India’s Renewable Energy Targets in Context: Ambitious yet the New Normal?
By Rahul Tongia
In 2014, before the Paris Accord, the new government of India announced exceedingly ambitious Renewable Energy (RE) targets: to quadruple RE capacity to 175 GW by 2022. This required a growth rate of over 25% per annum at the time, in contrast to targets in California, the EU, and China that were in the order of 5%.
So where is India right now? By some measures, it is behind schedule, despite expectations that things can pick up as prices continue to fall. One of the major shortfalls has been on rooftop solar, where fears of the utility death spiral (losing the paying customers) and lack of credit hampering Renewable Energy Service Companies (RESCO – which invest and enjoy revenues over time) are just a couple of the factors delaying developments in this segment of RE; there is a 40 GW target for rooftop solar installations out of the total of 100 GW for this RE source.
Nevertheless, per IRENA (International Renewable Energy Agency) statistics, PV growth of 9.6 GW in 2017 made India the second largest growth market, representing 10% of the global growth, but still far behind China which added more than half of the capacity installed in the said year. Global capital is likely available, and domestic resources for project completion are improving as well. So, is there a bottleneck? Or is it just a matter of time? There are two main issues to resolve, so that RE can grow not just as the source of new capacity (the “new normal”) but in a way to displace fossil fuels.
Risk and Returns
India currently depends on global imports for some 90% of its solar installations, and global module prices (in US$) matter. Global capital is important, not just due to limitations on domestic financing, but also because it can offer far cheaper debt than Indian Rupee financing which has high interest rates. One bottleneck for sovereign and pension funds investing in such projects has been risk; not just foreign exchange risks, which can be hedged at a cost, but counter-party risk. Indian distribution companies (DisComs) are cash strapped and lose money (on average) for every kilowatt hour they sell. Having a power purchase agreement is of little solace to a developer, if there is the risk of power curtailment or challenges in payments (including delayed payments).
Part of this risk is not finance per se; it is an issue of cash flows for required generation. Given intermittent or opportunistic RE (take it when you can) only goes so far towards addressing utility needs, they still need to invest in or pay for alternative capacity. This distinction between energy (where RE helps a lot) and capacity contribution at the evening peaks (where RE contribution is near zero) is a key challenge for India going forward, more so than other countries. There is a lot of overhang from the high growth of coal capacity in recent years, which grew more than double than the growth rate of power demand. This has helped reduce technical shortfalls to nearly zero, but puts pressure on RE, which is characterized by costs higher than the variable (fuel) costs of coal in much of India. Hopefully, as demand grows, this issue will be resolved itself, but it may take a little while. Another pricing risk has been one of new tax structures, and worries over import tariffs. These also should be resolved over time.
Before one gets too excited about creative destruction (“who cares about ‘dirty coal’”?), let’s step back to examine how much RE can easily be absorbed into a grid. There is never a single, let alone simple, answer and a lot depends on what else is in the grid. India, sadly, is behind many countries when it comes to a strong grid or fast-ramping generators. If variable RE is more than national instantaneous net demand (after accounting for must-run generators), then no amount of inter-state transmission will solve the problem, at any cost. Either one needs viable storage, or one has to curtail RE. The national mid-term RE targets may not be so high so as to mandate storage, but by the mid-2020s, that point will be reached. A key question is what will the viability of storage be by then?
If we step beyond levelized cost of energy (LCOE) calculations to systems level costs, then the hidden costs of RE become important. The government recently estimated that transmission costs (which are socialized today, and not paid by RE power) affect thermal generators in terms of ramping, efficiency penalty, etc. and all add up to over half the headline LCOE price of RE. Over time, the grid should be more able to absorb such power, with the rise of ancillary services, larger balancing areas, etc. However, as RE share in the energy portfolio of India grows from the current 7% to almost 20% by 2022 (if the 175 GW target is met), then the costs of integration will also rise. This dynamic is worth watching closely.
People talk about transitions – it is more than just RE displacing fossil fuels. The entire grid is becoming and needs to become far smarter, which can help manage demand dynamically and also match demand with supply, instead of vice-versa. Ultimately, targets are helpful for energizing focus, but the real action and effort needs to be on enabling frameworks. Even without focusing on high RE, India needs to stop treating all power sources the same – their behavior varies by time of day, location, ramping, etc. If we ignore underlying issues, RE risks becoming another burden for utilities, one they will resist, especially after a point. But done right, RE is a powerful tool in the energy portfolio of India ensuring not just sustainability, but also energy security, low cost, competition, investment, innovation, etc.
This article was edited by Panayiotis (Panos) Moutis.
Rahul Tongia, SMIEEE, is Fellow at Brookings India/the Brookings Institution, and an adjunct professor at Carnegie Mellon University. He is the founding advisor of the India Smart Grid Forum and was a key initiator of and technical advisor to the Govt. of India’s Smart Grid Task Force.
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