Return to growth: Given the mismatch between tariffs and risks, few new renewable IPPs being created

Updated: November 18, 2019 10:56:00 AM

Power tariffs had declined significantly in 2016-17, ensuring price competitiveness. However, since then, RE sector risks have increased.

The renewable energy (RE) growth momentum lasted into 2018, driven by solar power, but since then the sector has de-grown.

By Himraj Dang

Chhatrasal had written a piece in this paper (Nov. 15, 2017), entitled, ‘Who killed Renewables: This sunrise industry has received a telling blow.’ He went onto say, ‘The renewables sector in India is near-death. Capacity addition has markedly slowed down in this financial year. Few projects are achieving financial closure, and so, few projects are getting complete.’

The renewable energy growth momentum lasted into 2018, largely driven by solar power, but since then the sector has de-grown. While capacity addition in RE was impressive during FY 17 (11.3 GW) and FY 18 (11.8 GW), there has been a decline in capacity installation at ~8.5 GW during FY 19. Performance in the rooftop solar (RTS) sector has also been disappointing: out of a target of 40 GW by 2022, the achievement has been 2.1 GW. These lower and slowing increments cumulatively call to question the 175 GW target for 2022 (vs. 83GW at 09/19).

India has set ambitious targets for renewable energy (RE) capacity, with the MNRE upscaling the 175 GW target of 2022 to 227GW, with an even higher potential uptick to 450GW assured by the PM to the UN Climate Action Summit recently.

With the introduction of bidding, fall in capital costs, and availability of cheaper sources of capital discovered power tariffs had declined significantly in 2016-17, ensuring price competitiveness. However, since then, RE sector risks have only increased. Reverse auctions with unviable tariff caps, uncertainty in the applicability of taxes, outstanding dues from DISCOMS (and PPA risk), have resulted in an insufficient interest from IPPs for solar tenders, resulting in lower capacity addition in 2019.

The response from IPPs for the wind tenders has been similar. The wind energy sector (in stress since auctions were introduced in February 2017), has seen capacity addition fall from 5.5 GW in FY 17 to 1.86 GW in FY 18 and 1.5 GW in FY 19. The necessarily domestic wind industry simply cannot deliver at the capital costs commensurate with the expected tariffs. No wonder the October 1,200MW NTPC tender with a ceiling tariff of Rs. 2.93/kwh closed without a single bid.

It is debatable what purpose the tariff cap serves since buyers have been cancelling bids unacceptable to them anyways. Even the benefit of price discovery is not achieved, when the capital costs are transparent and known to regulators, utility buyers, and PSUs, who are no longer investing (given poor economics). This cap is a severe distortion of the market, and if the utilities cannot bear higher tariffs, it would be better to let the market decline for commercial reasons till the power demand picks up. Alternatively, the price cap can surely become a FIT, to lead to the same result.

Given the mismatch between tariffs and risks, few new IPPs are being created, leaving the consolidated sector devoid of MSMEs and start-ups. The sole emphasis on low tariffs has resulted in reduced domestic procurement, leading to an adverse impact on MSMEs and jobs in the RE manufacturing and supply chain.

Distributed renewable energy, primarily rooftop solar (RTS), has also witnessed slow progress, running at 5% of target. Increasing policy uncertainty, delays in net metering approvals, pushbacks by DISCOMS, proposing wheeling charges and power injections caps, and lack of appropriate financing instruments, have resulted in the slow uptake of RTS in India.

A recent report by CRISIL has concluded that the country is likely to miss the lowest renewable energy target of 175 GW by 2022 by a wide margin of 42 per cent due to regulatory challenges, policy flip-flops and also a steep fall in tariffs. The report notes that 26 per cent of the 64 GW of projects auctioned have received no or lukewarm bids, while another 31 per cent are facing delays in allocation after being tendered.

The MNRE has rebutted this report, calling it ‘ill-founded,’ factually incorrect and lacking credibility. MNRE’s response critiques the strictly annual view which ignores projects under installation (31GW) and awarded projects (21GW).

To bridge the gap between these different views, a group of NGOs got together recently to brainstorm ways to revive growth in the sector. Their suggestions included:

–Tendering should be done only after all procedural steps are taken, i.e. tariff approval by the CERC and the state regulatory authority in advance (as far as possible), and signing of PPAs only after full regulatory approvals (this would avoid the recent problem in UP).

–To learn from MP’s successful rooftop solar bids where project documentation gave a lot of comfort to bidders and tendering was successful. All risks were covered in the documentation, and this helped achieve lower tariffs by means other than a price cap, i.e. risk mitigation.

–Strict guidelines to be issued to states participating in SECI tenders not to re-open PPAs and to respect the sanctity of signed contracts.

–What is the sanctity of the ceiling based on the last bid? Can the CERC or SECI provide an economic rationale for the current price cap?

–On price caps, the GOI should commission a study based on public data on the composition of delivered tariffs in China and for recently-commissioned plants in India, as it used to be done for the fixed-ROE FITs. This will show up clearly the very poor margins and low debt coverage. Separately, the tendered prices have killed the domestic manufacturing industry in wind, so this study will show up the kind of prices India utilities will have to pay for future wind projects. Irrational bidding in the past by developers/IPPs would no longer be the basis of a price cap once actual capital and financing costs have been identified.

–An alternative to reviving the bidding market: arriving at a benchmark price for every bid instead of setting a price cap. The benchmark tariff should be backed by publicly-available data included in the bidding documents.

–If the bid price is the only criteria, then the projects would only come up with high-resource states. Can other states, to create jobs and investments, add other parameters to reward in-state power generation? Can there be a multiplicity of competing regulatory systems in a federal system?

–Consistency in open access policies: exemptions for open access charges in some states are only for 10 years, which restricts the bankability of projects.

–For Rooftop Solar (RTS), issues with delays in net-metering should be sorted out. NBFCs with the ability to appraise small-ticket transactions at low cost should be fast-tracked.

–Consultation with lenders as to why they are not increasing their exposure to RE generation. They will surely bring up mismatch with capital costs and contracting issues with DISCOMs.

–RPO enforcement pressure to be kept up to create regulatory demand.

–Standard bid documents to be created for states and kept unchanged for 5 years or more.

A dynamic, sunrise industry growing without subsidies, but in dire need regulatory support, could benefit from a greater and transparent dialogue among the stakeholders. Denying the slowdown or ignoring the widening gaps between targets and achievements serves no purpose. Some of these suggestions can be debated and implemented to bring back growth in the industry.

(The author advises green investments)

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