The Triple Challenge Dragging Down Solar In India

On August 21, the Central Electricity Authority (CEA), the premier national body tasked with laying down the roadmap to power for all citizens, and the policy interventions to get there, released a report on India’s solar and wind sector. Titled simply as “ Report of Under Construction Renewable Energy Projects”, the bland title laid bare a shocking truth formally. That India’s renewable sector, especially the solar sector, was in some serious trouble.

The CEA report lists over 90 renewable energy projects countrywide, adding up to 39.4GW, which are facing delays due to various reasons. Coupled with data from the MNRE (Ministry of New and Renewable Energy), the picture is stark.

Of these 39.4 GW of renewable projects, over 28 GW are solar projects running behind schedule, of which 20 GW have got a 5 month extension as per the rules for Covid impacted projects. The remaining 8 GW are not even getting of the ground anytime soon, as they are missing a formal Power Purchase Agreement (PPA) or a Power Sales Agreement (PSA).

The PPA is usually what developers sign with a centrally appointed agency like SECI or NTPC, which sign this subject to a back to back arrangement in the form of a PSA with a discom. So no PSA, no PPA .

A detailed reading of the report makes it clear that even among the projects that have taken the benefit of an extension due to the Covid rule, many will still miss the fresh deadlines, thanks to the limited progress made on critical parameters including financial closure, land acquisition, or even probability of transmission off take in time.

If this was the only issue facing the solar sector, the MNRE, which has been unusually aggressive in pushing for more tenders and a better policy environment, could have been trusted to seek a way out. After all, there is a target to be met. 100 GW of solar (out of a renewable target of 175 GW by 2022 end). But the sheer scale of challenges facing the sector today mean that come 2022, the best the MNRE can hope for is a ‘well tried’. So what are the biggest challenges that we see. Lets move to the challenge number 1.

India’s Thermal Legacy

At 231.5 GW out of a total capacity of 371 GW, India’s thermal sector (coal+gas+diesel) accounts for just over 62 percent of total capacity. Of this 62 percent, almost 88 percent is coal and lignite (55 percent of all sources total), with the remaining accounted for by gas (6.7 percent) and diesel. That’s a number expected to go down to possibly 50 percent by 2022. But don’t let that confuse you. In terms of actual share of generation, thermal sources are comfortably above 75 percent even today, and by 2022, are expected to be well over 65 percent.

India Power Sources	Capacity (In GW)
Thermal ( Coal+ Gas+ Diesel)	231.5
Nuclear	6.7
Hydo	45.7
Renewables ( Solar+ Wind+ Bio Gas+ Mini Hydro)	88

India’s Power Capacity as of July, 2020

Source: National Power Portal

The sheer dominance of thermal means that the country’s power infrastructure moves to the beats and vagaries of fossil fuels today. Be it the coal mines that supply the coal, the massive investments locked into thermal plants, or the transmission infrastructure designed for thermal off take, thermal dominates. That makes it a very powerful incumbent to dislodge, or even cede ground to renewable energy as it must.

So what are the biggest challenges here? By far, the biggest stumbling block to real change is the nature of the whole ecosystem that has come up around thermal. From long term PPA’s that have locked in discoms to buying fixed, or fixed plus costs for a long time, to the massive investments already made.The discom issue has been well documented, caused as it has been by years of mismanagement, poorly managed subsidies, and worse. Current outstandings to the generation sector have crossed Rs 1,50,000 crores, of which over Rs 8,000 cores is owed to the renewable energy sector. Multiple industry bodies have been sending missives to the government to help out, with some claiming that these delays could even push cash stretched developers to bankruptcy. But actual progress has been very slow.

A report by Vibhuti Garg and Kashish Shah, of the Institute of Energy Economics and Financial Analysis, called“ The Curious Case of India’s Discoms- How Renewable Energy Could Reduce Their Financial Distress” describes the discom issues well. To quote, ”The absence of competition, unsustainable cross-subsidies, economically inefficient tariff setting processes, expensive thermal power purchase agreements (PPAs), and a lack of modern technology and infrastructure development are adding to discoms’ losses.”.

The report, among other action points, proposes the shut down of end of life, ageing plants. Or avoiding entering into anymore long term thermal power contracts for high cost power. Both points have merit. If we take 1985 as a cut off year, then the total potential for retirements here will be close to 35 GW ! The Central Electricity Authority, taking a cut off of 25 years, has actually retired, in the March’ 2016 to May’ 2019 period, 30 different units spread across 26 projects using inefficient coal / lignite based thermal power units. These units were rated for a total 8470 MW generation capacity . In addition, 810.94 MW capacity Gas based/ DG Set units have also been retired since Sept.’2015 to May’ 2019. Besides these, it does consider further retirements totaling 25252 MW in the period 2022-2030 in its 2029-30 projections of energy mix. Keep in mind that all these are mostly public sector units. There is significant scope to create capacity for new power demand by finding ways to retire inefficient diesel and thermal units in India’s massive captive power sector too, variously estimated at 50 GW capacity. Though, more dependable power supply from the central grid will be the surest way to ‘retire’ this particular capacity. An unexpected challenge to a faster phase out cycle is the fact that among all the fossil fuels, the only one we have in abundance is coal. That is the reason that even on date, almost 60 GW of thermal projects stay on the planning horizon with states having a vested interest in ‘exploiting’ their coal reserves to their full ‘potential’.

