The $500bn waiting to boost India's clean energy sector

And what still stands in the way

The $500bn waiting to boost India's clean energy sector

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Sunrise in Gujarat - Image credit: Flickr/Santanu Sen

Global investors are ready to deploy hundreds of billions of dollars in the Indian decarbonisation story, helping mobilise the $500 billion needed over the next decade if India wants to achieve its 2030 target and install 450GW of renewable capacity. But experts warn that a ‘penny wise, pound foolish’ approach of some states could derail these efforts for years to come.

Analysts at the Institute for Energy Economics and Financial Analysis (IEEFA) have tracked the investments of a number of energy giants from across the world looking at India to diversify their green portfolio. In a report out this week, they map out the contribution of investors like the Swedish EQT and Singaporean Temasek, which through the newly established O2 Power, bagged contracts for 780MW in Rajasthan and 200 MW in Gujarat. The list also includes the French giant Total which sealed a deal for 20 percent of India’s Adani Green earlier this year, Canada Pension Plan Investment Board and many more.

Big promises

“Capacity building [in India] in the last 12 months has been nothing short of phenomenal,” says Tim Buckley, one of the report’s authors. Despite a slump in energy demand driven by last year’s Covid crisis, he says, 2020 has seen 20 of the world's biggest global investors building capacity in India. For the new renewable infrastructure, “the cost to consumers will be a fraction of what it was going to be even a year ago. So why would you not do it?” Buckley says. “The 2 rupees tariffs that we saw in December, that is below the marginal fuel cost of buying coal to run your coal fired power plant. Even if you've already built the coal plant.”

India has some unique competitive advantages compared to other countries looking to switch to renewable energy. “India is probably the only country that can provide scale, which is what foreign investors need because the investment size is so large,” says a top executive with one of the biggest solar power developers in India, who asked not to be named. The country’s energy demand is expected to grow steeply as it builds more infrastructure and life standards improve, so investors can expect good returns for a long time. “A lot of new capacity will be created,” the executive says, “and it will be filled up by renewable power, because nobody's going to invest into dirty fuels anymore.”

Secondly, the executive says, India's power purchase framework is very robust, it being “one of the few countries where all the bids are very transparent.” The tariff is “completely market driven”, the official says, “it's not dependent on a bilateral discussion with a regulatory body or with a government agency where the tariff is identified.” This means that international investors enjoy a level playing field with their Indian counterparts, which can’t be said for other sectors of the Indian economy, where foreign investors are often penalised.

The opposite seems to be true here. “If we observe the last three or four tenders, which closed at record low tariffs, most of them are won by international investors with access to cheaper capital,” says Subrahmanyam Pulipaka, CEO of the National Solar Energy Federation of India, while Indian developers, he says, are somewhat falling behind.

Uncertain returns

But while foreign businesses are eyeing the $500 billion pie of India’s renewables, they will only do it if the risk return metrics make sense, Buckley says. And this will only happen if “India can stick to transparency, longevity and certainty of the policy environment.” And while the government has successfully ensured transparency of the bidding process when assigning renewable contracts, there’s room for massive improvement on the policy front.

A bizarre collateral effect of solar tariffs plummeting is states reneging on previously signed contracts looking for better prices. Most recently, the government of the Western state of Gujarat walked back on a previous agreement, signed in August 2020, for 700MW of solar power plants to be built as part of a 5GW solar park in Dholera. The developers involved had already paid a hefty deposit to secure land for the project, but the local government took advantage of a loophole to greenlight a new auction - hoping to achieve lower tariffs.

This is only the latest in a streak of controversies in which states reneged on renewable contracts - and could seriously harm investors’ confidence. “I could just phrase it with a British saying: they're penny wise, pound foolish,” IEEFA’s Buckley says. “You're haggling over a billion bucks of investment when in fact, you're putting at risk 100 billion down the line.” By undermining investor certainty, he says, “you increase the risk, and when you increase the risk, you increase the required rate to return. So ultimately, the consumer of India pays the price for Gujarat’s stupidity.”

This comes on the background of a distribution sector in permanent crisis, says the solar executive. “The most important issue of this sector so far is the health of the utilities, because the construction risk in solar or wind is far lower than any other energy source, particularly coal and hydropower.” The only risk remaining in this sector once your plant is up and running, the executive says, “is the health of the utilities, because they are the ultimate buyers of this power.”

The government has proposed to do away with the utilities’ monopoly by revoking their licence and fostering greater competition in the distribution market, which should encourage companies to cut inefficiencies. This would not be the first time the government tries and fails to address the issue, but the executive is optimistic. “A lot of states are pushing back because these structural reforms would reduce the power of local politicians, but if this reform comes into place it will solve the sector’s biggest problem.”

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