India's energy transition: The challenge with decision-making at a time of rapid change

04 Sep 2020
Mr Parul Kumar
Mr Bharath Jairaj

India has set ambitious targets towards the achievement of the dual goals of climate action and sustainable development through its nationally determined contributions and energy access commitments. As India starts a new decade of energy transition, it is an opportune time to assess where India stands in achieving its targets as well as to identify the key challenges being faced during this transition.

Energy transitions

As national and state governments determine their socio-economic and development plans, India's national and global commitments in the energy sector provide important guidance to policymakers. This article attempts to examine where India stands today in its progress towards achieving these goals, particularly in light of recent challenges in the sector. Along with the need for advancements in the techno-commercial realm of the electricity sector, it is also necessary to tackle the problems of policy uncertainty and acknowledge the specific challenges of specific states. The article examines how issues of governance in the electricity sector can be better addressed, particularly in India's federal context.

India's Energy Transition: Context- Setting

India's energy transition is characterized by its ambitious targets. By the year 2022, India seeks to provide all households in the country 24×7 power. By 2022, India also seeks to install 175 GW of new renewable energy (RE) in the country1. These national targets are aligned with India's climate commitments made at the 21st Conference of the Parties of the United Nations Framework Convention on Climate Change (UNFCCC), also known as the Paris Agreement, which came into force in November 20162.

Through this landmark international agreement, countries collectively committed themselves to the goals of strengthening the global response to climate change in the context of sustainable development and efforts to eradicate poverty3.

India in its Nationally Determined Contributions (NDCs)4 committed to three targets, which are to be achieved by the year 2030. First, by 2030, 40% of India's cumulative electric power installed capacity will come from non-fossil fuel-based energy sources. Second, India will reduce the emission intensity of its gross domestic product (GDP) by 33–35% (vis-à-vis 2005 levels). Third, India will create an additional carbon sink of 2.5–3 billion tonnes of CO2 equivalent (through additional forest and tree cover).

In a 2016 report looking at the "future electricity grid",5 World Resources Institute, Prayas (Energy Group) and others raised the issue of how policymakers in developing countries will find it increasingly difficult to make decisions in a time of rapid change in the energy sector. The report identified the following five key market trends impacting the energy sector in developing countries like India:

  • Unprecedented growth and cost improvements in RE sources
  • Improvements in new technologies and energy efficiency
  • Growing instability in fossil fuel supply and prices
  • Growing support to RE from governments and investors
  • Electricity generation by new and different entities6

These trends create uncertainty in the sector, forcing regulators, grid operators, planners, and electric utilities to contend with technology changes evolving at a rapid pace, while also balancing the conventional, pre-existing pressures to increase electricity access, increase the amount and reliability of the electricity provided, and improve the quality of services rendered.

Over the past few years, India has set itself ambitious targets for expanding its RE capacity, which has led to dynamic changes in the energy ecosystem in India comprising utilities, RE producers, and electricity consumers. This has also led to its own share of challenges, some of which we have played out in recent times. The current state of play in the energy sector and the resultant challenges are discussed next.

Status Quo and Indicators

Current RE Capacity

As of December 31, 2019, India had a total installed RE capacity of approximately 86 GW7. Of this, solar energy capacity was close to 34 GW (39%) and wind energy capacity was about 37 GW (about 44%)8. In 2019, about 7.5 GW of new utility-scale solar capacity and about 1 GW of rooftop solar capacity were added to India's solar capacity9. The states at the forefront of solar capacity expansion were Karnataka (2 GW), Rajasthan (1.7 GW), Tamil Nadu (1.5 GW), Gujarat (936 MW), Andhra Pradesh (917 MW), and Madhya Pradesh (651 MW).10 The total installed wind energy capacity increased by 2.4 GW in 2019, with Gujarat (1.4 GW), Tamil Nadu (650 MW), and Maharashtra (212 MW) being the leading states in wind energy.11

It is unsurprising that these states are leading the RE capacity additions in India, since south and west India have more RE potential – particularly solar PV and wind energy. Other states are still at early stages of developing their renewable energy capacity. This is important to consider as India seeks to add more RE capacity in the coming months and years. The question, therefore, is how much more RE capacity can the southern and western Indian states absorb versus how much RE capacity will other states need to add?

