Shishir Asthana Moneycontrol Research
By all accounts Narendra Modi’s renewable energy targets looked ambitious, if not downright impossible when the Prime Minister first cared to throw his weight (and words) behind the dream project in 2014.
At 175 GW of renewable power by 2022, India was supposed to slowly wean itself from fossil fuels. The goal was two-fold: cleaner air and cheaper power. It was thought to be a win-win for the customer and the government alike. However, three years on, the project is hardly going anywhere. The shortfall in renewable energy generation for 2016-17 is a mind-numbing 70 percent. Policy logjam and poor demand have soured the dream. And, ironically, the project seems to have met its worst nemesis: the government itself.
Undercutting Business
Wind energy producers have been participating in a reverse auction which doesn’t guarantee them fixed power tariffs. Behind this industry-killing move are state governments which have been pushing for cheaper solar and wind power. Consequently, solar, along with wind tariffs have been declining over the years with new players hopping over each other to bid for the projects.
Early this year, Rewa Ultra Mega Power Project saw record low tariffs being set for solar power at Rs 2.97 per kWh. Wind power rates, too, have come down to Rs 3.46 per kWh. Both these rates are much lower than what thermal power bidding were carried out.
The question is are these rates sustainable? Common wisdom tells us that affordable prices will end up harming the industry in the long-term. Already wind power sector is feeling the pressure of low power tariffs.
Reports say that various state governments have asked wind power suppliers to terminate their existing power purchase agreements which were signed on a fixed-price basis. This measure asking the suppliers to match low prices, which were awarded through auction, will practically undercut their business. Gujarat, Modi’s home state, has refused to sign power purchase agreements for 230 megawatts (MW) of capacity and is now asking project developers to match auction rates, according to DV Giri, Secretary General of the Indian Wind Turbine Manufacturers Association who was quoted in The Mint.
Similarly, Andhra Pradesh, which was expected to see the highest level of wind power addition, has asked the power regulator to terminate all existing contracts with renewable suppliers next fiscal year itself -- four years ahead of the end date of 2022. Cut-price discounting by suppliers could hurt their livelihood.
These low tariffs which were touted by Power Minister Piyush Goyal in his tweets are soon becoming the reason for a slowdown and possible collapse of the sector.
Apart from tariffs, demand for renewable power is missing. RPO (renewable purchase obligation) commitment by states is not being fulfilled. This is a mechanism by which states are obliged to purchase a certain percentage of power from renewable energy sources. RPO is being implemented throughout the country to create demand for renewable energy.
A report by Mercom Capital on renewables says that if states had adhered to their RPO targets, installations would have reached 17,700 MW by end of FY17 as compared to 10,000 MW erected. Most states have defaulted on their RPOs, and this is the fifth year in a row. In the current financial year even Gujarat and Rajasthan have not been able to comply with state RPO.
So is this the beginning of the end of Modi’s short-lived dream? Returns for renewable energy producers based on very optimistic projections of costs are already at 14.20 percent, much lower than the 18-21 percent levels which saw many players jumping in the game. The returns are lower than those in the thermal sector where a conventional unit generates 15.5 percent.
Prices clearly do not have much room to go lower. The industry is in a standstill with GST adding to the confusion. Unless the government gets its act in place and creates a stable environment, renewables can remain a pipedream.
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