Lack of priority sector lending for RE is an issue

Amit Kumar, Partner-Energy & Utilities, PwC India, shares his thoughts on the government policies and challenges in the renewable energy sector.

Which government policies have boosted the development of renewable energy (RE) in India?
The Indian government has successfully launched several policy instruments, which have enhanced the viability and bankability of RE projects. The key policy instruments are:
Income-Tax Exemption: Under Section 80-IA of the Income Tax Act 1961, all infrastructure assets including RE generators are exempted from income-tax for a block of any 10 consecutive years out of the first 15 years of operation.
Accelerated Depreciation: A higher depreciation rate (80 per cent for plant and machinery) for non-wind RE projects vis-a-vis 7.84 per cent for thermal power plants and 15 per cent for other power equipment is provided. An additional 20 per cent depreciation is available for all manufacturing and production companies in the first year of operation. Thus, non-wind RE assets and wind assets can be depreciated 100 per cent and 35 per cent respectively in the first year.
Feed-in-Tariffs (FiTs): Under the FiTs, also known as preferential tariffs, RE power is procured by discoms at the FiTs specified by State Electricity Regulatory Commissions (SERCs). FiTs, applicable over 10 to 25 years, ensure predictable financial returns over the project´s life.
Renewable Purchase Obligations (RPOs): RPOs stimu¡late demand for RE by providing a guaranteed market for RE power. RPO targets are defined as a percentage of the total power consumed or distributed by the obligated entities, which include distribution companies, captive power consumers or open access consumers. These entities should meet their RPO targets either by generating renewable power from captive sources, purchasing renewable power, and/or purchasing RECs (Renewable Energy Certificates), before the end of each financial year. If they are unable to meet their RPO targets, they face a penalty for non-compliance equivalent to the forbearance price of RECs.
Renewable Energy Certificates (RECs): The Central Electricity Regulatory Commission (CERC) has included the purchase of RECs as one of the ways of meeting the RPOs. The REC programme aims to provide market-based incentives for RE developers and distribute the marginal cost of RE deployment nationwide.
Subsidies: The Ministry of New and Renewable Energy (MNRE) and several State governments support the development of grid-connected RE through subsidies.

What are the challenges in the renewable energy sector in India?
Challenges can be largely classified into policy barriers, regulatory barriers and financial barriers.
There is lack of cohesion in the government´s policy as seen in the contradiction with regard to share of RE in the fuel mix over the period 2010-2020 as per the National Action Plan on Climate Change, Integrated Energy Policy, and the interim report on ´Low Carbon Strategy for Inclusive Growth in India´. Absence of a separate RE law is another hurdle. The Electricity Act, 2003 (EA), has some enabling provisions to promote grid-connected RE sources. However, there are no legally binding targets facilitating the creation, trans¡mission, and deployment of RE.

Other barriers are non-alignment of State targets with national objectives and absence of single window clearance.
Regulatory Barriers: Non-availability of evacuation infrastructure and grid integration is affecting RE project development. As per EA, the development of evacuation infrastructure and providing grid connectivity is the responsibility of the transmission utility. However, in many States, it is the RE developer who has to first construct such infrastructure. The CERC has announced floor prices and forbearance prices for RECs only until 2017 leading to uncertainty regarding revenues from RECs beyond this time frame. This makes it difficult for FIs to lend to projects based on RECs because such loans normally extend beyond 10 years. Other barriers are poor enforcement of RPOs leading to low REC price and over supply, inconsistency in the definition of ´interconnection point´ for RE projects with the grid, which is often left to the whims of the local utility.

Financial Barriers: Lack of priority sector lending for RE resulting in lower participation by commercial banks; prohibitive interest rates with no interest subsidy that make RE projects unviable.

In addition there are other challenges like high risk of the off-taker default and delayed payments due to poor financial health of discoms in many States and lack of adequate evacuation facilities afflicting wind, solar and small hydro sectors. This has led to scaling back the commissioning and partial commissioning of new generation and the reduction of generation during peak periods. This issue is constraining the development of small hydro projects in Himachal Pradesh, Uttarakhand and north-eastern States and solar projects in the remote areas of Rajasthan and wind projects in Tamil Nadu.

What are the reasons behind low investment by the private sector in RE?
The major reasons are unattractively designed FiTs, reverse bidding, poor enforcement of RPOs, accelerated depreciation, risks associated with long development cycle times which leads to cost escalation and lack of tax-efficient structures.

FiTs have to be designed carefully, keeping in view the prevailing market conditions, state of technology development and resource availability. If the FiT is too high, it leads to unwarranted profits for developers, and if too low, it leads to very low financial returns and consequent low investments in the sector. Experience shows that the FiTs designed by certain SERCs have not been able to attract investments. Reverse bidding led to a significant decline in solar power procurement price but this also led to concerns about the long-term viability of qualified projects. Almost half of the projects were unable to get financing and had to utilise either equity financing or balance sheet financing. Reverse bidding also causes competition in an environment where capital costs, technology performance and access to financing are still in infancy, capacity addition becomes episodic, reduces interest of private equity investors, as ability to scale up appears uncertain.

The key limitations of the RPO and REC schemes have been poor enforcement, uneven cash-flows for generators, irrational floor prices for solar RECs, lack of price certainty post 2017, and constraints in trading and managing liquidity for RECs. Given that accelerated depreciation can only be utilised by profit-making entities with appreciable tax liabilities and cannot be transferred, it effectively excludes most IPPs (Independent Power Providers) and investors who plan on using an SPV route for project development.

– Janaki Krishnamoorthi