Making renewable energy sustainable

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Renewables is a sunrise sector and can solve the energy problems of the world by replacing fossil fuels. The sector has lived up to its expectations by clearly showing strong growth on the back of government policies, incentives and infrastructure investments. As a result, a sharp reduction in capital cost and tariff rates have helped reach grid parity. According to the Ministry of New and Renewable Energy (MNRE), India has an installation target of 100 GW for solar and 75 GW for wind by FY22. This entails an investment of $150 billion, one of the highest across sectors in India. The growth opportunities in this sector have attracted a host of strategic players, particularly global utilities and private equity players.

Long term viability?

One of the key risks for any sector is demand risk, since one cannot create demand. Renewable has grown in size mainly on account of the government’s intent to contract power, thus reducing demand uncertainty. The renewable sector, with long-term power purchase agreement (PPA), not only insulates it from revenue fluctuations but also offers stable operating profit for a period of 25 years. Firm, long-term PPAs, together with stable performance across geographies in the last 3-4 years, have mitigated the inherent cyclicality element embedded in market risk and bolstered confidence in the sector.

But this confidence requires to be protected by the government as the sector is nascent and extremely promising. Some States have shown signs of backing away from renewable because of non-availability of grid. Discoms in certain States like Tamil Nadu have curtailed wind power due to grid issues. Lenders who have funded these projects face default risk as these uncertainties cannot be built into the projections. The present situation has led to increased uncertainty among investors, especially among IPPs (Independent Power Plants).

Mirroring global issues

Similar grid issues have already emerged in China, Germany and the US and we need to learn from the mistakes of global experience. China has the majority of its wind power projects located in the northern region like Inner Mongolia, Ningxia, Gansu etc. while the consumption centres are East and Central region. Some of the wind-generated power could not be evacuated because there’s no transmission infrastructure to carry the power to population centres. Robust grid infrastructure will be a key matrix for renewable success story in India.

We cannot afford to see the fate of what happened to thermal, where Coal India could not deliver as promised. Most projects had Letter of assurance from Coal India Limted (CIL) for fuel supply, which could not be converted into fuel supply agreements post commissioning of projects. Lenders have already burnt their fingers with thermal and are extremely cautious and sceptical about renewable.

The way forward

The lenders and developers should not be penalised for the undrawn capacity by discoms. PPAs need to establish a clear demarcation for payment to be released based on deemed generation. If power cannot be evacuated after the project is available to inject power in the grid, the power should be considered to be deemed generated and sold. This is also being proposed in the Draft Renewable Act, 2015.

Another way out for renewable from grid issues is by connecting wind and solar projects to the Central transmission utility (CTU). It would ensure that ‘must run status’ for renewable is followed in spirit

. Scheduling of power by Regional Load Dispatch Centre (RLDC) will be unbiased and would ensure that renewable does not suffer at the cost of other sources of power.

As per Merit Order dispatch (currently not applicable to renewable), the available sources of energy are ranked such that the cheapest source of power based on variable cost is scheduled first. This will ensure that renewable energy gets priority status in scheduling.

There has been a considerable delay in receivables over six months for wind projects from the discoms in Maharashtra, Tamil Nadu, Rajasthan etc.

These States were always considered ‘progressive’ in their outlook for renewable energy and attracted substantial amount of private investments in the recent past. Lenders are finding it difficult to fund any new projects in certain States on account of non-performing asset (NPA) risk.

The long-term growth story of the Indian power sector remains strong and with the ever-growing demand in a country like India, there will always be a need for power and the participation of private players will play a pivotal role.

However, developers intending to set up fresh capacities are questioning the States’ commitment towards Renewable, considering the precedence of issues jeopardising the return expectations for the developers. One cannot emphasise enough on the crucial role that the Central government has to play in protecting the interests of all stakeholders in the sustainable development of the Indian Renewable sector.

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