being addressed; and a major attempt at transforming the energy mix-with a goal of 175 GW of renewable energy by 2022-is under way. The renewable energy sector in India has made remarkable progress growing from 3.3 per cent (2002) of the total generation capacity to 13.4 per cent (2015). Production rose from 0.4 per cent to 5.6 per cent in this period.
Of this, about two-third is from wind, and the balance is from small hydro, solar, biomass and waste to energy, and other sources.
Policy & Regulation
The Electricity Act, 2003, (hereinafter the Act) which has facilitated development in the sector, is being amended to introduce new elements to, inter alia, enhance competition and reform the energy mix. The proposed amendments aim to reform the distribution business by segregating the network and supply business, with the latter to be opened to other players to bring in efficiency and competition. It will also allow consumers to choose their suppliers by eliminating the existing barriers to open access.
The national budget (2015) announced a five-fold ramp-up of renewable energy targets to 175 GW by 2022. This comprises 100 GW solar, 60 GW wind, 10 GW biomass and 5 GW small hydro-power capacity supported by a substantial budgetary allocation.
The existing generation capacity is dominated by conventional coal-fired thermal power (192 GW, 70 per cent of total capacity). Non-fossil fuel generation includes renewables (36 GW, 13 per cent), large hydro (42 GW, 15 per cent) and nuclear (6 GW, 2 per cent). The government yet again doubled the clean energy cess from `100 to `200 per tonnes of coal.
The policy amendments will drive the energy mix change through mandatory targets. The RPO for solar power is to be upped from the current 3 per cent to 8 per cent by 2022. Furthermore, a new RGO has been proposed. It requires fossil fuel plants to produce 10 per cent of their capacity through renewable sources, and allows them to bundle renewable and conventional supply in a single contract. The regulators are to be empowered to deal with non-compliance of RPOs and limit cross-subsidy surcharge to 15 per cent of relevant tariff.
Domestic manufacturing in renewable energy is under-equipped to serve the ambitious growth target. Solar PV manufacturing is fragmented with many small players (total capacity is a mere 1.38 GW of solar cells and 2.75 GW solar modules) and lacks vertical integration.
Solar parks (25 parks, each with 500-1,000 MW capacity, totalling 20 GW) are to be developed to benefit small, independent, or international investors who may prefer pre-developed land and infrastructure in which to set up their solar projects. In the initial stage, 10 solar parks are to be taken up in these states-Madhya Pradesh, Andhra Pradesh, Rajasthan, Uttar Pradesh, Gujarat, Telangana, Karnataka, Jammu and Kashmir, Meghalaya, and Punjab.
To enhance the flow of international finance, the government is exploring a new model that allows procurers to tender for solar power projects with tariffs denominated in USD, and to hedge the currency risk through a pool of funds (corpus of Rs.60 billion) to be set up.
Regulatory reforms are proposed in the amendments to the Act, such as mandatory tariff determination on an annual basis to cover cost escalation. Further, utilities are required to file for tariff requests on a timely basis. Transmission, particularly, for renewable energy projects, is a challenge, given the low capacity factors and congestion on existing networks. To bring green power to the national market, and minimise curtailment, the government has announced a green energy corridor project to handle 33 GW and 22 GW of renewable energy in two phases of development. The wind power sector has undergone a major shift in India, from tax-credit driven investment to mainstream IPPs. This has led to the setting up of large wind farms that deploy the latest technology and practices-larger MW class wind turbines, inclusive O&M practices for plant life, use of logistics tools for construction and maintenance, and seamless grid integration. Further, the industry has gained from improvements in drive-train technology, tower structure and use of advance power electronics, which add to overall cost effectiveness.
Turbine costs declined in late 1990s, but have since risen. This is due to a variety of factors-greater turbine dimensions and higher material costs. However, with design technology maturing and production stabilising, costs have started to decline from 2010.
Further gains are expected from the use of lightweight materials such as carbon-fibre reinforced plastic, better aerodynamic profile, on-site manufacturing, segmented blades, and variable-diameter rotor can reduce costs and increase the capacity factor. A US DOE study suggests that the adoption of advanced technology can increase the energy output between 21 to 61 per cent with smaller changes (-36 per cent to 21 per cent) in capital cost.
The government policies have been supportive to renewable energy companies seeking FDI, multilateral and development bank funds or external commercial borrowings. The government´s own direct support, however, has focussed on smaller projects, first of its kind technologies and demonstration pilots.
The central bank has categorised renewable energy as a priority sector for bank lending from this year (commercial banks are obligated to lend a certain proportion to defined priority sectors such as agriculture, small enterprises and housing). If renewable energy, hypothetically, absorbed about 1.5 per cent of net bank credit (within its allowed limit), it would meet the entire debt requirement for 150 GW up to 2022. This is unlikely, however, as individual loans are capped at Rs.150 million per project.
Energy security is a prominent policy concern. Primary fuels are India´s single largest import, accounting for 37-40 per cent (2013-2015) of total imports and periods of high commodity prices have resulted in constrained supplies, budgetary deficits, and fuelled inflation.
Climate change is a key consideration too with coal responsible for 76 per cent of electricity produced. The government´s drive to build 175 GW of renewable energy by 2022 will help achieve energy security and reform energy mix. The policy proposes to use RPO and RGO targets to develop this, and regulators are seen to take steps to improve enforcement.
The government has set in place a robust procurement model in the form of auctions and standard bidding documents (RFQ, RFP, PPA) to facilitate a quick, harmonised, and transparent bidding process for solar power development.
A number of private companies are setting up renewable energy projects for their own use, or have committed to source 100 per cent of their consumption from green sources. State-owned organisations are tasked with establishing 10 GW solar projects.
The Supreme Court of India, in May 2015, ruled that renewable obligations are in larger public interest and can be imposed on captive users and open access consumers.
The Indian Government has set ambitious targets- 100 GW of solar energy by 2022; compared with the present total installed solar capacity of 3 GW, the task seems herculean. The National Solar Mission is running behind schedule. The Indian Government however is stepping on the gas with a massive push for renewable energy generally and solar energy in particular.
This article has been authored by Mytrah Energy Limited in partnership with PwC India.