Higher oil prices, the consequent inflationary pressures and a weaker rupee have dominated recent news headlines. While short-term measures to deal with these macro-economic trends are essential, it is also necessary to look at the long-term structural changes required to bring about stability in the Indian economy and reduce exposure to the vagaries of macro-economic trends.
Environmental concerns alone do not drive India’s renewable energy push today: Economic and financial compulsions are even more critical. Policies have helped expand the sector, but figures such as an expected $105 billion crude oil import bill for the country for the financial year 2018-2019 (according to the Oil Ministry) give us an idea of the urgent need to further reduce our dependence on imported fossil fuel and find alternative sources of energy.
For “energy independence”, renewable energy is the elixir that the country needs and it will mean addressing more significant policy issues and creating a policy framework that supports “energy independence”, factoring in a multitude of elements.
First, the proposed 70 per cent duty on imported solar cells and modules merit re-examination. While this is needed to encourage domestic solar cell manufacturers, such high import duties will also slow down solar energy expansion.
The critical question is: Will the economic gains from the proposed duty be more significant than the benefits of a vibrant and growing solar sector using cheaper imported (read Chinese) solar productsIJ
Critical evaluation of such questions will help frame coherent policies across the energy spectrum. Weighing competitive advantages of one policy versus another to create an overall framework that is consistent will help expedite renewable energy creation.
The fact that facilitating renewable energy expansion is critical not just from a financial perspective but also a national energy security perspective should inform such policies.
Interest rate policies also have a bearing on the renewable energy sector, and the sector needs to be cognizant of the impact that higher interest rates may have on debt funding for both current and future projects.
Renewable energy auctions have seen tariffs nosedive over the last two years. While this is great for the consumer, the question is whether the renewable energy sector in India is ready for a higher interest rate regime.
Renewable energy players must look at a careful analysis of converting floating interest rate loans to fixed rate loans and borrowing for longer durations where necessary to better prepare for a higher interest rate regime.
India needs to ensure that the pace of renewable energy expansion is affected as little as possible from rising interest rates.
With the expansion of renewable energy capacity, it is essential for the energy industry and the government to take stock of the risk of stranded thermal power assets. The primary concern is how do we deal with thermal plant assets that aren’t financially viable any more.
In a recent report entitled “An Assessment of India’s Energy Choices: Financial Performance and Risk Perception”, Vinit Atal and Gireesh Shrimali bring forth crucial points regarding the stranded asset risk.
As renewable energy increasingly becomes a greater source of energy at competitive price levels, the risk of stranded thermal plants goes higher. Unviable thermal power plants lead to more stranded assets, thereby adding to the Non-performing assets (NPAs) for banks. Atal and Shrimali hold that investors “perceive renewable energy power investments to be less risky than fossil fuel power investments”.
The government needs to think of the long-term ramifications of the growth of renewable energy on existing thermal power plants and any new thermal power plants in the pipeline. Given the long-dated nature of power plant assets, closer scrutiny around asset viability is warranted to avoid a build-up of more NPAs.
India has made significant progress over the last decade in the renewable energy sector. However, given the rising energy needs and the dependency on energy imports, now is the time to push the energy “independence” agenda further and faster. Greater policy clarity, consistency in policies and a focus on the broader economic mandate are urgently needed.