A mini-controversy broke out last week with Indian credit rating and advisory company CRISIL issuing a report claiming that India would under-achieve the 175 GW renewable capacity target for March 2022 by 42%. MNRE immediately issued a prickly rebuttal terming the report as factually incorrect and lacking credibility. It has expressed confidence that capacity target of 175 GW would “…not only be met but exceeded.” But it later betrayed its own statement by extending timeline for meeting the target from March 2022 to December 2022.
- The sector is facing double whammy of severe supply side constraints as well as weakening power demand growth;
- States with high RE penetration are already struggling to cope with associated financial and operational challenges;
- The sector seems likely to muddle along at 8-10 GW annual capacity addition unless the government backs up its ambitious talk with urgent reforms;
CRISIL has put blame for undershooting the capacity target primarily on policy uncertainty and falling developer interest. Those are valid reasons but there are more important exogenous factors at play. The sector faces serious supply side challenges on land, transmission and debt financing. There is a huge pipeline of 31.3 GW of projects in various stages of construction but most projects are facing delays of 6-18 months because of various bottlenecks. We stated just last week that utility scale solar and wind capacity addition has averaged below 2,000 MW over last six quarters. Moreover, power demand growth in the country is showing worrying signs of a slowdown. Total generation has slipped by about 5% in the last two months over previous year. Power prices on the exchange have fallen to a two-year low of INR 2.77/ kWh. Weak demand is being attributed variously to slowdown in the economy and extended monsoon.
Figure: Monthly power generation, million kWh
Source: CEA, BRIDGE TO INDIA research
The bottom line is that the sector is facing the double whammy of execution challenges as well as weak power demand. Andhra Pradesh and Telangana, two leading RE states have formally raised the issue of excess renewable capacity and their inability to pay for it. We believe that Karnataka is likely to be facing similar challenges with RE penetration already in excess of 30%.
In such a scenario, it seems difficult and even inadvisable to add more than 8-10 GW of renewable capacity on an annualised basis. In fact, we believe that CRISIL’s estimate of 40 GW incremental capacity addition by March 2022 is a tad optimistic. Including about 5 GW of rooftop solar capacity, we estimate new capacity addition at only about 35 GW in this period. The government may not like these estimates but it needs to acknowledge industry concerns and be open to critique.
We maintain that long-term fundamentals of renewable sector remain very strong in India. But revival of growth requires a multi-pronged approach including power distribution reform, adoption of new technologies like storage and, progressive measures on ancillary services market and demand side management.
