India is known as an ambitious country when it comes to setting renewable energy goals. The country of almost 1.4 billion people is in the middle of an energy transition phase. This transition is now at risk after the supply-chain disruptions and construction complexities due to the pandemic-induced lockdown. Even before Covid, it was uncertain that India would meet its Sustainable Development Goals (SDGs), the coronavirus pandemic has almost made it certain that it won’t.
The crisis has not only created new challenges but sharpened existing ones.
In 2014, India announced a short-term target of 175 GW of renewable energy by 2022, which wouldn’t require major upgrades or storage, with a likely upgrade to 450 GW by 2030. Coal, which accounts for half of India’s energy, is being replaced by renewable, at least for most new electricity. Simultaneously, through aggressive policy interventions the country is moving towards electric mobility.
Choices about including non-renewable limits were a couple of years away, it is likely that COVID-19 has delayed them further. Prior to the pandemic, about 90% of energy was coming from Power Purchase Agreements (PPAs), however, demand is down. While power exchanges currently have exceptionally low costs, PPAs have limited the value of cheap third party supply.
Tough Time for Investment
Foreign and private sectors contribute a major share to cross-subsidise homes and agriculture but the pandemic and lockdown have dented the balance sheets of these companies. Analysts estimate the losses of distribution companies to double to about $15 billion. This will likely shrink the investment in the sector.
Moreover the domestic market is already constrained by rising non-performing energy assets and has limited capability to finance energy transitions. In all likelihood the investment will get diverted towards the healthcare sector, as the current pandemic has exposed the vulnerability of our healthcare space.
Ashwini K Swain, a fellow at Centre for Policy Research told The Blue Circle, said that a drop in electricity demand will alter the investment in renewables, as the maximum burden of new energy demand was earlier being met through clean energy. This comes at a time when there was an expectation of an increase in energy demand by 5%. “It could take 2-3 years for the demand to go back to pre-covid level,” said Swain. A Long-haul to restoration will increase the costs of the components.
“Governments and companies will first get back on production and capacity rather than optimise energy mix,” said Abhishek Gupta, President, Sunipod, a solar power company to TBC. He added that the projects that were in place are likely to get delayed.
Will there be an appetite to invest in this sector remains to be seen.
Capital and Markets
The bigger issue that renewables have been facing is the lack of recycling across all three avenues of capital – debt capital, equity capital, and asset block recycling. Most investors have been found waiting for a long time now to release their equity capital and return the capital to their shareholders and investors. This has limited the development of the sector and the fear of uncertainty around the time of pandemic will aggravate the situation further.
Despite compelling long term benefits of renewables, transactions have been affected due to indiscriminate payment delays by discoms, inadequate redressal of land and evacuation issues, and inconsistencies in permission processes of different states. The imposition of Sustainable Development Goals have affected the equity cash flows adversely.
Indian debt markets have not been encouraging either. The market lacks depth in terms of size, volume, liquidity, and tenor. The poor ratings of renewable papers owing to the poor financial health of PPA counterparties, make investors ineligible to invest in these papers. Another concern is the illiquid nature of India’s market beyond five years.
However, the government has taken steps to solve the problem of capital which includes, ensuring payment security, letter of credit, and asking discoms to make timely payments to the Renewable Energy developers which can help bring investments.
The Economics of Coal
Coal has its own economy, it’s a major revenue generator for a lot of states and employs a large number of people. Swain reckons that it won’t be easy to downside coal as it has a strong lobby and there is an impulse from the government to protect coal. “It’s also the institutions and politics around it,” said Swain. But, in the last 2-3 years, coal-based plants have been struggling and were operating at low Plant Load Factor(PLF). The utilisation value of coal-based power plants touched an all-time low in April amid falling electricity demand during the lockdown.
Meanwhile, 40 Gigawatt(GW) of coal-based generation capacity is lying idle as there are no takers for the plants. Many international players are not interested in investing in coal and have already announced their exit. “On the economic ground, it does not have any viability to invest in coal, ” said Vibhuti Garg, Energy Finance Analyst, Institute for Energy Economics and Financial Analysis(IEEFA) tp TBC. “The increase in demand in the future can easily be met with renewable energy,” she added.
On the other hand, the government does not seem to be pushing the coal-based power plants to reduce pollution levels. In 2015, as part of its climate-change commitments, the government made coal washing mandatory for supply to all thermal units more than 500 km from the coal mine. A few days back, the government announced that coal-washing will no longer be mandatory. Garg said that the government is clearly not bothered about the environment.
The falling price of fossil fuels and an increase in the price of components due to disrupted supply chains have reduced the cost advantage of renewables.
The coal ministry has removed surcharges, quantity restrictions, and advance payment requirements to maintain demand, and may even cut prices. A couple of states have written to the central government to further bring down the cost of coal to economic levels.
As India’s Make in India has gotten a push, it could suggest boosting domestically generated coal. It is likely that big public companies with access to funds, scale, and technology will thrive. Even if no new greenfield coal power plants are built, half of India’s electricity will still come from coal by 2030. India will need more investment to clean coal energy.
Efficient Policy Making
The transition to clean energy has to come in a decentralised manner, with equal involvement from the states. While the central government focuses on providing incentives, states must chart their own transition models to become financially self-sustainable. The incorporation of clean energy models in the recovery plan will help the economy to become resilient. For instance, improving the health infrastructure with decentralised clean energy. The government needs to ramp up schemes such as KUSUM, which was launched to support the installation of off-grid solar pumps in rural areas so that there is less burden on the state government. Swain suggested that there should be a shift from tariff-based subsidy to a capital-based subsidy.
Reforms in pricing, regulation, risk allocation, market design have been pending or delayed pre-covid, mostly because they were politically unpopular. The uncertainty in the policymaking needs to be eliminated and an environment should be created where investors can calculate the risks of investment easily.
Gupta suggested that the government should come up with a consistent positive policy which does not change as per discoms. Discoms need to align their goals with Renewable Energy and revamp their business. Independent Power Producers (IIPs) should have some assurity and stand in terms of policies for the sector so that agreements are not dishonored at will.
While the demand for energy should revert to previously higher levels post-pandemic, there could be a lag in the recovery of demand for renewable energy. “Buyers could shy away from the relatively higher costs associated with clean energy and may no longer have the desired initiative or confidence to commit to new contracts,” said KPMG, a risk, financial services and business advisory company in a report. This may be a significant setback to India’s energy transition even though the costs of modern energy, including from renewables, has seen a sharp dip in the past few years.
Directions for the Future
Currently, the price of batteries including storage cost is high but it’s falling gradually and slowly becoming competitive. “In a few months or a year, battery and Renewable Energy together can compete with coal,” said Garg. She also stressed the importance of using energy derived from solar and wind during peak hours.
India could create new, efficient coal plants when required to replace old plants before they reach their end-of-life. This would create space for new renewable energy plants and help to utilise the stressed assets of coal plants.
The commitment towards climate change and the adoption of cleaner fuel needs to increase from the corporate sector. They should set an example for newer companies and stand shoulder-to-shoulder with global competitors. The government should look to earn more revenue from clean energy sources. This can be done by promoting domestic manufacturing and reducing reliance on imports. At present, India imports 80% of the solar cells and modules from China. “It is a very unnerving time for solar as it is heavily dependent on China for its components,” said Gupta. The current political situation will also determine the future of imports.
At a difficult time like this, India needs a strategic approach to sustain the transition to a 21st-century energy future. “We are looking at a substantial delay which could be anywhere from a few months to a couple of years,” said Swain.
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