Funding renewable energy remains a challenge

Updated: Jun 30 2009, 06:17am hrs
Kameswara Rao
Indias renewable energy sector is the worlds fifth largest and continues to attract a lot of private sector interest. It bridges our economic need for energy security and broader concerns of climate change. Though it represents only 9% of our generation capacity today, the potential is vast enough to become mainstream in future. In the near-term our 11th Plan target to add a modest 14,000 mw will need actions set out below.

Develop a unified national market

The RPO, set individually by state regulators based on local factor availability, must move towards a national common goal. The proposed REC and recent CERC inter-state renewable tariff regulations will help renewable energy trade across state boundaries. The CERC intent to mandate 5% RPO from 2009-10 onwards and 15% by 2020 is a welcome step, as today only 16 SERCs have notified RPO, and only 8 achieve it. There are other market barriers too that must be addressed. For example, some states set feed-in tariffs at low levels (Rs 2.7/kwh in AP) or offer a shorter term (5 years in West Bengal against 20 years in Tamil Nadu or Gujarat).

The upfront benefit offered by tax breaks ensures financial investors a far better return than green IPPs. The former is a limited market, and incentives must be redesigned to be more attractive for producing green power than tax cover. On top, it is unfortunate that the generation-based incentive scheme is still waiting to start, is capped at only 50 mw, and offers only 50p/kwh for just 10 years. These restrictions must be eased to grow the market.

In an encouraging move, the state renewable policies started to do that. The Gujarat Solar Policy offers longer tariff protection (25 years, against 10 years under the national scheme), and several other states permitting additional capacity.

Financing remains a challenge as renewable energy is capital intensive and at current tariffs it is hard to finance them on commercial bank terms (say, SBI BPLR of 11.75%, 7 year tenor, 2.33 leverage) unless supplemented by tax cover or trading profits. This is in contrast to many parts of Europe and US where feed-in tariffs are higher and interest rates far lower. In biomass, inputs feedstock costs have risen significantly whilst tariffs are pegged to nominal escalation, and will need more periodic reviews.

Take steps to invest in resource planning and in supply chain

To reach lead centres, renewable projects need transmission, which few states plan, and those who do may lack capital to invest. The state governments tendering these projects must adopt a proper basin-level, from access to off-take plan. Utilities must start to incorporate renewable sites in network plans, as generation often concentrated in certain seasons and locations and can result in severe congestion and failure to dispatch. In the biomass sector too, the distance and diversity impact viability, leading to feedstock shortages despite a large potential. We need resource surveys with higher resolution than before to help in site decisions.

Simplifying administrative proce-sses for easier business

It is reckoned that small hydro projects developers spend over 60% of the time from project start to commissioning merely in chasing clearances and other procedural matters. The so-called single window processes need a thorough review and states must take steps to simplify administrative processes so that projects are developed sooner and at lesser cost.

The writer is India leader for electricity and mining, PwC