Recently, there was a news report that the Indian government wants to issue a single 20 GW solar tender to boost solar project development and domestic manufacturing. R.K. Singh, the new Minister for Power and New and Renewable Energy, has also publicly stated that he wants to auction 4.5 GW of wind power contracts in the next few months followed by 20 GW in the next two years for expediting achievement of ambitious clean energy targets. To put these announcements in perspective, India’s total operational solar capacity is 18 GW and the maximum wind capacity commissioned in a year so far is 5.4 GW in 2016-17.
There was record solar and wind power capacity of 5.5 GW and 5.4 GW respectively commissioned in 2016-17 but that was still significantly below the combined yearly target of 16 GW. 2017-18 capacity numbers are also likely to come well under targets.The new central government regime, under pressure from slowing procurement and issues relating to GST, import duties and anti-dumping duty, seems compelled into making bold announcements. But these mega-announcements are not convincing.
The recent Economic Survey, prepared by the Ministry of Finance, argued that India should ‘calibrate’ (i.e. reduce) investments in renewables in view of the underutilization of coal fired power stations causing major losses to investors and lenders. We partly disagree with their methodology, but agree that the wider power demand-supply dynamics and inter-play between different sources of power will have an important bearing on RE demand in the coming years. India’s aggregate power demand has grown at a CAGR of 4% over the last five years, in contrast to 11% and 10% growth in coal-fired capacity and total power generation capacity respectively in the same period. Demand growth has actually slowed down to 3.7% this financial year (until September 2017) and the result is falling capacity utilization in the coal fleet and all-time lows for cost of power traded on the exchanges.
DISCOMs buy bulk of their power under long-term PPAs under a two-part tariff structure. So long as their requirement is met sufficiently from these PPAs and/or short-term power from the exchanges at prices below INR 3.50 (USD 0.05), they will be reluctant to buy new (variable) RE power. Unfortunately, the Renewable Purchase Obligations (RPOs) are not being enforced by regulators. A large majority of Renewable Energy Certificates (RECs) remain unsold. Our analysis shows that over the next 3-4 years, RE capacity will grow by only about 10 GW per annum in a status quo scenario, in contrast to the government target of over 20 GW per annum.
The current situation of low demand, increasing competition and falling tariffs is causing angst in the private investor community. Leading Indian and international investors have made large commitments to the sector drawn in by the 175 GW target but feel hamstrung. An overly ambitious target is off-putting for all stakeholders with the risk that nobody takes the government seriously. The government needs to provide strong policy vision and clarity to the sector by laying out a compelling path for realizing the 175 GW RE target, or revising it downward to make it credible.