The national RE targets must be broken down into the specific contexts of different states based on their varied needs and constraints.

Slowdown in the RE Tendering Process

India's RE growth in the year 2019 was at the slowest pace in the past 4 years.12 There were several reasons for this, including the trends seen during the process of auctioning RE capacity. During the process of reverse auctions, when the auctioning agency sets an upper limit in the tariff for the project bid, developers are constrained to bid lower than the cap imposed on the tariff.13 As per one study, auctions worth 8.4 GW were under-subscribed by 4.4 GW in 2019, and this under-subscription was attributed to applicable caps on tariffs.14 On the one hand, tariff caps make the investment unattractive for the developer, and on the other hand, the resultant fall in the quantum of tendered RE capacity has an adverse impact on the overall RE capacity added in a year. It has been reported that the Ministry of New and Renewable Energy (MNRE) is contemplating a removal of such tariff caps, though there has not yet been any official announcement on this.15

Achieving the 2022 Target

The target of 175 GW has a deadline of the year 2022, which was recently clarified to be December 2022.16 Union Minister R K Singh has repeatedly expressed confidence that the target of 175 GW of the installed renewable energy capacity will be met by the year 2022 as planned.17 This statement is contrary to the projections by CRISIL, which estimates that India may have installed capacity of only about 104 GW by 2022, 42% short of the government's target of 175 GW.18 It has also been estimated that India will need about $330 billion in investments in the course of the next decade to meet its renewable energy goals.19

However, the Government of India remains confident that the 175 GW will be achieved by 2022. A statement by the Secretary, MNRE recorded in a recent Lok Sabha Standing Committee Report20 reflected optimism about not just achieving, but exceeding the target of 175 GW by 2022. This optimism is based on the roughly 31,000 MW under implementation and an additional 39,000 MW likely to be bid soon. Whether India will reach 175 GW as on December 2022 or not, there is no taking away from India's commitment to a significant non-fossil fuel-based energy future.

Challenges

Renewable Purchase Obligations as a Ceiling, Not Floor

One of the mechanisms for promoting the installation of RE capacity in India has been the stipulation of targets for a mandatory minimum purchase of a certain percentage of RE by utilities, which is known as a Renewable Purchase Obligation (RPO).21 While most states have struggled to reach their RPOs, Karnataka, a leading RE state, has been asked by its regulator to curtail further procurement of solar energy from large-scale projects.22 The RPO, which was meant to be a floor (minimum), is thus also being used as a ceiling (maximum). The decision to restrict RE procurement rather than enhance or exceed the RPO benchmarks has not sent out a positive signal for the growth of the RE sector in India's leading RE state.

The potential for RE capacity in India is not uniform across states. The southern states have shown themselves to be leaders in RE. In light of India's 2030 target of 40% of electricity capacity to come from non-fossil fuel sources, it is necessary that each state should try to reach this target on an individual level. RE-rich states such as Karnataka and Tamil Nadu will need to exceed the "average" given that states geographically located in areas with less RE capacity may not be able to achieve their individual targets. Aspiring for lower RPOs instead indicates that practical and financial difficulties continue to pose obstacles even for the RE-rich states.

Finance for the RE Sector is Not Easy

As per the PRAAPTI Portal, electricity distribution companies (DISCOMs) owed a total of Rs. 82,073 crore as outstanding amounts at the end of October 2019 to various generators, including RE generators.23 When DISCOMs face cash flow issues, this results in RE producers also facing a liquidity crisis. Public sector banks are hesitant to grant loans to RE projects, and not many private sector banks are forthcoming with loans.24 Additionally, the interest rate of existing loans to RE companies has also witnessed a rise in recent months.25 Industry specialists also point to the difficulties of raising funds from Centre owned financial institutions, such as the Indian Renewable Energy Development Agency Limited (IREDA) and the Power Finance Corporation (PFC), as well as the challenges of accessing foreign funds.26

Policy Uncertainty is Bad for the Economy

The section on legal systems and contract enforcement in the Economic Survey 2018–2019 emphasized the importance of policy certainty for the enforcement of contracts and for the rule of law.27 The value of the certainty of contracts and the importance of consistency and stability in rules and policy cannot be overstated in the energy sector in India. Some events in 2019 (discussed below) have shown how investor confidence can be adversely impacted when contracts and agreements are unilaterally altered.

