Rush to renewables in India

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Is renewable energy the answer to India’s rising demand for power? The potential is tremendous, but policy uncertainty and the high price of capital may thwart growth. Sanjay Chakrabarti reports.

India’s energy sector is on the move, with power capacity and demand rising fast. Driven by urbanization and a growing middle class, the country is now fourth on the list of the world’s top energy consumers.

This huge need for power is the primary driver of India’s renewable energy sector. But while FY13 saw renewable power generation soar to 12.3% of the country’s total energy mix (up from 7.8% five years ago), much of India’s renewable energy potential remains untapped.

Untapped potential

In many ways, India is a country made for renewable energy. With almost endless sun and vast land, the nation boasts abundant untapped renewable energy resources and significant potential to produce energy from biomass derived from agricultural and forestry residues.

The ability of renewable energy to be scaled up and down and distributed widely, without the need for big grids, also makes it well suited to India. Its large population is spread widely throughout the country, and many people are located in remote areas that lack the critical infrastructure needed to deliver conventional power.

Increased use of renewables also offers India the opportunity to:

  • Reduce dependence on expensive imported fossil fuels
  • Improve energy security
  • Meet climate change goals

The potential of India’s renewable energy market is boosted by strong government support and incentives and a liberal approach to foreign direct investment.

Wind still dominates, solar set to shine

Wind energy contributes about 19GW of India’s installed capacity, making it the dominant renewable energy source. India’s wind power industry is also currently the world’s fifth largest.

Small hydropower contributes 3.6GW, as does bio energy — although ambitious targets aim for 10GW capacity from biomass by 2020. Solar adds 2GW of installed capacity.

While it may lag far behind wind, solar is emerging as the shining star of India’s renewable energy segment, boosted by strong government support, which has set targets to install 9GW of solar power by 2017.

The capital crunch

This regulatory uncertainty is a key challenge for the sector. India has a policy of renewable purchase obligation, wherein specific segments of energy consumers are mandated to source a set percentage of the energy through renewable sources. While the announcement of this policy was hailed as a tipping point for the Indian renewable energy sector, it is yet to be enforced.

Some Indian regions have recently altered capacity targets during projects’ bidding processes, while others have reduced tariffs and changed deadlines for submissions. These sudden shifts are discouraging for investors, especially developers and suppliers who had already invested based on original proposal processes.

Another challenge is a lack of the infrastructure needed to connect power generated from renewable energy to the power grid.

But perhaps the single biggest threat to growth in India’s renewable energy market is the high cost of capital. India’s higher interest rates, the falling value of the rupee and short-term lending rates have caused the cost of capital to soar to 13% or more (compared to about 6% in other markets), making Indian renewable projects extremely expensive.

A recently announced Government policy that allows solar projects to receive direct grants covering as much as 40% of the upfront cost of building projects will help. However, the high cost of capital will continue to be a problem with no easy answers.

Local insights key to success

A country as hungry for energy as India has little choice but to embrace renewables. With abundant natural resources and a supportive Government, the nation’s renewable energy market looks primed for success.

But to reach its growth potential, India must stabilize the regulatory environment and offer certainty around its energy policy framework. The high cost of capital will also remain a challenge for the foreseeable future, though increased FDI may help bring it down.

For those keen to invest in India’s energy sector, partnering with local advisers who understand the complexities of India’s energy regulators, tax laws and utilities sector will be a critical success factor.

How we can help

We have teams in 13 offices across India and extensive experience working with clients in government, the utilities and cleantech sectors, and the corporate environment. We have supported foreign investors, including Fortune 500 clients, to evaluate the opportunities and to establish successful operations in the Indian renewable energy sector. EY India provides Assurance, Tax, Transactions and Advisory services, as well as focused cleantech knowledge.

For more information

EY-Mapping India's Renewable Energy growth potential: status and outlook 2013

Read our publication: Mapping India’s Renewable Energy growth potential: status and outlook 2013


Key policy initiatives

EY – key renewable energy policy initiatives

Source: EY analysis