India is moving rapidly from direct government support for renewable energies to more market-driven mechanisms. Soon no support will be needed. This opens up the Indian market to growth in a completely new dimension.

• Accelerated Depreciation was the early choice for government support for renewables. It allowed the Indian wind power sector to take off
• Generation-Based Incentives came next. They attracted more international investment and improved efficiencies of renewable energy plants
• We are now entering the phase of Renewable Purchase Obligations. This will give the market more freedom to choose the most cost-effective way to meet renewable energy targets
• By 2016, renewable energies in India will be driven by purely commercial calculations as they become competitive with grid power on the power consumer side

This is a brief history of India’s renewable energy policies. In the mid 1990’s tax incentives kick-started the Indian renewable energy economy, leading to significant investments into wind parks by Indian taxpayers from companies to Bollywood movie stars. Turbine manufacturers, such as Suzlon, Vestas or Enercon started to move down the value chain and develop entire projects, which could be sold as tax-optimizing investments.

As a result of the focus on installed capacity, and since owners of the plants where not from the industry, generation of wind power remained below international par. At the same time, the government started early capital subsidy-based programs to support off-grid renewable energy generation. These were of limited success, however, as they failed to create attractive market opportunities.

From around 2007 onwards, India moved towards Generation-based incentives (for wind and solar power) and Feed-in-Tariffs. The National Solar Mission, which came into effect in 2010, was the first scheme that supported a renewable energy source across the country (prior programs were offered by India’s individual states) and based on a preferential FiT. The program – as well as the state solar policies of Gujarat, Rajasthan and Karnataka – limited the amount of capacity that was to be built.

While Gujarat offered its solar projects to investors on a first-come-first-served policy (with some financial and technical criteria), the other policies used a reverse bidding auction to determine which project developers would be allowed to benefit. During a time of rapidly falling solar component costs, these auctions successfully ensured that the distribution utilities did not overpay project developers.

There was some concern in the investor community that the reverse bidding process would reduce the price certainty in the market and thereby reduce international investor interest. These concerns have, however, proven to be unfounded as more and more international investors seek to enter the Indian market not only for solar energy, but also for wind, biomass and small hydropower. As professional renewable energy investors emerge, a slow shift has started towards higher quality project execution and limited (or even no) recourse financing.

The next step will be the Renewable Purchase Obligations (RPOs). All Indian distribution companies will thereby have binding targets for the amount of electricity from renewable energy they sell as a percentage of the total. The central government suggests a rise from 7% in 2012 to 15% in 2020 (with a sub-category for solar power of 0.25% in 2012, rising to 3% in 2020). The RPO quotas are currently in the process of being implemented on the levels of the states (under India’ federal system, they have the ultimate say), with some variations in percentages and timelines. There are still some doubts as to the enforcement (penalization) of the quotas, but most observers believe that the system will be up and running staring in the financial year 2013-14.

In addition to the RPO scheme, there is an option of trading Renewable Energy Certificates (RECs). These can be generated by renewable energy producers that do not receive a preferential feed-in-tariff and bought by “obligated entities” (distribution companies and large captive consumers) in order to meet RPO targets.

The RPO system will help India to complete the transition from installed capacity-based to more effective generation-based incentives. It will also be a significant step towards a free market for renewable energies by placing wind, biomass and small hydropower in direct competition with each other. (It is important to consider that India’s main goal is to produce as much power as cheaply and as reliably as possible – not to foster a specific renewable energy technology.)

The RPO scheme itself, however, will only provide a bridge between the current FiT-driven regulatory support scheme and the time when renewable energies will be able to compete widely with other sources of energy. Given that energy is seriously short in India and given the rising fossil fuel costs as well as the rapidly falling costs of renewables, the relevant “parities” will come within the next three years. Some technologies, such as wind, small hydropower, biomass and (a little later) CSP will compete with coal and gas in the grid. Others, especially PV will compete with end-user power prices. Diesel power generation (a 60GW installed capacity in India) is already significantly more expensive even than PV power generation and the breakeven with PV plus storage (to be able to replace back-up power units) is expected in the next two years.

By and large, the Indian government is very successful at encouraging the growth of renewable energies. While the focus is on power generation, the policies also allow for a domestic renewable energy industry to develop. Both factors together significantly increase India’s energy security. Where the policies are not yet strong enough, is with respect to de-central energy generation – which India’s underserved countryside sorely needs and which renewables could very well provide. Impending Telecom-tower legislation, net-metering (and a proper grid-code), financing support for projects and a wider scope for generation of RECs could help here.