Sustaining renewable in the long run

Sustaining renewable in the long run
Renewables is a sun rise sector and can solve energy problems of the world by replacing fossil fuels. The sector has lived up to its expectations by clearly showing strong growth on the back of government policies, incentives and infrastructure investments. As a result, a sharp reduction in capital cost and tariff rates have helped reach grid parity. As per Ministry of New and Renewable Energy (MNRE), India has an installation target of 100 GW for solar and 75 GW for wind by FY2022. This entails an investment of $150 billion, one of the highest across sectors in India. The growth opportunities in this sector have attracted a host of strategic players, particularly global utilities and private equity players.

One of the key risks for any sector is demand risk, since one cannot create demand. Renewable has grown in size mainly on account of the government’s intent to contract power, thus reducing demand uncertainty. The renewable sector with long term power purchase agreement (PPA), not only insulates it from revenue fluctuations, but also offers stable EBIDTA for a period of 25 years. Firm long term PPAs together with stable performance across geographies in the last three to four years have mitigated the inherent cyclicality element embedded in market risk and bolstered confidence in the sector.

But this confidence requires to be protected by the government at large as the sector is nascent and extremely promising. Some states have shown signs of backing down renewable because of non-availability of grid. Discoms in certain states like Tamil Nadu have curtailed wind power due to grid issues. Lenders who have funded these projects face default risk as these uncertainties cannot be built in the projections. The present situation has led to increased uncertainty among investors, especially among IPPs (Independent Power Plants).

Similar grid issues have already emerged in China, Germany and the United States, and we need to learn from the mistakes of global experience. China has majority of its wind power projects located in the northern region like Inner Mongolia, Ningxia, Gansu etc., while the consumption centres are East and Central regions. Some of the wind-generated power could not be evacuated because there is no transmission infrastructure to carry the power to population centres. Robust grid infrastructure will be a key matrix for renewable success story in India.

We cannot afford to see the fate of what happened to thermal, where Coal India (CIL) could not deliver as promised. Most projects had LoAs (Letters of Agreement) from CIL for fuel supply, which could not be converted into FSAs post commissioning of projects. Lenders have already burnt their fingers with thermal and are extremely cautious and sceptical about renewable.

Renewables requires a solution similar to thermal, where in two parts tariff insulates developers and lenders in case of back down of power. The lenders and developers should not be penalised for the undrawn capacity by discom. PPAs need to establish very clear demarcation for payment to be released based on deemed generation. If power cannot be evacuated after the project is available to inject power in the grid, the power should be considered to be deemed generated and sold. This is also being proposed in Draft Renewable Energy Act, 2015.

Another way out for renewable to get cloistered from grid issues is by connecting wind and solar projects to the Central transmission utility (CTU). As per Ancillary Services Operations Regulations 2015, merit order dispatch though presently not applicable to renewable, ensures that power where the marginal cost is the least is scheduled first. Renewable have the least marginal cost. Also, it would ensure that ‘must run status’ for renewable is followed in spirit. Scheduling of power by Regional Load Dispatch Centre (RLDC) will be unbiased and would ensure that renewable does not suffer at the cost of other sources of power.

There has been a considerable delay in receivables of over 8-10 months for wind projects from the discoms in Maharashtra, Tamil Nadu, and Rajasthan, among others. These States were always considered ‘progressive’ in their outlook for renewable energy, and have attracted substantial amount of private investments in the recent past. Lenders are finding it difficult to fund any new project in certain states on account of Non-Performing Asset (NPA) risk. Land-related issues have always troubled the sector. Following up on the ‘Digital India Land Records Modernization Programme’ announced earlier, the government could look at providing a set-up of nodal agencies, which could act as “land banks” for easy access for developers to obtain required land for renewable projects.

The long term growth story of the Indian power sector remains strong, and with the ever growing demand in a country like India, there will always be a need for power and participation of private players, which will always play a pivotal role. To maintain this momentum the government must continue taking steps to further develop key infrastructure components such as power, energy, inland water ways, rural housing, etc. A positive step in this direction would be to encourage projects, which harness renewable energy sources by giving them special focus and incentives.

Infact, much of the clean energy promotion has come from the centre and often adopted by states through political delegation. If India is to achieve its global commitment on energy transformation, it needs to promote bottom up planning and execution, at least at the subnational level. Developers intending to set up fresh capacities are questioning the states’ commitment towards renewable, considering the precedence of issues jeopardising the return expectations for the developers. One cannot emphasise enough on the crucial role that the central government has to play in protecting the interest of all stakeholders in the sustainable development of the Indian renewable sector.

(The authors is Chairman, L&T Finance Holdings)
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