All-Round Support NEEDED to PUSH RENEWABLE ENERGY
India currently ranks 4th worldwide in installed renewable energy capacity. The renewable capacity excluding large hydro capacity has grown with a CAGR of 16% in the last 5 years with total renewable capacity growth to 103GW by October 2021 as against the thermal capacity growing at a CAGR of 2% in the same period clearly
India currently ranks 4th worldwide in installed renewable energy capacity. The renewable capacity excluding large hydro capacity has grown with a CAGR of 16% in the last 5 years with total renewable capacity growth to 103GW by October 2021 as against the thermal capacity growing at a CAGR of 2% in the same period clearly indicating the thrust on renewables. The government clearly remain focused on renewables announcing a further increase in reliance on renewables and reduce the carbon intensity and to adopt a net zero target by 2070 at COP26 summit in 2021. The government has already increased the December 2022 target of 175GW to 450GW by December 2030.
Out of 450GW, a total of 280GW would come from solar against a 48GW capacity at October 2021 requiring around 25GW annual capacity addition in the next 9 years. The existing solar tariffs at around Rs 2.5-2.7/unit factoring in higher commodity prices and increase in duties on imported panels are still cheaper than thermal and hence makes economic case to install such large capacities. The reduction in the solar module prices over the last decade has made solar tariffs cheaper as compared to NTPC's average realization of around Rs. 3.8/unit. Though the raw material price reduction over the last decade played a large part however initiatives by government such as bringing in SECI as off-taker reducing the counterparty risk, must run status to renewable power, no transmission charges associated with renewable projects along with development of large solar parks has brought in confidence among the developers to develop large capacities annually. However currently the contribution of renewable energy is less than 15% in the overall generation and it needs storage systems like batteries for grid balancing in case it goes above a certain threshold of 15-17% due to its infirm nature. Hence these high annual installation targets if installed would come with an associated cost of storage in future. Hence the policy level initiatives from government would continue to be required so that discoms continue to tie up the renewables in case of increase in cost than other sources.
India is importing around 80%-85% of its solar modules which is the major cost in a solar project. The issues in China over the last one year has led to increase in the module prices and hence increasing the tariffs in recent bids. India has around 7-8GW of module and around 2GW of cell manufacturing operational capacities respectively, though the domestic module prices are still not competitive internationally due to highly subsidized Chinese capacity. Also, the solar modules are ultimately manufactured from polysilicon where India has no refining capacity at all. With the announcement of PLI scheme of Rs. 45 billion, the dependency on imports is likely to reduce, as the private sector is investing in module and cell manufacturing capacities to the tune of 13-14GW and 7GW respectively. India however would still remain dependent on import of basic raw materials including polysilicon and wafers until there are large investments to be done in poly silicon manufacturing to indigenize the entire value chain. One such 4GW Giga factory is planned by Reliance Industries Limited, however it is still much less than the required capacity.
The other major addition of around 130GW would need to come from wind sector where the capacity addition CAGR growth in the last 5 years is just 7%. The wind additions were high before FY18, when the projects were on feed-in-tariff basis. Though the economic viability remained with the reduction in tariffs with introduction of competitive bidding in wind sector, the issues faced including land acquisitions has derailed the growth. The wind tariffs also remained higher as compared to solar as wind sector had no advantage like solar where polysilicon prices declined sharply shifting the off-takers focus to the solar. However, the focus on the hybrid renewable will add up to the wind capacities in coming years. Though both solar and wind power are infirm in nature however given the complimentary nature of generation, a hybrid plant has more firm supply than individual power to the off taker and hence the wind addition shall continue, though the issues need to be addressed to enable such large growth.
Though it makes sense economically for increasing the renewable addition, however the capital required for such large capacities can become a road block both from the debt and equity side. A back of the envelop calculation suggest that to reach 450GW target, it would require additional capital of USD270 billion over the next 9-10 years requiring large equity and debt commitments. The domestic banking system has already seen large NPAs in private sector thermal projects in the last decade. Though, in renewables, the nuances of credit risk are different as due to low gestation period, the capex cost overrun are usually restricted or small as against a thermal project. With maturity of the solar and wind sector in India, investors including banks do have better understanding on the renewable financing models.
Also, other than domestic markets, the global markets are now more accessible given the focus shifting from coal projects to clean energy. Further, the annual equity requirement at around USD8 billion is also huge compared to the cash flows available post debt servicing for large power entities and hence the sector is seeing increased participation of foreign players on standalone basis or in collaboration with existing players to provide impetus to the required growth. The increasing focus on ESG is leading to increasing investments by global energy giants like Total Energies, Shell in India.
Given the tariffs in the industry are very competitive and is fixed for the next 25 years with no pass- through unlike coal-based projects with long term PPAs, the majority of the risk remains with the technology and the timely cash flows to service the debt. The weak financial health of state discoms along with states not adhering to PPAs have cautioned the investors for a calibrated growth. The turnaround of discoms in future bringing the required discipline for timely cashflows can help in bringing more confidence to both debt and equity investors and help in achieving the required growth.
- Nitin Bansal
Associate Director, India Ratings and Research
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