That is unconscionably high, considering the cost, impact and sustainability of coal fired power versus renewable energy today. The wide domestic availability of coal decided not only our high focus on thermal power, but today, even plans to phase out thermal energy have to consider its impact on coal mining in India. Barely any effort has been made to explore options beyond mining, including letting the coal stay underground in some of the more eco-sensitive zones, including virgin forests. A recent decision to open up 40 more sites for mining have been uniformly condemned accordingly, with barely any impact on the decision. Like large Hydro projects with their questionable delivery and performance record, our addiction to coal powered energy is not just hurting our present with the pollution and damage it causes, but also our future, by suffocating the growth of renewable energy. In effect, this has become a political decision today, the worst way to delay any decision in a noisy democracy like India. A public sector firm, Coal India Limited, with a Rs 1,40,000 crore turnover and its 285,000 employees accounts for over 80 percent of the mined coal in India, spread across multiple states. It also serves as a very useful cash cow for various interests. It might sound big, but today that number is no longer as important or large as say 20 years ago. The coal mining sector, according to TERI, accounts for less than 0.7 percent of the economy today. That makes a transition away from coal, in a period much shorter than the over 30 year period envisaged in plans currently, eminently possible with the right political will and negotiations.

Challenge number two, which has taken many by surprise, has to be the sheer failure of electricity demand to keep up with capacity additions. The demand issue is not a new one, as through most of 2019, it was already sending warning signals. But the Covid 19 pandemic has simply taken it to a whole new level. Where 2019 demand numbers were being compared to the higher 2018 figures, 2020 demand numbers are not expected to match even these lower numbers from 2019 now. In simple terms, chances are that demand will be subdued right till 2021, assuming that the recovery from the pandemic picks up pace. In fact, a recent report from TERI posits that pre-covid demand projections could be hit by 7 -17 percent till 2025, due to the Covid impact, which is still being measured. This, when power demand was projected to triple by 2040, on 2015 numbers.

That is a huge blow to renewable energy plans. Not only has this demand slowdown/contraction already put pressure on discoms to curtail renewable purchases, it has absolutely frozen progress on signing of PPA’s/PSA’s for fresh projects that have been tendered out in 2020. This will lead to a chain of delays, that can potentially impact capacity creation right upto 2022 and beyond now. As mentioned at the start here, almost 8 GW of renewable energy projects are stuck at the LOA stage, with no PPA signed between SECI/NTPC with relevant discoms to move ahead to stage two. The demand issue is an even bigger problem to solve, thanks to the huge idle capacity of thermal plants that already exists, like a ticking time bomb for the banks that have lent money to them. Consider this. Of 33 stressed ‘assets’ or projects that have been taken up for some sort of resolution, worth 40 GW of capacity, 14 were actually ‘resolved ‘ in the past 12 months. But now, even these 14 projects with a size of 16,500 MW are struggling to meet debt servicing obligations due to inadequate cash generation, caused by both low offtake, and delayed discom payments. Reviving this massive basket of projects, with a sunk investment of over 200,000 crores potentially, is already leading to demands for extending PPA benefits beyond the original period, or retaining high tariffs, or finally, allowing them to sell merchant power at the energy exchanges in the country. Except for the last, each of the options is an indirect blow to renewable energy providers seeking to get a share of the stagnating demand pie. The saving grace is that despite all these challenges, demand , as expected is the easiest of the challenges to manage, thanks to the sheer size and options India has.

So there is work that has already been done, besides what can be done to revive demand. What is done is that in the last three years, almost 26 million Indian households have been connected to the electricity grid for the first time, thanks to the Saubhagya initiative launched by the government of India in October 2017. This cohort of new users, along with rising incomes of the rest of the consuming class, can push up power demand by a clear 5 percent, as they acquire more household appliances. Add the push for 24X7 power to all, and you have the base for a steady driver of electricity demand growth.

The second big move that needs to be done is electrifying the transportation sector. While many policy announcements have been made, actual movement on the ground has been slow going. But the picture here is promising, as the process here seems to be on an irreversible path. From the many metro systems across the country, to the pledge of the railways to go all electric by 2025 or earlier, to the revised and progressive  EV policies in key consuming states like Delhi, momentum is truly building up. As this electrification spreads to bus transport and personal transportation like two wheelers and four wheelers, the benefits will be enormous for demand as well as renewable energy. A strong backer for this is Union Minister Nitin Gadkari, who holds the road transport portfolio, among others. With a strong reputation for execution of large projects, Gadkari is a major votary for electrifying the transportation sector, to take care of surplus power production.