When the possibility of the state reneging on or unilaterally changing the terms of a contract exists, it leads to an adverse impact on investor confidence as well as incurs additional costs (e.g., to pay unforeseen surcharges as well as costs for pursuing legal remedies), which had not been previously anticipated.

Further, since pursuing legal remedies requires time, business must proceed in uncertain circumstances. Performing contracts in uncertain circumstances also hinders future planning of the businesses.

Karnataka

In 2019, the Karnataka Electricity Regulatory Commission (KERC) took the decision to retrospectively levy a five-fold increase in wheeling and transmission charges on open access consumers in the state.28 Although the direction was ultimately set aside by the Karnataka High Court on the ground that KERC could not unilaterally alter the executed contracts,29 it sent out a negative signal to the industry, in addition to the expending of substantial legal costs by the parties to the litigation.

Andhra Pradesh

In 2019, Andhra Pradesh's decision to review all power purchase agreements (PPAs) with RE producers was another development that raised concerns.30 Protracted litigation in the state over tariff renegotiation also led to delays in payments by RE companies to their banks, mounting DISCOM debts, and an overall concern about RE investments in the state.31 After months of uncertainty, the Andhra Pradesh Electricity Regulatory Commission (APERC) in February 2020 directed the state utilities to procure power from RE producers to meet the state's energy needs and to honour the power purchase agreements that it had entered into, pending a final judicial decision on the ongoing dispute.32

This kind of policy uncertainty is bad for the economy. As the Economic Survey rightly notes, "This is a world of 'butterfly effects' and unintended consequences, where uncertainty is inevitable. As uncertainty exacerbates, the temptation to renege on contracts when the ex post outcome is different from the one expected ex ante, the ability to enforce contracts and the rule of law become critical to navigating an uncertain world..."33 Along with low tariff margins and tariff pressure, policy uncertainty in the form of retrospectively cancelling net metering and the failure to honour capital incentives have made it difficult for RE companies, particularly smaller RE companies, to survive.34

Similar concerns have been raised by RE companies over the uncertainty over import duties, particularly for solar cells. While the aim of the increase in import duties is purportedly to promote domestic manufacturing, the impact will be faced by solar energy companies in terms of higher costs.35 As India takes its next step towards a clean energy future, these challenges will need to be overcome.

Suggestions for Improving Sector Governance

Improve Data Collation and Sharing

In order to address these challenges and policy uncertainty in the electricity sector in India, the need for better and more reliable data is paramount. The energy sector in India encompasses a variety of institutions and bodies, with most of them having the power to collect data under different legislations.36 These should be harnessed in order to collect and make available relevant data on energy usage. Data on consumption by different sectors (industry, agriculture, households, etc.), captive power plants, open access energy procurement, and so on will be particularly useful in order to fill policy gaps and frame new regulations.

The organization and dissemination of data must be treated as a priority area by state agencies that have access to such data and the power to collect data.37 In practice, since it is predominantly the CEA that has the mandate to disseminate data, a heavy burden is placed on it to perform this function, a problem that is complicated due to its inadequate human resources and technical capacity, limiting its ability to perform such a function.38

Since India straddles the challenges of improving energy access and increasing RE on the grid, its energy profile continues to evolve. The challenges thrown up by this transition are also multifaceted and by no means stagnant. The data needs may span several metrics. For example, the data provided by the Saubhagya dashboard focuses on the number of households electrified.39 Yet, data on the quality and reliability of the supply of electricity (including the actual number of hours of supply) and the number of households disconnected due to defaults of payments after the provision of the initial connection are absent.40

Additionally, we require better and more nuanced data on the demand and consumption of electricity in order to formulate analysis on India's future energy requirements. Since many of the electricity connections serving rural households and agricultural consumers are unmetered, we do not know accurately how much energy is required for these consumers and how much is being consumed.41 Linking this back to India's RE targets, the MNRE has set a target of 25,750 MW of solar energy through the Pradhan Mantri Kisan Urja Suraksha evam Utthaan Mahabhiyan (PM KUSUM) scheme and 18,000 MW under the new Solar Rooftop scheme by 2022. Improving the manner in which the data is collected and shared in the public domain will help us identify and overcome barriers and track progress.

