India Economy

Renewable energy needs hand-holding

Kameswara Rao | Updated on March 10, 2018 Published on September 17, 2017

Lack of state support for supply chain creates a regressive environment for manufacturers

The opportunities in the area of renewable energy at present should be a source of delight. India’s ambitious programmes — to connect the world’s largest un-electrified rural population, fully eliminate shortages, and shift to clean energy — constitute a big opportunity for local manufacturing.

But a regressive situation is in the making. Despite the ambitious agenda in renewable energy and several mega projects, manufacturers face market erosion due to a succession of setbacks — the Union Budget slashed tax benefits, putting off traditional corporate buyers; State governments’ clampdown on captive and third-party sales disappointed the large energy users looking to source green energy, and now, power utilities are reluctant to contract any more PPAs.

Manufacturers, trying to stay afloat, have cut prices aggressively to win the few available contracts, and are accepting stiff penalties for commissioning delays or for shortfall in operating performance. So, a turbine or panel sold today could still lose them money tomorrow.

Long-term policies needed

A few have taken to monetising their land banks or to bidding in auctions themselves to drive sales. New investors have quietly shelved plans to set up manufacturing. The damage is near irreparable to the ecosystem, which is extensive in solar (over three-fourth of a panel’s cost is from materials supplied by others) and harder to recover once decimated. As a result, the surviving main equipment makers will face higher costs and imports in future. What the policy makers must set right is clear-cut. The market opportunity, large as it may be, should be credible and governments must commit to long-term policies for it to stimulate manufacturing investment.

A declaration of faith, however heartfelt, will not move the market; instead, governments must demonstrate it through market mechanisms.

Many countries have understood this and demonstrated commitment for far longer than India. Germany used fixed feed-in tariffs and incentives to maintain a stable market for manufacturers and developers, moving to auctions only after the EU guidelines in 2015.

The US extended its production tax credits to wind farms repeatedly, now available to those starting operations even as late as 2020. Nordic governments offer renewable energy subsidies that run to 2030.

The largest solar market, China, is experimenting with auctions only now, still relying on feed-in tariffs, which despite a cut last year remain attractive (ranging from ₹6.32 to ₹8.27 per kWh). India may have fallen for its own promotion and prematurely turned off the state support necessary to develop the supply chain.

The buying decisions of renewable energy companies, many owned by financial investors — such as private equity, pension trusts, and sovereign wealth funds — are made with a global outlook. Still, when they had a reliable pipeline with annual purchases at regulated feed-in tariffs, they invested in local relationships with site owners and manufacturers. Now, with reverse auctions, bidders are forced to make the most expedient choices.

This is not to argue for a return to regulated tariffs. However, the industry, which has lost sight of both price and volume, is badly in need of a guide.

Ideally, procurement obligations should have been made compulsory when abandoning fixed prices. Otherwise, for manufacturers having to keep their factories running, every purchase enquiry turns into a fire-sale.

The recent change in the attitude of Chinese solar suppliers underlines this. They prefer to sell assured volumes (set by policy targets) to local developers, who continue to build despite cash flow risks (as support for feed-in tariffs is underfunded), than export to the Indian market that cannot assure a price or volume. Local manufacturing offers supply security that a capital-intensive renewable programme needs. This is not about employment or taxes (more jobs are created in its deployment than in production). A producer supplying to the local market invests in skills and technologies that can drive future adaptations to improve efficiency and field performance.

Good first step

The recent government notification to establish Indian standards (even if it’s equivalent to the global IEC standards for now) is a good first step that can lead to locally relevant standards.

Previous efforts to scale-up local manufacturing, from thermal to solar, have under-delivered. Also, attempts to carve a space for local producers, with domestic content rules, anti-dumping duties or capital subsidy programmes have backfired. The only time that it has worked (e.g., wind power, until recently) is when policies remained consistent over a long period.

We must start by setting right the basics that drive the market. A consolidated roadmap is necessary, whether this comes from strictly enforced obligations or from a comprehensive collation of perspective plans. This will aid, besides manufacturers, States and developers from bunching up tenders. Second, deregulation of retail supply will boost demand, because India is still an under-served market due to lack of access (rural areas), high prices (industrial consumers), and with emerging uses (urban transport). Third, system costs from transmission and intermittency can be cut by use of hybrids such as wind-solar or solar-pumped storage hydro.

These reform actions will improve the quality of information, size of the market and cost competitiveness. This, with stable government policies, will give confidence that market potential can be truly translated into sales, and get the factories rolling.

The writer is Partner and Leader – Energy, Utilities and Mining, PricewaterhouseCoopers

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