The other contribution expected from the government is the development of the enabling framework for the launch of the electric mobility business, which has already taken off in China and elsewhere.
By Himraj Dang
The renewable energy (RE) sector in India has matured. Low tariffs discovered by bidding have no doubt supported a fast scale-up (17% CAGR in the last five years). Solar capacity has reached 33GW out of a total of 89GW of RE capacity, itself 24% of the country’s total power capacity. The most recent bid in November this year has delivered a remarkable tariff of Rs 2/kwh, a reduction of 15% from the last bid just this summer.
We can argue endlessly that the marketisation of tariffs occurred before the industry reached a suitable scale, but assets continue to be built, SEB opposition to RE is reducing, and as elsewhere in the world, there is no return from this meaningful market transition.
The flip side of the buildout based on razor-thin margins has been the consolidation of the RE industry, promoted by a flight to scale, essentially favouring the lower cost of capital achieved by the top IPP generators. This transition is not available to existing or prospective SMEs, and they are largely absent from the new bids.
The last few years have also seen a few new IPP platforms being created, Temasek’s O2 Power being the most recent well-capitalised entrant. There is still hesitation from domestic bankers to lend to low-tariff projects, given ongoing execution and PPA risks (not signing SECI-awarded bids and not paying state-awarded assets). So, even as the sector does keep growing, further aided by the latest tariff reduction, we can expect that meeting the target of 175GW BY 2022 will still be a challenge.
Does this mature segment of power generation appear attractive for fresh new business creation and entrepreneurship? Probably not, given the mismatch between risks and rewards, and the competitive positions of the deep-pocketed IPP leaders with very low-cost capital. Agnostic entrepreneurs and fresh investment should track other segments which are not so capital-intensive, where there is less need for leverage, and still the prospect of higher returns to capital and time spent.
These could be the pairing of renewable power with electric mobility applications through managed charging programs, decentralised power solutions in rural areas, RE forecasting, O&M services, trading of regulatory products, energy efficiency applications (solar ag. pump sets, solar cold storages, lighting, metering). The use of renewable power, but for a higher-value application than simply power to the grid. With the prospect of displacing conventional solutions using the pricing advantage from the path-breaking low cost of RE power generation at Rs 2/unit.
By producing round-the-clock (RTC) power, with a higher PLF achieved by coupling with battery storage, many higher-value industrial applications of power (eg low-temperature heating applications), by-passing standard power generation, can also be explored.
Another development which will reduce uncertainty is the production-linked support (PLI) being given to the domestic module manufacturing industry. We can assume the solar PV modules will eventually come largely from India, so will Li-ion batteries. Probably at a somewhat higher cost, but with no China-specific sourcing or overall contracting risk. New businesses must use the surplus or marginal output from this capacity for solarising India.
The investment community is keenly searching for non-grid power applications from RE. However, there is less appetite for VC investments. Entrepreneurs need to first get a prototype out, then look for capital to scale-up. Funding support for the demonstration application itself has been very hard to come by. The entrepreneur should ideally plan to fund that herself. This is better for valuations and for maximising promoter equity value. Only with clarity on the earnings from the first application, can and should external funding be used.
Gaps in public policy
For this non-grid power application segment, the support needed from the government is to refresh the UDAY program and implement serious distribution reforms (DBT, smart or pre-paid metering, and private participation) to make utilities viable—much-needed for myriad reasons. If the grids are not financially viable ever, and the tariffs do not reflect cost, then eventually even non-grid power applications will not be able to scale up. We see this in the regulatory obstacles the state grids put on rooftop solar generators to hold onto their commercial and industrial customers and cover-up for the bleeding elsewhere.
The other contribution expected from the government is the development of the enabling framework for the launch of the electric mobility business, which has already taken off in China and elsewhere. We are still at a very early stage, and the regulatory framework needs to evolve faster to promote the proliferation of electric vehicles from rickshaws to buses.
The ultimate challenge
Energy storage was the original Holy Grail for renewable power. With the decline in battery prices, this story is now coming to pass. For example, 19GW of solar PV projects with storage are under construction in the US. The pairing of electric mobility with renewables has now become the ultimate target of renewables worldwide: to decarbonise transport. Progress on grids and the launch of EV businesses should afford Indian entrepreneurs with this timely challenge.
The author advises green investments. Views are personal