Further, in order to improve the accessibility and dissemination of data, it has been suggested that the data should be made available in easyto-use formats such as .xls and .csv.42 Further, workshops among various data agencies to harmonize and reconcile the collected data and exchange ideas on best practices are also recommended.43

Improve Centre–State and State–State Coordination

As mentioned above, the Central Government has laid down certain national goals in the field of energy, including in pursuance of its obligations under the Paris Agreement. It is not always clear how these national goals can be further broken down into achievable targets for individual states. A recent development is the announcement of a Renewable Energy Promotion and Facilitation Board, with the intention of minimizing risks for developers in the RE sector. It may be a good initiative in this regard.44

The Board seeks to act as a liaison between developers and various state governments and authorities and to coordinate actions with various financial institutions. Though it is yet to be established, the Board can indeed play a significant role in helping states tackle specific barriers and roadblocks to RE implementation.45

In addition, there is much that can be achieved through more sharing between states. As emphasized above, the RE capacity of India's states have varied potential and are at different stages of development. Instances such as Karnataka's pushback against the extant RPOs indicate that even states with sizeable RE potential may not have adequate incentives to expand their RE capacity beyond a certain threshold.

At the same time, other states with lower natural potential for renewable energy and at a less advanced stage of capacity development may not be able to meet the goal of enhancing their RE procurement.

For example, mechanisms to allow RE-rich states to sell their RE to other states may be worth exploring. Rajasthan's Solar Energy Policy 2019 introduced a cess of '2.5 lakh per MW per year for selling solar power within the state and '5 lakh per MW per year for selling power outside the state.46 Although, in principle, the power is being sold to other states at a premium, selling solar power to other states can help them meet their RPOs while at the same time compensating Rajasthan for the utilization of its energy infrastructure in the form of land and wires.47

Done right, RE can provide multiple development benefits: the creation of jobs,48 reductions in local air pollution, enhanced livelihoods, more inclusive decision-making, energy security, employment, economic growth, and so on. The sharing of lessons between states will help create a larger pool of policy and regulatory interventions to choose from.

Improving Transparency, Accountability, and Participation in the Sector

India's energy transition efforts have focused on creating enabling environments for investors and RE developers and not necessarily on building institutional capacity, developing robust stakeholder processes, or enhancing sector transparency. As India considers the next steps in the energy transition, there is an urgent need to reinfuse these processes with public interest by seeking the opening up of these processes to a wider range of voices and drawing greater attention to issues such as affordability, service quality, and environmental impacts.

Another acknowledged challenge in the electricity sector is the limited capacity in key government and regulatory agencies, particularly at the subnational level. Many of the issues discussed above highlight governance challenges in the sector. In addition to ensuring 24x7 electricity for all and increasing the contribution of clean and renewable energy in the energy mix, sector decision-makers need to ensure financial viability of the sector while making decisions about investment priorities, resource mix, and pricing of electricity. The workings of these institutions — policymaking, planning, and regulatory — are often complex, and opening the decision-making processes in these institutions to a broader set of stakeholders could reduce the inefficiencies, short-term gains, and suboptimal decisions that often result.

On the demand side, there are an increasing number of electricity consumers who want to be part of the clean energy transition that includes local renewable energy generation in combination with energy conservation and efficiency measures. The success of India's residential rooftop solar programme will, in part, depend on how decision-makers engage with consumers.49 Some of the examples discussed above demonstrate that important decisions in the energy sector could benefit from more participation and support from a wider set of stakeholders.

