Opinion

Bright prospects for RE

Sabyasachi Majumdar/Girishkumar Kadam | Updated on August 30, 2021

Thanks to competitive tariffs and a strong policy push

The green or the renewable energy (RE) sector is set for robust growth in the coming years, backed by solid policy support by the government. This is evident from the cumulative policy target of 175 GW by 2022 and 450 GW by 2030. Given that the installed RE capacity in India as on March 2021 stood at 94 GW, this implies a strong investment trajectory over the next 8-10 years.

Over the last 3-5-years, the RE sector has seen significant awards of utility scale projects through the bid route by central intermediaries — Solar Energy Corporation of India Ltd and NTPC — State nodal agencies. The share of renewables in installed capacity is estimated to increase gradually from 25 per cent as on March 2021 to about 35 per cent by March 2025, with the incremental capacity addition of 60-65 GW and investment of ₹3-3.5 trillion over this period.

Within RE, solar will continue to occupy a dominant share, given the relatively greater execution challenge in the wind energy segment and its concentration in a few States.

The regulatory framework for RE has been supportive, given the must run status for RE assets and applicability of renewable purchase obligation (RPO) norms for all obligated entities (mainly distribution utilities and open access consumers). Also, tariff competitiveness of both solar and wind energy in utility scale has improved significantly as seen through bid tariffs which have remained well below ₹3/unit for the last 3-4-years.

Rising input costs

While the upward pressure due to basic customs duty w.e.f. April 2022 as well as rising cost of inputs lately including that for polysilicon, solar glass and other commodities, the average bid tariff discovery in recent solar auction has gone up by about 20 per cent over the lowest level of ₹2/unit discovered in November 2020, still it remains well below ₹3/unit.

From the perspective of ultimate off-takers, that is, State Discoms, such RE tariffs remain cost competitive given that the marginal variable cost of power purchase remains well above ₹3/unit. From the RE developers’ perspective, the viability of bid tariffs remains critically dependent on the capital cost (which is a function of module price level in the case of solar PV project), PLF expectations and cost of debt funding.

The demand prospects for green energy adoption/RE procurement by the commercial and industrial (C&I) consumers also remain favourable, led by both the tariff attractiveness and growing thrust in sustainability initiatives. However, regulatory challenges are relatively higher in such third party/captive PPA-based RE projects mainly because of rising open access charges being levied by SERCs across States along with tightening of banking norms. As a result, an incremental RE capacity addition is expected to remain predominantly in the utility segment.

The financial position of Discoms remains weak in most States due to higher level of aggregate technical and commercial (AT&C) losses compared to regulatory norms, inadequate tariffs in relation to their cost of supply, and inadequate subsidy support from States.

Moreover, significant delays in the tariff determination process for Discoms in key States like Rajasthan, Tamil Nadu, Telengana and West Bengal remain a matter of concern. The annual book losses for state-owned Discoms in FY 2021-22 are estimated at about ₹75,000 crore. Further, overall subsidy dependence for Discoms in FY 2021-22 is estimated at about ₹1.2 lakh crore, given the highly subsidised nature of power tariffs mainly towards agriculture and certain sections of residential consumers.

The Centre has initiated several reform measures through the recent revamped distribution sector scheme as well as the draft amendments in the Electricity Act among other measures. The distribution scheme focusses on capex measures to improve operational efficiencies through smart metering and upgradation of distribution infrastructure, including the segregation of agriculture feeders and system strengthening, to enable the state-owned distribution utilities to curtail AT&C losses, with the scheme target set at 15 per cent by FY25-26.

ICRA estimates that every 1 per cent reduction in AT&C loss results in the Discoms achieve a saving of ₹50 billion every year.

There is an urgent need for States to have strong political will with a focus towards sustained financial turnaround of their respective Discoms — which remain the ultimate off-takers in the power sector value chain.

Majumdar is Group Head and Senior VP, and Kadam is VP and Co. Group Head, ICRA

Published on August 30, 2021

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