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Return to growth: Given the mismatch between tariffs and risks, few new renewable IPPs being created

By Himraj Dang

Chhatrasal in a remarked that 'The renewables sector in India is near-death. Capacity addition has markedly slowed down in this financial year. Few projects are achieving financial closure, and so, few projects are getting complete.' (, FE, Nov 15, 2017)

The renewable energy (RE) growth momentum lasted into 2018, driven by solar power, but since then the sector has de-grown. While capacity addition in RE was impressive during FY17 (11.3 GW) and FY18 (11.8 GW), there has been a decline in capacity installation (~8.5 GW) during FY19. Performance in rooftop solars has been disappointing-out of a target of 40 GW by 2022, India has been able to achieve 2.1GW. These lower and slowing increments cumulatively call to question the 175 GW target for 2022 (capacity addition was 83GW till September 2019).

India has set ambitious targets for renewable energy capacity. The MNRE has further upscaled the 175GW target of 2022 to 227GW. Moreover, the PM at a recent UN Climate Action Summit suggested an even higher potential uptick to 450GW.

Power tariffs had declined significantly in 2016-17, ensuring price competitiveness. However, since then, RE sector risks have increased. Reverse auctions with unviable tariff caps, uncertainty in the applicability of taxes, outstanding dues from discoms (and PPA risk), have resulted in an insufficient interest from IPPs for solar tenders, resulting in lower capacity addition.

The wind energy sector (in stress since auctions were introduced in February 2017), has seen capacity addition fall from 5.5GW in FY 17 to 1.86GW in FY18, and further to 1.5GW in FY19. The necessarily domestic wind industry simply cannot deliver at the capital costs commensurate with the expected tariffs. No wonder, the October 1.2GW NTPC tender with a ceiling tariff of Rs. 2.93/kwh closed without a single bid.

It is debatable what purpose the tariff cap serves as buyers have been cancelling bids. Even the benefit of price discovery is not achieved, when the capital costs are transparent and known to regulators, utility buyers, and PSUs, who are no longer investing (given poor economics). This cap is a severe distortion of the market, and if the utilities cannot bear higher tariffs, it would be better to let the market decline for commercial reasons till the power demand picks up. Alternatively, the price cap can surely become a FIT, to lead to the same result.

Given the mismatch between tariffs and risks, few new independent power producers (IPPs) are being created, leaving the consolidated sector devoid of MSMEs.
Distributed renewable energy, primarily RTS, has also witnessed slow progress, running at 5% of target. Increasing policy uncertainty, delays in net metering approvals, push-backs by discoms, proposing wheeling charges and power injections caps, and lack of appropriate financing instruments, have resulted in slow uptake.

A report by Crisil concluded that the country is likely to miss the lowest renewable energy target of 175 GW by 2022 by a wide margin of 42% due to regulatory challenges, policy flip-flops and a steep fall in tariffs. The report notes that 26% of the 64GW of projects auctioned have received no or lukewarm bids, while another 31% are facing delays in allocation after being tendered.

The MNRE, however, has rebutted the Crisil report, calling it 'ill-founded,' factually incorrect and lacking credibility.

To bridge the gap between these different views, a group of NGOs recently got together to brainstorm ways to revive growth. Their suggestions included:

  • Tendering only after all procedural steps are taken, i.e. tariff approval by the CERC and the state regulatory authority in advance (as far as possible), and signing of PPAs only after full regulatory approvals.
  • To learn from MP's successful rooftop solar bids, where project documentation gave a lot of comfort to bidders and tendering was successful.
  • Strict guidelines to states participating in SECI tenders not to re-open PPAs
  • Sanctity of the ceiling and an economic rationale for current pricing
  • The GOI can commission a study on the composition of delivered tariffs in China and for recently-commissioned plants in India, as it used to be done for the fixed-ROE FITs. This study will show the kind of prices Indian utilities will have to pay for future wind projects. Irrational bidding in the past by developers/IPPs would no longer be the basis of a price cap once actual capital and financing costs have been identified.
  • An alternative to reviving the bidding market: arriving at a benchmark price for every bid instead of setting a price cap.

If the bid price is the only criteria, then the projects would only come up with high-resource states. Can other states, to create jobs and investments, add other parameters to reward in-state power generation? Can there be multiplicity of competing norms?

Consistency in open access policies: exemptions for open access charges in some states are only for a decade.

For rooftop solar, issues with delays in net-metering need to bes orted out. NBFCs to appraise small-ticket transactions at low-cost should be fast-tracked.
Consultation with lenders as to why they are not increasing their exposure to RE generation.

RPO enforcement pressure to be kept up to create regulatory demand.

Standard bid documents to be created and kept unchanged for 5 years or more.

A dynamic, sunrise industry growing without subsidies, but in dire need of regulatory support, could benefit from a greater and transparent dialogue among the stakeholders. Denying the slowdown or ignoring the widening gaps between targets and achievements serves no purpose. Some of these suggestions can be debated and implemented to bring back growth in the industry.

(The author advises green investments)