The share of RE power is expected to increase from 12% in FY2022 to 16% in FY2025 and further to 28% in FY2030

Vikram V

Vice President & Sector Head - Corporate Ratings, ICRA

What is the current RE market trend in India? How is the growth scenario?

The renewable energy (RE) based power generation capacity increased at a CAGR of close to 17% over the past 6.5 years and stood at 118 GW as of September 2022, constituting close to 30% of the overall power generating capacity, led by strong policy support and improved tariff competitiveness. The solar power segment remained the key driver of capacity addition in the RE sector, which in turn increased its share in the overall RE mix to 51.5% as of September 2022 from 15.8% as of March 2016.

Going forward, the RE segment will remain the key driver for capacity addition in the power sector, considering the policy focus of the government to reduce dependence on fossil fuels and increase the share of RE power in the energy mix. Further, there is greater adoption of RE power by commercial & industrial (C&I) customers to meet their sustainability goals driving the demand for RE power. ICRA expects the share of RE power in all India electricity generation to increase from 12% in FY2022 to 16% in FY2025 and further to 28% in FY2030.

What is the prevailing market scenario in the solar segment? What is trending in roof-top solar?

The solar power sector in India has come a long way, with the tariffs coming down from more than Rs. 15 per unit in early 2010s to less than Rs. 2.5 per unit, and the installed capacity going up from less than 1,000 MW as on March 2012 to over 60 GW as of September 2022. Strong policy backing from the Indian Government and a sharp drop in solar bid tariffs caused by the cost of PV modules contributed to the capacity expansion.

However, the developers are facing challenges in the near term owing to the elevated cell & module prices, including the impact
of basic customs duty (BCD) on imported cells & modules. Moreover, the developers are required to procure their modules from OEMs in the approved list of models & manufacturers (ALMM), which currently comprises only domestic module manufacturers. The lack of backward integration keeps the domestic module manufacturers dependent on imports for sourcing solar PV cells and wafers. The timely development of integrated solar manufacturing units, as envisaged under the PLI scheme, remains important for the sector.

The share of rooftop solar projects in the overall installed solar capacity remains modest at 12%, i.e., about 7.5 GW against the target of ~40 GW set by the Government by the end of 2022. The progress in the addition of roof-top solar capacity remained slower than envisaged, owing to challenges on the regulatory front with varying rules and regulations across the states. State governments and state distribution utilities must play an enabling role in improving the adoption of solar rooftop projects.

How is the wind energy segment evolving? What are the latest trends?

The installed wind power capacity in India stood at ~42 GW as of September 2022, constituting 10% of the overall installed capacity and 35% of the installed RE capacity. The capacity addition in the wind energy segment slowed down post FY2017, with annual capacity addition remaining below 2,000 MW, post the shift from the feed-in tariff regime to tariff-based competitive bidding. This is owing to delays in execution caused by land acquisition issues, delays in transmission connectivity, financing challenges amid concerns over the viability of the bid tariffs, and delays in the signing of PPAs/PSAs as well as delays in securing approvals from regulators. The developers are also facing challenges in sourcing WTGs, given the limited options, with many OEMs being under financial stress. The overall wind project awards so far are at 16.3 GW, with about 5.8 GW commissioned as of September 2022 against over 11 GW to be commissioned, as per the timelines provided under these bids. Moreover, about 3.3 GW of capacity is stuck or cancelled, leaving 7.2 GW under execution.

On the other hand, the implementation of tariff-based bidding led to a significant reduction in wind energy tariffs compared to a feed-in tariff regime, thereby improving the cost competitiveness of wind-based generation. While the tariffs reached an all-time low of Rs. 2.43 per unit in December 2017, there has been an increase thereafter, and the tariffs have remained largely in the range of Rs. 2.7-3.0 per unit. Despite this increase, the tariffs remain competitive from the perspective of the discoms.

High input cost is a major challenge faced by solar PV manufacturers in the country. How do you look at this, and what is the way forward?

The average price of the mono PERC modules remains elevated at 25-26 cents/watt in November 2022, increasing by over 30% from 19-20 cents/watt in December 2020. Also, the cell prices remain elevated at over 16 cents/watt. This has been mainly driven by the sharp increase in the price of polysilicon, a key input for cell and module manufacturers. This has adversely impacted the economic viability of the solar power projects bid out over the past 24 months, wherein the tariffs are less than Rs. 2.4 per unit, aggregating to close to ~8 GW. Also, the hardening of interest rates is another cost headwind for developers. The cost pressure is showing up in the tariffs quoted in recent tenders, with tariffs going higher than Rs. 2.5 per unit in a recent bid by Gujarat utilities and at Rs. 2.8-2.9/unit in a tender by Maharashtra utility. Nonetheless, from the perspective of the state discoms, the solar power tariffs remain cost competitive in relation to the marginal cost of procurement from thermal stations. The cell & module prices remain a key monitorable for the developers, for viability of the projects bid out over the past two years.

How far is the PLI scheme helping in the local production of solar PVs and wind turbines?

The Government notified the Production Linked Incentive (PLI) scheme to promote the domestic manufacturing of high-efficiency solar modules with full backward integration and thereby reduce dependence on imports in the solar power sector. Under this scheme, the bidders are selected based on the extent of integration, production capacity and yearly PLI requirement. The winning bidders are required to commission the units within 1.5-3 years from the date of sanction, depending on the level of integration. The first tender for setting up solar PV module units under the PLI scheme received strong response, with bids received for a total capacity of 54.8 GW against offered capacity of ~10 GW. As a result, the scheme outlay has been increased to Rs. 240 billion from the initial outlay of Rs. 45 billion and the SECI has recently called for tender under PLI-II for setting up solar manufacturing facilities. Timely commissioning of these capacities remains important to reduce import dependence and meet the growing demand from the solar power developers.

What is your outlook on RE market in India?

ICRA's outlook for the renewable energy (RE) sector remains stable, led by strong policy support from the Government of India, high tariff competitiveness, and sustainable initiatives by C&I consumers to increase their consumption of green power. The Government of India has set a target to achieve 500-GW non-fossil capacity by FY2030 and has notified the long-term trajectory for renewable purchase obligation (RPO). Also, the presence of strong intermediate procurers like SECI is supporting the growth of the sector. However, challenges remain on the execution front, distribution utility finances, and tariff viability concerns amid elevated module prices & hardening interest rates.

The RE project pipeline remains robust, backed by the projects awarded by the Central nodal agencies and state distribution utilities, providing visibility on capacity addition in the near to medium terms. However, developers are facing challenges owing to the elevated module prices, including the impact of BCD and ALMM, along with the hardening interest rates, which have put pressure on the return expectations from the solar projects won over the past 2-3 years. In this context, ICRA expects the RE capacity addition estimate for FY2023 at 14.0 GW, which is similar to the addition achieved in FY2022. This is owing to the elevated cell & module price levels and execution-related challenges. Nonetheless, the capacity addition is expected to improve over the medium to the long term, given the strong policy push and highly competitive tariffs.

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