Renewable Electricity Sector Outlook: 2019-20

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Introduction

In a world marked by turbulent markets and a China in decline, India remains a shining beacon. India, currently the world’s sixth-largest economy in GDP term, has consistently been at the forefront of surging development. India’s GDP is forecast to grow 7.2%, up from 6.7% last year, according to data published by Central Statistics Office. India has steadily been amongst the fastest growing economies in the world, with its economy set to reach $5 trillion by 2025.

India has showcased some impressive statistics in terms of its electricity sector – India’s energy deficit has been nearly eliminated, with Indian turning a net-exporter of electricity. It is understood that 16 states have achieved 100% household electrification. The Ministry of Renewable Energy has stated that India globally ranks 5th in terms of overall installed renewable energy capacity (and 4th for wind power); and as of 2018, India was ranked 4th in the Renewable energy country attractiveness index.

Some Headwinds

While there have been impressive gains in the sector, there have also been some worrying trends – the distribution sector has yet to emerge from the shadows of sustained financial woes, resulting in pervasive poor performance on the part of distribution utilities. Policy uncertainty and unpredictability is hampering investor sentiments. This is compounded by the relative nascency of India’s domestic renewable energy manufacturing capabilities being some of them.

The renewable energy sector, has, in recent years, been riding a wave of positive investor sentiment and the promise of high demand. However, in recent months, the sector has seen a significant slow-down, with planned auctions being deferred, delayed or cancelled. This is resulting in capacity addition falling short of targets. The industry has been dogged by issues such as delays in obtainment of land, evacuation constraints, reluctance on the part of discoms to sign PPAs at higher tariffs, and persistently sub-par RPO-compliance. More recently, the industry has been caught between the cost-pressures resulting from market-driven lower tariffs and an increase in the cost of inputs owing to the duty on imported solar modules.

The thermal energy sector has also been facing significant headwinds in recent years. Large capacities of private sector projects are stuck due to non-availability of coal, financial problems faced by promoters, delays in land acquisitions, uncertainty of demand, and the additional burdens of technological upgradation. This is leading to a number of projects being ‘stranded’ and going into liquidation.

Ambitious Targets -Rising Demand

Government of India has set an ambitious target of achieving 175 GW of installed renewable energy capacity by 2022. Of this, 100 GW is proposed to be solar energy, 60 GW from wind energy, 10 GW from bio-power, and 5 GW from small hydro-power. As of October 31, 2018, the installed capacity of renewable energy in India stood at approximately 73 GW, which means that 102 GW has to be installed and commissioned to meet the target of 2022. This also dovetails comfortably into the projected surge in demand for electricity in India – the International Energy Agency projects that electricity demand in India will almost triple between 2018 and 2040. The Central Electricity Authority has estimated the electricity consumption on all-India basis in 2021-22 at 1300 BU, and the all-India electrical energy requirement in 2021-22 at 1566 BU, and the peak electricity demand at 226 GW. The mainstreaming of electric vehicles is also expected to significantly contribute to rising energy demand. However, it is important that adequate steps are taken to manage the load curve and it is expected that 2019 will see renewed interest and development in load curve management (besides demand management).

Positive Steps

Efforts are underway to address bottlenecks in the electricity industry as well as foster growth – particularly with respect to easing aggregation of land, ensuring surety of power supply, reforming the distribution sector, reducing transmission losses, boosting the electric vehicles market, and creating a facilitative framework for the domestic industry. Also, on the anvil is the proposed set of wide-ranging amendments to the Electricity Act, 2003. The amendments contemplate, amongst other things:

  • Penalties for contravening power purchase agreements (which could prove to be an effective deterrent to errant discoms);
  • Separation of carriage and content (which may provide effective in providing more choice to consumers);
  • Provision of subsidies through direct-benefit transfer (which might potentially see tariff-rationalisation for traditionally high-paying consumers);
  • A slew of promising measures targeted at the renewable energy sector – a separate renewable policy, imposition of a renewable generation obligation, penalties for non-compliance with RPOs and a defined trajectory for RPOs.

When and in what form these amendments will see the light of day is debatable, but they nevertheless hold out the possibility for a broad-scale second generation of reforms for the industry.

Alongside have been broader reforms that have improved and promise to improve India’s business environment – the new insolvency regime, designation of special courts for commercial matters, amendments to the arbitration laws, steps to ease inflows of FDI, and, more recently, reforms to the types of contractual relief available under law. Indeed, these efforts have seen India leap 23 places to rank 77 out of 190 countries in the latest Ease of Doing Business rankings published by the World Bank.

Focus: Sustainability

In the ultimate analysis, there is an increasing need for India to take a holistic approach to the energy sector. Policy and market growth will be driven by due focus on the four energy pillars – energy access, energy efficiency, energy sustainability and energy security – to ensure a stable and sustainable energy future for India.

 

Author: Mr. Vishnu Sudarsan, Partner & Kartikeya G.S., Senior Associate, J. Sagar Associates (JSA).

Views expressed are personal.

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