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Growing renewable energy faces new pressures


02 July 2018 | Vinay Rustagi

Growing renewable energy faces new pressures

India has made tremendous progress in renewable energy in the last four years. Solar sector, in particular, has grown rapidly with India becoming the third largest international solar market after China and the USA. Both by total installed capacity and annual capacity addition, India is now amongst the top five renewable countries in the world. The industry is understandably upbeat about the future as shown by our third renewable industry CEO survey, which saw participation from 42 private company CEOs. 70% of these CEOs are optimistic or extremely optimistic about their future business prospects.

Growth has, however, brought in its wake a shifting set of challenges as validated by the survey results. A headline finding of the survey is that the March 2022 target of 175 GW is likely to be undershot by a considerable margin. The industry expects India to have total solar and wind capacity of only 118 GW as against the government target of 160 GW. The real disappointment lies in rooftop solar, where expected capacity is only 10 GW against a target of 40 GW. This is a reflection of two factors in our view – one, the rooftop solar target itself is wrongly calibrated. Two, the government has failed to grasp policy requisites for this market. Despite falling costs, it continues to rely on costly and inefficient capital subsidies rather than directing attention to educating consumers and helping them to make the right decisions.

Another interesting finding pertains to the use of competitive auctions in the sector. The government has reasons to be pleased that auctions have halved the cost of renewable power in just three years. Indeed, both solar and wind power are now by far the cheapest new sources of power with current prices in the range of Rs 2.40-2.80 per unit. That has spurred demand from DISCOMs as well as bulk energy consumers such as railways, IT companies and auto ancillaries. The flip side of fiercely competitive auctions is that the urge to win at any cost has led to aggressive bidding. There have been persistent fears that tariffs have gone down too far, too fast and the survey results support that view. 70% of the participants believe that bidding is “irrationally aggressive.” The government needs to build safeguards in auction mechanisms to ensure that projects are delivered on time, quality is not compromised and the banks are not saddled with NPA’s as seen in other sectors.

Falling solar power cost owes partly to falling module prices and, in turn, rise of China in the global module manufacturing business. India, like much of the world, is heavily reliant on Chinese manufacturers, who have aggressively scaled up capacity and invested in R&D to account for more than two-thirds of the global supply. Indian manufacturers are unable to compete with their Chinese counterparts and that is fuelling tension between domestic manufacturers and project developers. The survey confirms that proposed safeguard duty on import of solar cells and modules poses the biggest challenge to the sector. Moreover, a majority of the participating CEOs believe that India would continue to meet more than 70% of its requirement from imports in the foreseeable future. This assessment shows that relying on trade barriers is not a satisfactory solution. Focus should instead be on creating more business-friendly environment – simplification in labour laws and other bureaucratic hurdles, lowering power cost, improvement in workforce skills – for improving domestic manufacturing prospects.

Amongst states, Gujarat wins by fair margin on ‘ease of doing business.’ Karnataka is the overwhelming favourite for open access market when most other states are in the negative territory. Madhya Pradesh leads in rooftop solar but most other states do well in this market. States are vying with each other to build more renewable capacity and they have much to learn from each other by way of sharing best practices and success stories.

The survey also reveals that uncertainty in overall policy environment, poor financial condition of DISCOMs and land acquisition are the main challenges facing renewable energy. The conundrum here is that the government has been rather enthusiastically framing new policies. But despite a plethora of new schemes and policies governing every aspect of the sector, uncertainty prevails. Constant tinkering, poor design and implementation have failed to produce results.

For example, it is unrealistic to expect businesses to commit to manufacturing investments when the policy environment is so volatile – changing repeatedly from financial incentives to assured demand, to safeguard duties and now, back to assured demand. And therein lies the key to realizing the sector potential. Creating a stable policy environment is the need of the hour for attracting private investments.


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