4 minute read 11 Dec 2019

Renewable energy in India: developers face challenges as a giant awakes

By Somesh Kumar

EY India Power & Utilities Leader

Experienced energy leader with deep regulatory knowledge.

4 minute read 11 Dec 2019

Challenges continue to arise as India works towards getting ready to meet the renewables energy 2022 target

India’s Prime Minister, Narendra Modi, claimed one of the most high-profile announcements at the UN Climate Action Summit in September, with a commitment to increase his country’s renewable energy capacity to 450GW – a significant increase on the existing 2022 target of 175GW of new renewables.

However, for all the positive momentum created by the new goal – for which the Government has yet to specify a timeframe – the focus for the renewables sector is on the existing 2022 target. There continue to be challenges in getting capacity installed, which the Government is trying to help overcome.

As of the end of last year, India had installed 128GW of renewables, of which onshore wind made up 37GW, solar 31GW and hydropower 50GW. Biomass and waste-to-energy made up the remaining 10GW.

Its 2022 target – which comprises a goal of 100GW of solar, 60GW of wind, 10GW of biomass and 5GW of small-scale hydro – makes India one of the most compelling renewables markets globally in terms of size. Even before Modi’s announcement in New York, the Indian Government estimated the sector’s investment needs to be around US$30b/year over the next five years. 

For all its potential, however, policy challenges are deterring investment and imperiling the Government’s goals. 

CRISIL, an India-based credit-rating agency owned by S&P Global, has forecast that the sector will install just 58% of the 175GW target, which does not include hydro, by 2022.

It cites policy changes, overly aggressive lowering of the tariff caps set in renewable energy auctions and foot-dragging by state power distribution companies (discoms) once developers have successfully bid into auctions.

For example, the shift in the wind sector from fixed feed-in tariffs to competitive auctions means that few bids are being received from developers. Equipment manufacturers have made representations to the Government, but it is unlikely to change its decision to move to competitive bidding.

In Andhra Pradesh, one of the leading states for renewables development, the state is attempting to renegotiate power purchase agreements (PPAs), resulting in disputes with developers and leading discoms to delay payments to operating projects. The Ministry of New and Renewable Energy is strongly opposed to any changes in signed PPAs, however, so it remains to be seen if such a step will be taken. 

In solar, ground-mounted systems are expected to provide 60GW of the 100GW target. Here, developers are under pressure from squeezed margins from reverse auctions, tariffs on imported systems, and rising financing costs. As of the end of September, about 29GW of ground-mounted solar had been installed. Similarly, roof-top solar uptake has a long way to go; by the same date, only 2.2GW was operational. 

However, the Government – which hit back at the CRISIL report, claiming it doesn’t take into account projects under development or in the bidding process – is acting to relieve some of these pressures. For example, land acquisition has been a challenge for developers, but the Government has stepped in to provide sites in recent tenders. It is also working to provide transmission capacity for sites that are distant to demand centers, which should ease pressure on potential bidders. In addition, it has encouraged discoms to begin giving letters of credit to power generators, easing payment delays.

On roof-top solar, the Government is responding by incentivising distribution companies, offering them subsidies for speeding up connections, while the Kerala State Electricity Board – the local discom – has launched a program to install 500MW of rooftop solar. In addition, the World Bank and the Asian Development Bank are offering discounted lending to installers of rooftop solar, to help reduce financing barriers. 

While the onshore wind sector is stalled – and likely to remain so until cost reductions allow bids to meet the expectations of central and local governments in India – the country is pressing ahead with offshore plans. 

A 1GW tender is due to be launched before the end of this year, as part of the country’s goal of installing 5GW by 2022 and 30GW by 2030. The Government is reportedly planning to offer around US$900m of funding to bridge the gap between prevailing domestic power prices and the likely cost of offshore wind, but it is an open question as to how much offshore wind capacity will be possible in the near term in such a cost-sensitive market as India.

Large-scale hydro, however, presents opportunities. Earlier this year, the Government ruled that hydro plants greater than 25MW would qualify as green, allowing them to access cheaper finance and opening the door to a hydro obligation on utilities, which would require them to obtain a proportion of their supply from hydroelectric sources. The country has significant untapped hydro potential in the Himalayas, which the Government’s growing willingness to provide transmission capacity promises to unlock.

Unquestionably, the Indian renewable energy market faces some challenges, many of which lie within the power of central and local governments to address. 

The size of the market and the Government’s clear ambition to place renewables at the heart of its energy policy, makes it impossible to ignore for renewable energy investors and developers.
Shuaib Kamili,
Senior Manager, Renewable Energy Advisory, EY India


The Indian government is working towards its solving the challenges they are facing in the renewable energy market.

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By Somesh Kumar

EY India Power & Utilities Leader

Experienced energy leader with deep regulatory knowledge.