India: Realising its Solar potential

Original Post: Rachel Parkes

The BJP’s general election victory in 2014 triggered hopes that in BJP leader Narendra Modi, India may have the renewables champion to help it realise its vast potential. A year on, Rachel Parkes looks at how India’s renewables market is developing.

The victory of the centre right Bharatiya Janata Party (BJP) in India’s general election in April 2014 was controversial in many respects, and unexpected in its decisiveness. But for the renewables industry in the country it represented the possibility of a revival of fortunes after a period of flagging growth. For, with the BJP’s victory came the leadership of Narendra Modi, former chief minister of Gujurat, long-time advocate of low carbon energy and credited with being the political architect of Gujurat’s transformation into a 900MW Indian solar PV powerhouse.

Since 2009, when year-on-year growth in renewables peaked at 31%, growth had waned to 13-14% in 2013-14 on the back of policy uncertainty and subsidy delays. With a new government, and a new prime minister seemingly personally committed to renewable energy, the industry hoped that renewables – and solar in particular – would pick up once more.

Top of the list of industry players enthused by the BJP’s victory was US solar firm SunEdison, which worked with Modi during his stint in Gujurat, developing the 1 MW first canal-top Narmada solar project. Speaking shortly after the election, Pashupathy Gopalan, SunEdison’s head of operations for the region, said he expected the new prime minister to make a “dramatic change” to the solar industry in India, based on his extensive knowledge of the industry and the “pioneering” steps he took as chief minister. Vineet Mittal, vice chairman of Indian power producer Welspun, echoed this sentiment, telling local reporters that they could now expect Gujurat’s success to be replicated nationally.

Indeed, it was under Modi’s stewardship that resource-starved Gujurat was transformed into a thriving economic powerhouse underpinned by technology, including exponential growth in solar PV. In addition to leading India’s solar revolution, the state also became the country’s third largest wind producer, with installed capacity of 3.6 GW in March 2015, up from 1.5 GW three years ago.

Certainly, the new prime minister has not been short on rhetoric, or new initiatives. Since coming to office, the BJP has dramatically increased the country’s capacity targets for solar to 100 GW by 2022, up from 20 GW. Of this, approximately 40 GW will come from rooftop installations, with an additional 60GW from ground-mounted installations, the Ministry for New and Renewable energy (MNRE), confirmed earlier this year. A National Wind Mission, which will set the target for onshore wind at 100 GW by 2022, is reportedly on the cards for later this year.

Proposed changes to the Tariff Policy could also see the Renewables Purchase Obligation (RPS) for solar PV ramped up from 3% to 8% by 2022 for all utilities, as well as a new requirement for all new thermal plant to have a 10% renewables mix either be generated on-site or bought as a credit from another renewables project.

In addition, Modi’s administration has stepped up its campaign to encourage foreign investment in solar in particular, targeting $100 billion investment from abroad over the next seven years, ramping up a previous target of $100 billion for all renewables over five years. The administration has embarked on a comprehensive campaign of international diplomacy, with visits to Japan, Canada, China and the US, with offers to help overseas companies enter the notoriously difficult Indian market. In addition to a $1 billion deal with the US Import-Export Bank to help companies looking to ship equipment from the US, the government also has plans to set up solar bonds, as well as help foreign firms set up rupee bonds.

Significantly, Modi has also steered India towards a more conciliatory tone on climate change. As part of the Copenhagen agreement in 2009, India pledged to reduce its carbon emissions by at least 20% on 2005 levels, but the country’s official position has always been that the burden for emissions reduction should fall on developed nations. However, in a recent visit to the US ahead of this year’s climate talks in Paris, Modi indicated that India may be prepared to commit to further emissions reductions, with renewable energy – and solar energy in particular - at the centre of the country’s strategy.

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Climate concerns

However, India’s quest for a renewables revolution should not be mistaken for its prime minister’s personal crusade: there are a number of other factors driving the political momentum. First and foremost the country has grave concerns for energy security. With GDP growth consistently at 5-7%, India’s primary energy demand grew 7% in 2014. The International Energy Agency (IEA) believes that power demand, most of which is still met by coal, will continue to rise by 5.2%/year to 2020. However, domestic coal production has not kept up with the increase in demand in the power sector and some regions have been plagued by blackouts, as utilities struggled to contend with erratic supplies and poor quality coal.

Meanwhile, in order to maintain economic growth, India’s government is keen to keep up its programme of electrification of the country’s 640,000 villages – of which off-grid renewables will play a major part. India’s 12th Five Year Plan (FYP) to 2017 envisages 3.4 GW of off-grid power, of which the majority will be met by non-bagasse co-generation, and 1 GW by solar PV. Last year, the BJP launched the “Smart Villages” initiative, which seeks to deliver low-carbon electricity, sanitation and internet access to 2,500 villages by 2019.

However, Modi’s enthusiasm for all things solar certainly could see it overtake wind as India’s go-to renewable technology. Over the past year, total cumulative solar PV installations have grown from approximately 2.6 GW in mid 2014 to around 4 GW in June 2015 – a considerable achievement given that India produced no solar power of note until 2010. Installed wind capacity, meanwhile, has grown at a slightly slower rate to 23 GW, from 20 GW. The National Wind Mission, long proposed, is yet to materialise, as the second phase of the Jawaharlal Nehru National Solar Mission (JNNSM), launched by the previous administration to promote solar energy, gets already underway.

