Are state utilities risking centre’s mission for creating renewable capacity?

All that is required is a stable and equitable policy regime and a long-term integrated approach amongst the centre and state authorities in planning renewable energy procurement

Mumbai: Renewable Energy capacity addition is one of the flagship showcase programmes of the government of India (GoI) that announced India’s ambition to the world. GoI targets to add 100 gigawatts (GW) of solar capacity and 60GW of wind capacity by 2022.

Quite a lot has been achieved since 2009, when GoI announced the Jawaharlal Nehru National Solar Mission. India has managed to achieve huge capacity addition with current installed capacity having crossed 13GW and 32GW of solar and wind power, respectively.

For the first time in 2016-17, the net capacity addition of renewables crossed conventional power—India added ~11GW of solar and wind as compared to ~7GW of coal-based capacity.

If one looks at a global comparison, India is today ranked as the second most attractive market for renewables after China and ahead of the US, according to EY’s latest survey on Renewable Energy Country Attractiveness (RECAI). Under the competitive bidding regime, both solar and wind projects have seen tariffs plummeting to grid-parity levels.

Today, renewable power is perhaps cheaper than conventional power if you go by some recent bids.

Having said that, recent actions taken by state utilities such as in Uttar Pradesh, Tamil Nadu, Jharkhand, Andhra Pradesh and Karnataka to renegotiate tariffs and/or scrap past bids threaten to derail the efforts taken by the central government to push renewable energy.

These actions only reinforce the key concern that has always been expressed by developers and lenders alike, which is that in a falling tariff regime, will state utilities continue to honour power purchase agreements (PPAs) or past commitments?

This issue has the potential to irreversibly damage capacity addition in the sector leading to India falling far short of the announced targets and impacting India’s image as a pro-investment destination.

In the current scenario, there are theoretically two options for central and state authorities; first is to wait till tariffs stabilize and start procuring power only after that, and the second is to understand and accept the declining tariff trend and frame policies around the same.

The first alternative is obviously not practical because “If not now, then when? If not at this tariff, then at what tariff?” The need to add power generation capacity is now, more so given the dearth of coal-based capacity being added by the private sector.

This leaves us with only the second option, which is to design a robust policy framework acknowledging the sector dynamics and supported by solid implementation.

Few suggestions that can be considered by the concerned authorities are:

• Encourage state utilities to have a well-defined short and medium-term plan for procurement of renewable energy, which have been pre-approved by the respective State Electricity Regulatory Commissions—this should be announced well in advance and authorities should be mandated to adhere to the timelines stipulated irrespective of the prevalent tariff. This will help address the feeling of buyers’ remorse among state utilities that is currently prevalent due to the falling tariff scenario.

• Package projects so that there is minimal probability of any delays that can be attributed to governmental authorities post award of the project—execute back-to-back power off-take agreements with state utilities before inviting bids (in case of central auction), provide enabling infrastructure like Solar Parks, evacuation permits for the project special purpose vehicles (SPVs), etc. The auctions should only be undertaken once these basic requirements are addressed by the auctioning authority.

• PPAs with successful bidders should be signed within a fixed time-frame of say 30 days of the completion of the auction. This will avoid any large time gap between the auction results and the signing of the PPA wherein results of other state/central auctions in the intervening period cause the state utilities to have a rethink. This will eliminate instances like the Jharkhand state auction, where PPAs were not signed for a 1,200megawatts (MW) solar auction conducted in March 2016 till September 2017 and the state utility is now renegotiating tariffs.

• Have a clear policy in place wherein tariffs discovered through a competitive process should not be allowed to be questioned/renegotiated by any authority.

• Authorities should also recognize the fact that delays may take place in the Indian context in project execution and that the private sector is not always delaying projects for financial gains. Authorities should consider providing some flexibility in timelines in case projects are delayed due to genuine reasons rather than cancelling PPAs while also penalizing promoters who have unjustified reasons for delaying projects.

• In the immediate term— perhaps we need to have more projects under central auctions since investors seem to be clearly preferring these projects. This would enable even those states that do not have the adequate renewable resource to procure renewable energy and meet their renewable purchase obligations (RPOs).

Given climate change considerations, developers and investors worldwide are keen to invest in renewable energy. India, with its immense potential for renewable energy and development needs, presents probably the largest economic and social market for such investors.

In other words, the stars are aligned for the renewable energy market in India. Success is imminent unless we mess it up.

All that is required is a stable and equitable policy regime and a long-term integrated approach amongst the centre and state authorities in planning renewable energy procurement.

Sushi Shyamal is partner – transaction advisory services at EY and Jitesh Khatrani is senior manager – transaction advisory services at EY.

Source: livemint