The final big move would be the green energy corridors, envisaged as grids dedicated for agricultural use, powered exclusively by renewable energy. Till a year back, July 2019 to be exact, Power Minister R.K. Singh, while replying to a question in parliament, had stated that India has added 10261 MW of renewable energy capacity to the Green Energy Corridor. According to the numbers provided, Madhya Pradesh has seen the maximum growth in renewable energy capacity with nearly 4593 MW of new renewable energy capacity added to the ISTS under the project. The second best in the list is Karnataka with 1532 MW of renewable capacity and Rajasthan in third with 1100 MW renewable capacity added. The logic here, that in states that subsidise power for agriculture, the investment into renewable energy and transmission infrastructure for the green energy corridors, will easily pay for itself in 5-7 years, depending on the extent of subsidies saved once the corridors are functional.

The ambitious PMKUSUM scheme for solar water pumps (Pradhan Mantri Kisan Urja Suraksha Evam Utthan Mahabhiyan) is another initiative that can power this. Launched initially to support solar water pumps in off grid areas the PMKUSUM scheme has been expanded to target solar water pumps for 3.5 million farmers now, with the opportunity to supply excess power to the grid and earn too. IF executed well, this could be a huge driver of demand for power as well as solar at that.

Finally, we come to reason number 3.  is the sheer apathy of a large part of India’s political class to the environment. Or a greener future. In state after state, especially the leading industrialised states where action is most urgent, the political class borders between apathetic to resistant to any major change . It is this love for the status quo that has become the biggest challenge for further inroads by renewable energy. Can you recall any election being fought on a green issue? Yes, elections have been fought on say, the compensation paid for displacement due to large dams, or rehabilitation from natural disasters of the kind whose frequency is increasing every year. But none of our political parties is ready to commit to sustainability the way we should by now.

On the one hand, thermal power has created a web of incestuous links between the coal supply chain, plant owners, and calculation of fixed charges and cost plus margins, renewable energy, especially solar power has become a political minefield, seen as a pet project of the central government. Take just one example , the case of the 1320 MW power plant to be st up by Pench Thermal Energy , a subsidiary of Adani Power. It has signed a 25 year PPA with the MP Power Management Company Limited , for supply of 1230 MW of power. The agreement, the first thermal signing across India since the last such PPA in Kerela 5 years ago, was won with a reported bid price of Rs 4.79/unit (Rs 2.90/unit as fixed charge and Rs 1.89/unit variable charge), by Adani Power. Madhya Pradesh has already tied up about 21,000 MW through long-term PPAs even as its peak demand in 2019-20 was 14,886 MW. It is no coincidence that states which have signed up for contracted capacities in excess of actual demand have got some of the most stressed discoms too. Maharashtra and Tamil Nadu are two prime examples, with both signing contracted capacities that are over 40 percent over their peak demand.

At a time when even round the clock energy from renewable energy projects is available at under Rs 4, which will typically take far less than the 54 months the thermal plant will take to set up , these decisions are inexplicable. Worse, chances are, by 2025, thanks to lower storage costs the renewable costs will be even lower, while the thermal costs have no such future.

Political apathy has led to a steady build up of issues related to land acquisition for renewable energy projects. As of now, over 1.5 GW of projects have been cancelled by developers claiming issues related to land allotment, among other things. Close to 11 GW of wind energy projects face a similar predicament.

Not Ambitious Enough

The challenges we have outlined here might seem daunting, as they truly are, but the best ray of hope comes from the market. If allowed to function in a truly free market for energy, chances are, India too will move like the rest of the world towards renewable energy. We have just heard news of solar auctions in Portugal where developers have bid under Rupee one per unit for grid tied solar contracts, thanks to cleverly designed contracts. Or how coal has fallen from grace in the world’s largest energy market till recently, the US. No one predicted it, least of all the IEA, (International Energy Agency) whose 2006 prediction had expected coal consumption in the US to be 1267 million tonnes in 2030, and 1150 million tonnes in 2015. Well, consumption in 2020 is projected to be UNDER 400 million tonnes now, at 395 million tonnes. All driven by lower renewable prices, a conscious political move to discourage coal power, and consumer driven pressure to clean up.

As it turns out, coal production peaked way back in 2007, at 1023.3 million tonnes.

It’s time for India to aim for peak coal by 2025, and then, thanks to lower energy storage costs, higher efficiency and a further drop in renewable costs, a much faster transition to an energy mix that is truly renewable, and sustainable.