India is an ideal market for renewable energy. The country is immensely energy hungry but has a supply shortage: It has coal, but of low quality. There is hardly any gas or oil. Importing fossil fuels is difficult and increasingly expensive. At the same time, it has a vast potential for generating power from the sun, from wind, from small hydropower and from biomass. And yet, according to a new study by Pew Environment, its investments into renewables have grown by only 2% on an average over the last five years, compared to a GDP growth of between 5-10% and a growth in electricity generation capacity of between 4-10% over the same period. As a measure of its GDP, India’s investment intensity into renewables is less than 0.10, compared to the US’s 0.22, China’s 0.41 or even South Africa’s 0.82. Why is India’s renewable energy sector underachieving?
- Bureaucracy and a lack of dependable and transparent policies are holding back investment
- Renewables in India are mid-way in transition towards becoming mainstream, non-subsidized energy supply options. Corresponding regulations are still in the making
- In the long-term, India will, by default if not by design, be one of the most important markets for renewables
Today, India has 30 GW of installed renewables. The majority of it comes from wind (18 GW), followed by small hydro (5 GW) and solar (2 GW). In wind, India was an early mover, with significant growth already in the early 2000s. However, the market has now slackened. Solar, the technology favored by politicians in the last years, has grown fast from a very small base in 2010 and 2011, but has stagnated since. The highly ambitious targets of many manufacturers and project developers have not been met. There is a sense of soberness in the market.
In 2013, India was only ranked 8th with respect to new renewable capacity additions. Even in a field such as distributed solar power – which would be so ideally suited to Indian conditions (weak grids and high insolation) and needs (power deficits and rising tariffs), India is only 11th. (See two charts by Pew Environment, below.)
There are three main reasons for India’s underperformance. They relate to and enforce each other. At the most immediate, a key challenge is the policy process. Renewables in India are still driven mainly by some kind of government support, whether in the form of tax incentives, capital subsidies, feed-in tariffs or certificates. There is an excessive focus on bringing down tariffs through auctions. This has resulted in below-par quality execution and plant performance, which has in turn affected returns and investor and banker confidence.
In addition, many programs are not well managed, putting off investors and slowing down the market as a whole. Examples are: the capsized Renewable Purchase Obligations (RPO) and corresponding Renewable Energy Certificates (REC) schemes or the non-availability of actual funds for the distributed solar capital subsidy scheme. Some policies especially at the state level were simply not well thought through initially: they are delayed, changed too often or simply not feasible. The Tamil Nadu Solar Policy is an example. This condition has been exacerbated by the distorting effect on policies of the current election season (general elections are due in April/May 2013). In many ways, the shortcomings in the renewables policies are shadowed by the energy sector as a whole, which has come to a grinding halt in the last two years.
Project developers can be faulted, too, in focusing on short-term gains and attempting to extract above market returns by trying to combine different incentive schemes. Too many of them are running after improbably promising policies rather than focusing on the fundamentals. And too much running without results has dampened spirits.
A more systematic problem is the lack of a strong innovation and finance ecosystem in renewables in India. Despite that fact that the country has installed 30 GW of solar power already, the economic base is slim: manufacturers of wind turbines and solar cells and modules are struggling. Investment into R&D is far too low. There are too few academic centers of excellence researching into materials, applications and business models. Innovation in infrastructure finance is non-existent. Very few renewables companies have tapped into the stock market. Venture capital is scarce – as are companies to invest into. This could be very different: China has built manufacturing champions that are increasingly innovative. Germany has an excellent landscape of specialized companies interacting with universities and politics to build new solutions. The US has many innovative renewables start-ups and the venture funding to give them a chance to become successful. Without a strong ecosystem, even if the market picks up, it will be non-Indian companies that capture most of the value.
The third reason, why the Indian market is stagnating, is that renewables are currently stuck between two very different worlds. In the old world, renewables were thought of as specific technologies, worthy and in need of government support. The government would set targets for them and provide policies and incentives to reach them. In the new world, created by falling costs of renewables and rising costs of fossil fuels, renewables are just another energy source. They compete directly with other sources of energy. However, they are different in two crucial ways. Firstly, some of them (especially solar) can be deployed in a distributed manner, near the point of consumption. Secondly, they are mostly intermittent sources. Both factors have a large impact on the management of the grid. This is actually part of a larger, global trend as the below graphic from McKinsey shows:
In India, the trend is accentuated by the fact that there is a deficit of power. 300 million Indians do not have access to grid power and there are 60 GW of installed diesel back-up systems. Recent wind and solar policies were affected by this transition: it was unclear how much (if any) support these technologies still need and it was unclear under what rules they should be able to use the power grid. Net-metering and open access policies are developed and revised. Technical information on the grid’s ability to sustain renewables is often lacking. Utilities, used to the comfortable life of a monopolist, are skeptical about a massive privatization of the power market that renewables promise to bring. At the same time, the benchmark power and diesel prices are unpredictable as they are, at least in the short run, driven by political rather than commercial considerations.
While uncertainties about regulations hold renewables back, their large-scale adoption seems inevitable and only a matter of time: utilities in most Indian states fail to provide enough reliable power to their customers and the economics of renewables are becoming more favorable by the day. If not by design, then by default India will become one of the largest markets for renewables.
Tobias Engelmeier is the Director at BRIDGE TO INDIA.