India’s approach for the renewable energy sector has been quite extraordinary. Prime Minister Narendra Modi’s vision of scaling up renewable capacity to 450 GW over the next decade, the focus on ‘Make in India’ and falling tariffs spell optimism for the clean energy sector.
The electricity sector has been growing by about 10% annually and energy elasticity against GDP growth has been 1:1, driven by demand from agriculture and manufacturing sectors. But over the last few years, with India’s economy getting more service-oriented and improvement in energy efficiency, this elasticity is down to 1:0.8.
However, with a boost to domestic manufacturing under ‘Make in India’ and a vision to be the global data centre hub, demand for electricity is likely to record a quantum jump.
In India, many thermal plants are on a path to be decommissioned, either because they are past their expiry date or becoming financially or environmentally unviable or due to the government’s clean energy push. Scales have been tipping in favour of renewable energy as tariffs plunge and thermal plants fail to comply with tighter emission norms.
The Central Electricity Authority has estimated that coal-based plants are bracing for a drastic fall in capacity utilisation to as low as 48% by 2022 as additional non-thermal electricity generation capacities come on stream.
An analysis by Climate Research Horizon has estimated that decommissioning of old thermal power plants in certain states can save the exchequer Rs 53,000 crore over five years.
Recently, the Indian government committed Rs 6,000 crore to the National Investment and Infrastructure Fund (NIIF) over the next two years. The NIIF will use this amount to raise more than Rs 1 trillion as debt for investing in the infrastructure sector.
India requires almost $20-25 billion capital over the next decade for the clean energy sector. Clearly, additional funds focused on renewable energy from NIIF or foreign investment from pension funds, insurance funds and other investors must come into play to fuel growth.
Fixed-income yields in western markets are 2% or less. Therefore, an annuity financial product with double-digit returns is a no-brainer for investors to flock into this sector in India. Further, to channelize funds for renewable energy projects, India ought to develop a vibrant bond market.
The growing priority of ESG (environmental, social and governance) investments among global investors, and with faster adoption of innovative solutions like wind and solar energy storage hybrids, the renewable energy sector can be a key contributor to the country’s economy.
To make even the power sector ‘Aatma Nirbhar’ [self-sufficient], the government has floated far-reaching amendments to the Electricity Act to improve efficiency and commercial viability. These reforms could also lead to a decline in risks and the cost of investment.
For a flourishing market like India, the growth potential of 450 GW of renewable capacity in the next decade—a scale only comparable to China and the US—is likely to be an attractive investment proposition when backed by policy certainty. But the government needs to address challenges in execution, land availability, distribution companies’ mindset and cost of capital, which squeeze liquidity and bothers renewable project developers.
Some fundamental challenges ought to be addressed on priority. Here are some of my recommendations:
- Both industry and investors need long-term policy stability, as it tends to impact the mindset of investors to a great extent.
- Unlocking capital from existing projects by resolving long-standing discom payment issues should take precedence. Since power is a concurrent subject in our constitution, discord between priorities at the state level and at the centre is an impediment to growth.
- The government has been taking firm steps in this direction through a support package of Rs 90,000 crore under the ‘Aatma nirbhar Bharat’ announcements. However, these are short-term measures and do not address the fundamental problems. A lot more needs to be done for this sector.
- Industry and the government should forge a partnership for R&D and advanced technology support to make renewable energy firm and RTC (round-the-clock) power, since this requires significant investment.
- The government should announce more welcome measures like setting up 5,000 MW to 10,000 MW solar parks to mitigate land related challenges and the recent land reforms law in Karnataka or the proposed grid corridor, which is likely to mitigate evacuation challenges.
- Expediting formation of an Electricity Contract Enforcement Authority, to decide upon matters regarding specific contracts related to purchase or sale of power, enforcing contractual sanctity by law.
- Also, formation of a National Renewable Energy Policy to promote generation of electricity from renewable sources of energy. The policy should prescribe a minimum percentage of electricity purchase from renewable and hydro sources.
- The planned sale of a discom in Chandigarh is a crucial step towards privatisation of electricity discoms. Continued efforts to improve financial and operational efficiencies in power distribution with privatization is likely to make a difference in this sector.
- Implementation of Direct Benefit Transfer and smart prepaid metres, as proposed in Electricity Act reforms, would prove beneficial for poorer consumers and the concept of free power at the discoms’ expense can be done away with.
The downward spiral of tariffs also calls for some introspection by project developers. Putting together these pieces of the puzzle will transform this industry and catalyse the next phase of our country's economic growth.
Sunil Jain is CEO at Hero Future Energies.