The renewable energy push from the Narendra Modi government met with potent obstacles in 2017, as capacity additions failed to keep pace with the set targets. Introduction of the auction-based competitive bidding for projects impacted additions in wind capacity, while increase in solar panel prices posed a hurdle to financial closure of solar projects.
The renewable capacity addition in the first six months of FY18 stood at 2,900 MW, data from ratings and research company ICRA showed. This is against the government’s target of adding 19,000 MW in the fiscal. Data up to December is not available, however; it is unlikely the industry will be able to catch up with the shortfall of about 16,000 MW in the remaining six month period. In FY18 till September-end, the renewable capacity additions were primarily led by solar segment at 2,500 MW, while wind witnessed a slowdown, given the ongoing transition from feed-in tariff-based projects to competitive bid-based projects. Wind capacity addition for the same period stood at 400 MW.
Lack of capacity addition in wind allowed the share of solar power capacity in the renewable mix to increase to 24.6% in September-end from 21.5% on March 31, 2017. On March 31, 2016 the solar power share was still lower at 15.8%. Wind power, however, continues to occupy a dominant position in the renewable mix, with its share at 54.4% in September-end 2017.
Experts believe addition in solar capacities could have been higher if solar panel prices had not risen by more than 15% in the last six months, which led to renegotiation of contracts by panel manufacturers. Anmol Jaggi, founder and director of Gensol Consultants, a Delhi-based company providing concept to commissioning solutions to the solar industry, said, “The possibility of an anti-dumping duty of around 15% on Chinese module imports in the next few months time will increase the project cost by another 10%. This along with rising panel prices would make many of the aggressively bid projects difficult to commission in FY19.”
It should be noted that companies had bid aggressively for the projects at rates as low as `2.44/mWh on the assumption that panel prices would continue to fall even as funds would be available at low rates. The players assumed that the continuous drop of 25 cents/watt peak in solar panel prices would continue for a few more quarters. They were taken by surprise when panel prices rose by 15% to 35-37 cents/watt peak from 32 cents in the six month period, following the extension of feed-in-tariff regime in China, which triggered a massive build-up in solar power capacity.
If the firm trend in panel prices continues for another three to six months, it will have an adverse impact on the viability of the recently allocated solar projects, where the bid rates were below `3.5/mWh. According to Gyanesh Chaudhary, managing director of domestic solar module manufacturer, Vikram Solar, the viability of the competitive bid-based tariffs for the winning developers in the wind and solar power sectors would be dependent on cost of capital, plant load factor, tenure of the debt and competitive cost of funding. Also, land acquisition and ability to secure connectivity with the transmission system remains crucial for commissioning the project.
According to Ratings Agency ICRA Research, the solar PV energy project capacity awarded (both through the National Solar Mission and the State Policy route) with a bid tariff below Rs 3.5/kwh as on August 2017 stood at 3,250 MW, within which 750 MW bid capacity has a tariff below `3/unit (varying between Rs 2.44/unit and 2.65/unit) and the balance 2,500 MW capacity has a bid tariff of above `3/unit (varying between `3.15/unit and Rs 3.47/unit).
If the price of solar panel increases by 6 cents/watt it is estimated to result in an increase of about 11% in the capital cost, which in turn is estimated to result in a decline in cumulative debt service credit ratio (DSCR) by 0.12 times and a decline in project internal rate of return (IRR) by 180 basis points for a solar power project with a tariff of `2.44 per unit, says the ICRA report. “With imported PV module content, the capital cost for solar PV energy project remains exposed to volatility in both, the PV module price level and the INR-USD exchange rate,” said Sabyasachi Mazumdar, vice-president at ICRA. Similarly, for wind projects the IRR is expect to remain below 10% for projects bid at tariffs of `2.64/mWh.
However, all is not over for the renewables sector. It is estimated that with the increase in renewable purchase obligations (RPO) of states — as they have been curtailing renewable power purchases and have not been meeting the RPO requirements, despite the must run status — renewables capacity will need to grow significantly to reach 20.5% share of each state’s power consumption by FY22. In this backdrop, along with a demand growth of 6%, the total renewable energy capacity required would be around 108,000 MW by FY22. Even at a conservative estimate of 15% RPO, the incremental renewable capacity requirement will be around 63,000 MW during the period.
There is huge potential on both the wind and solar sides to meet the emergent requirement. According to National Institute of Wind Energy, the total wind energy potential in India is around 302,000 MW, while we have achieved only 32,700 MW as on September 30. On the solar front, the National Institute of Solar Energy has assessed the solar power potential in India at about 749,000 MW, while the actual installed solar power capacity stands at 14,800 MW.
The new bidding guidelines for wind projects issued by the government earlier in December are also likely to address key concerns related to the off-taker’s credit profile, grid curtailment and termination of payments that developers have been facing in the past couple of years. Besides, it has allowed states to invite wind capacities, which will reduce the regulated tariffs for wind projects and also create huge job opportunities in the states.
DV Giri, president of Wind Turbine Manufacturers Association, said this year is not likely to see more than 1,500 MW of capacity addition, but with new guidelines and framework for states to bid out wind capacity, and SECI-based projects, it is likely that FY19 will see an addition of 3,500-4,000 MW.
On the issue of falling tariffs, Giri said, once `25,000 crore worth of inventories lying with equipment manufacturers, component manufacturers and at project level gets cleared, the tariffs are likely to stabilise between `3- 3.5/mWh. “For the industry to stabilise it is important that tariffs go up. How much can interest rates or equipment cost fall?” Giri asked.