ReNew Power chairman Sumant Sinha, ET Entrepreneur of the Year, said stress in the thermal sector serves as a lesson for renewable energy developers in India, but aggressive bidding to drive tariffs down is something that Indian businessmen find difficult to avoid. The head of India’s leading renewable energy business told Nishtha Saluja in an interview that the focus of policymakers may be misplaced in seeking low tariffs for power produced through renewable energy sources the country really needs to bring in healthy capital to ensure that renewables do not meet the same fate as thermal power projects. Edited excerpts:
What is the business environment looking like in the renewable energy sector in India?
I think what has happened in the renewable energy sector is that we are in a bit of a transition stage, which is driven to some extent by macroeconomic issues. One is the rupee depreciation, which is making capex of imported equipment higher so that is going to impact some projects. Secondly, interest rates are also beginning to go up, and that will also impact the profitability of some of the projects that have already been bid out and also will result in higher tariffs for future bids. Thirdly, the better sites having already been taken because of evacuation availability. The government needs to construct evacuation in the better wind and radiation areas fairly quickly to make sure that we continue to offer competitive tariffs. That is something that is leading to a bit of uncertainty in the sector right now. In future bids, tariffs have to respond to some of these changing market conditions, and that is where the government needs to be a bit proactive in responding to these market changes.
So, are projects won by ReNew Power being impacted by these changing market conditions?
I think that as far as we are concerned, we are not getting really impacted. All the projects that we won were at least six months earlier and these market conditions have been prevailing for the last couple of months. We’ve always been prudent and careful about the bids that we are doing. If you are a small player, you are going to have a difficult time getting financing. So, we have to see how that plays out.
The only positive here is that we have two years to execute projects won in the last six months or so and there is a hope that in two years the foreign exchange will come back on a good rate, and the financial markets will settle down. So, I think this is a shortterm scenario.
Going forward, all of the new bids will have to reflect some of these changing situations. Having said that, this is all a short-term situation, (in the) longer term, the outlook for renewables in India continues to be bright, the government’s programme of auctioning fairly large amount of renewables remains. From that standpoint, the overall view on renewables continues to be fairly positive and this short-term stress in financial markets is impacting not just the renewable energy energy industry but every other industry.
Is access to financing for renewable energy projects getting difficult on account of NPAs in the thermal sector?
That’s always something at the back of everybody’s mind that the thermal sector has been impacted on account of various factors, whether it is aggressive bidding, fuel supply risks, among other factors. It has always been a very salutary lesson for everybody in the renewable sector that we should not go down that path. Having said that, the lenders certainly have have that fear about lending to the renewable energy sector but they have lent, because everybody recognises that renewables is fundamentally different from the thermal sector. We don’t have fuel supply risks and capex cycle times are very short. So, the only risk we share in common is the payment risk from the discoms. To that extent, lenders are cautious. I would say that it has not impacted us negatively in any way. If anything, it has been a healthy lesson for us, that we should make sure that as a sector we don’t make the same mistakes. It’s led to a little bit more prudence in our sector.
But then aggressive bidding continues in the renewable energy sector also…
That is, I think the Indian story; everybody tends to bid too aggressively and everybody becomes very short-term in terms of focus and that is something that seems to be the Indian DNA unfortunately.
This is where perhaps the government should be more enlightened in its policymaking, knowing that various sectors have got into this problem in the past because of the poor behaviour of the private sector, and the government should formulate different strategies, different plans about allocating capacity.
But from their standpoint, I can understand this is the most transparent way of allocating capacity and therefore will not lend itself to questioning in the future. I understand where they are coming from, but unfortunately between government policymaking objectives and requirements, and private sector DNA, it constantly leads to this problem, not just in our sector, but in other sectors as well.
Do you think Feed-in Tariffs (F-i-T) should make a comeback?
The best thing would be to come out with a long-term feed-in-tariff for both wind and solar bids. You can perhaps do it by wind zone, or radiation levels. That way you will have much more broad-based installations of renewable energy across the country and grid utilisation will be much better and people can make large-scale investment decisions on a multiyear basis that will really drive a lot of capital to come in to the country. Instead of this start-stop system that we have right now, it will be more sustainable. The tariffs could be Rs 2.80-3 per unit; there could be different tariffs in different zones.
Does the excessive stress on low tariffs mean a shift in focus?
The reality is that the government has to define its own objectives. If they decide that the objective is to deliver 175 GW renewable energy capacity by 2022, then I would tell you that having very aggressive price caps is not the way to get there. If on the other hand their objective is to drive the lowest tariff into the system, then what they are doing is perfectly valid.
But you can’t have 175 GW met with such low tariffs. You have to give sustainable returns to capital providers for them to be able to bring large amounts of capital required in this industry. By driving price caps down, you are bringing in the most risk-prone capital and if that is then coupled with any negative shock, it results in people going under. So, that is really the danger in going with this aggressive price cap-type of a strategy.
The government probably has a view that if they set higher price caps, then discoms will not buy it. So, they are themselves trying to align between different objectives as well, but I am not able to see their pushes and compulsions. Even at sub-Rs 3, it seemed to me that renewable energy was very competitive, and at that level also discoms were buying. They were also buying at Rs 4-5, not too far in the distant past.
So that is where the government has to then decide that there is a renewable purchase obligation (RPO), and it’s not that the discoms need to take a decision only on the basis of price, you also have to meet RPO targets. Therefore, the government has to push RPOs on the discoms, and that hopefully helps them to be relaxed a little bit on the kind of tariffs they are willing to accept.
Do you think the larger idea of tackling climate change has taken a back seat?
I think there definitely has been a shift from the 175 GW target which, keep in mind, the PM had set back in 2014, when wind F-i-T was Rs 5 and solar auctions were still going on at Rs 6-7 per unit. I do believe that at some point of this journey in the last two to three years, we have become very fixated on prices and tariffs and have somewhere become less focussed on the objective of 175 GW and our commitment in terms of the Paris Climate Agreement. If that focus is still there then the whole concept of RPO enforcement on discoms would still have been very much there and that would have driven further off take of renewable energy. At this point there is only one target of 175 GW, there is no target on tariffs.
I would say that climate change and our commitments under the Paris Accord are as critical as anything else. Therefore, there should clearly be higher adherence to those targets and now that you have a commercial element given the tariffs are already low, that makes these objectives self-reinforcing.