The IEA, in a report made before the BJP revised its wind and solar targets upwards, projects that installed onshore wind power capacity will grow by 21 GW to 2020, while solar PV will grow by 12.4 GW. Bioenergy, a category that includes solid biomass power, bagasse co-generation and biogas, will grow by 2GW.
However, despite the optimistic growth projections, REN21 notes that solar PV market shrunk in 2014 compared to 2012 and 2013, due to policy uncertainty caused by on-going subsidy delays, and difficulties securing financing.

Indeed, access to finance and the cost of capital is one of the key hurdles facing the renewables industry going forward, despite recent improvements. Interest rates in India are comparatively high, with nominal interest on 10 year government bonds at around 8%. Moreover, the domestic banking sector is still relatively inexperienced in renewables, and subsequently more cautious.

Nevertheless, onshore wind and solar have both benefited from falling unit costs, and as the scale of India’s abundant resources has become increasingly apparent, there can be no doubt that renewable energy has become more attractive as investment opportunity. In addition, the previous administration’s decision to move away from a tax-based subsidy regime (the Accelerated Depreciation regime which allowed large, usually state-owned, companies to claim up to 80% depreciation on renewable energy assets) in favour of a Generation-Based Incentive (GBI), has opened the market up to a larger pool of independent power producers (IPPs).

And, as the levellised cost of energy (LCOE) has come down for both wind and solar, some estimates suggest that the best locations are now competitive with new coal and gas-fired plants without subsidies.

However, the industry in general is still very much dependent on policy support to compete with fossil generation. As such, the abrupt halt to the GBI in 2012 (and its subsequent reinstatement a few months later) caused shockwaves in the marketplace, resulting uncertainty from which the market is yet to recover.

“Generation based incentives play a crucial role in supporting the development of renewables in India,” says Ankita Chauhan, analyst at IHS Energy. “When the government temporarily removed the GBI for wind in 2012, growth slowed considerably. The advance of new technology continues to close the cost gap between renewables and conventional energy sources, but incentives are still needed.”

Bob Smith, CEO of Mytrah Energy, a UK-based wind developer with 543 MW of onshore wind power currently operating in India, says that raising debt in the local marketplace has been one of the most difficult aspects of the company’s development programme.

“India is not an easy place to do business in any respect,” he tells Renewable Energy Focus. “The people who have been successful have had to go through a lot of different experiences in order to be able to build a sustainable business. One of the biggest ones of those is raising money. You go in with your equity cheque, but you have to raise debt in order to be able to build those projects

“We’ve built relationships with 25 banks in India. That’s very hard today. Our ability to keep building is largely down to our relationships with those organisations.”

Grid problems, meanwhile, continue to act as a significant barrier to India’s renewables sector. The country’s transmission network is in dire need of upgrading and expansion, especially if it is to connect the areas of best resource with demand centres. This, says Smith, puts a serious constraint on where developers can site projects.

“Where the wind is, is not necessarily where there is grid,” he says, adding that the company has planned its 200 MW pipeline around the bottlenecks in the grid, as well as the government’s planned expansion programme.

In addition, the grid is also in need of better management. Large volumes of power are lost in the grid, either through theft, poor billing or low loads, which means that state-owned distribution companies are usually left out of pocket.

This in turn has a knock-on effect on the expansion and upgrade projects for the grid, says Chauhan. “The weak financial condition of state-owned distribution companies, who suffer from high rates of power loss, is [a] major challenge to renewables investment,” she says.
Furthermore, land acquisition remains a significant problem for both project siting and grid expansion. Indeed, the canal-top Narmada solar project was conceived as a way round the lengthy and expensive negotiations that often ensure with landowners over land rights.

“India is a democracy, which comes with constraints as well as benefits,” says Smith. “You can’t just go to a farmer and say I’m going to buy your land and build a cable across it. You have to negotiate with him, and that’s why things take a little bit longer. But things do get done eventually.”

International interest

Ultimately, the success of India’s renewables sector will hinge on the country’s ability to attract international investment. With wind now established, and as the new government steps up efforts to tempt foreign capital into the sector, Smith notes that international finance giants are now taking an renewed interest in India’s renewables space.

“We’ve seen a number of substantial players come into the country,” he says. “Morgan Stanley and Goldmans Sachs are investing quite heavily. There are a number of private investors coming into the IPP market.”

“And now India is moving to a much more aggressive pursuit of the solar market as well as wind, which creates a huge demand for equity and for debt, which the internal Indian market cannot support,” he adds. “We’ve seen a lot of international players taking a more interested view than they have in the past, both on the debt side and on the equity side. The recent publicity around it over the past year or so has greatly accelerated the interest in India.”

Chauhan, however, is more circumspect. “An emerging breed of specialised renewable power plant developers and owners are now scaling up in India, building-up experience, and are attracting capital from private investors and power companies from across Asia, Europe and North America,” she says “But considering the many challenges, most private investors are entering cautiously.”

All eyes will be on India over the next few years as it reaches for its ambitious wind and solar targets in 2022, however the jury is out as to whether these targets will be met on time.

“It looks unlikely India will be able to fully reach its goals by the 2022 target year,” says Chauhan. “[But] the country is nevertheless on track to become one of the major centres of renewable power growth globally over the next several years.”

The country will also need to overcome its “difficult for business” image. However, Mytrah’s Smith is optimistic that the commercial environment will continue to improve. “For us, I think that the environment today is as good as it has ever been for energy development in India,” he says. “India is a tremendously entrepreneurial marketplace and when there is a strong demand for something, someone will find a way to meet it.”

ABOUT THE AUTHOR

Rachel Parkes is a freelance journalist and copywriter, with expertise in the Energy and Environment fields. She is a long-time contributor to Renewable Energy Focus magazine.