Conclusion

Even though India's energy goals are predominantly defined at the national level, its energy transition will take place differently in different states. Some states face greater capacity challenges to adopt and implement the national level clean energy and energy access commitments than others. In addition to capacity challenges, technical challenges remain with integration of renewables in the grid – changes in consumer behaviour, electricity generation ownership patterns, and institutional arrangements raise questions on consumer tariff design and utility revenue models. Regulators and policymakers will need to find the right balance between stability and flexibility in this era of declining costs of renewables and improved performance of new technologies. Additionally, the policymaking for the future should have greater robustness and certainty in order to boost investor confidence.

In conclusion, there is no doubt that ambitious RE and climate targets have pushed India well on its way to a clean energy future. However, more needs to be done to help India achieve its potential. As this article discusses, some of these efforts are technical and financial, while others will need focused efforts to improve the governance of the sector.

Parul Kumar and Bharath Jairaj work with the Energy Programme of the World Resources Institute India.

This article was first published in Energy Future April-June 2020 issue

Footnotes

[1] "Bringing 24x7 power to all by 2022", The Hindu BusinessLine, Sept 28, 2017
[2] India's Intended Nationally Determined Contribution, UNFCCC. See also Report of the Expert Group on 175 GW RE by 2022, NITI AAYOG (Dec. 31, 2015).
[3] Status of the Paris Agreement, UNITED NATIONS TREATY COLLECTION.
[4] Article 2 of Paris Agreement, UNFCCC.
[5] India's Intended Nationally Determined Contribution, UNFCCC
[6] CEA Monthly Report (December 2019)
[7] CEA Monthly Report (December 2019)
[8] India installs 7.5 GW of utility-scale solar and 2.4 GW of wind in CY2019, JMK Research and Analysis (January 17, 2020)
[9] Ibid.
[10] Ibid.
[11] Joshi and Bilal Abdi, "India's renewable energy generation registers lowest growth in 4 years," ET Energyworld (January 17, 2020)
[12] Priya Sanjay, "MNRE Mulls Removal of Tariff Caps for Solar and Wind Tenders," MERCOM India (February 11, 2020)
[13] Ibid.
[14] Ibid.
[15] Ministry of New and Renewable Energy, Clarification 4/9/2019-EFM dated October 3, 2019
[16] "India on track to achieve 175GW of renewable energy by 2022: Government", Economic Times (October 16, 2019)
[17] "REturn to uncertainty," CRISIL (October 06, 2019)
[18] "Can India realize its ambitious renewable energy targets?"
[19] "[W] e have set a target of 175 GW of installing Renewable Energy capacity by 2022 in 2015. In 2015, that looked very ambitious. Out of 175 GW, 82,580 MW have already been established and 31,000 MW is under implementation. Other than this, 39,000 MW is under bidding. If we add all these capacitities (sic) which is under implementation and underbidding and already implemented, so we reach a figure of 152.85 GW. So, with another 23 GW left, we are confident that by 2022, we would not only achieve the target but we would exceed the target." Source: Standing Committee on Energy (2019-20), Seventeenth Lok Sabha, Ministry for New and Renewable Energy, First Report (December 2019), http://164.100.47.193/lsscommittee/Energy/17_Energy_1.pdf
[20] See Section 86(1)(e) of the Electricity Act, 2003, and Clause 6.4(i) of the National Tariff Policy, 2016.
[21] https://www.livemint.com/industry/energy/karnataka-puts-a-stop-on-new-solar-energy-projects-1556771536456.html
[22] Payment Ratification And Analysis in Power Procurement for bringing Transparency in Invoicing of generators (PRAAPTI)
[23] G. Seetharaman, "Why India may not achieve its 2022 clean energy target," Economic Times (November 03, 2019)
[24] Ibid.
[25] Mandvi Singh, "Solar power: In a slump India's booming," Down To Earth (January 07, 2020)
[26] "The economic model described in the blueprint is explicitly about creating virtuous cycles in an evolving, complex landscape. It is about investment, risk-taking and innovation in an environment that is inherently uncertain and unpredictable due to a range of factors from changing technology and consumer preferences to geopolitics and economic cycles…" Source: 'Chapter 01: Shifting Gears: Private Investment 01 as the Key Driver of Growth, Jobs, Exports and Demand', Economic Survey (2018-2019), https://www.indiabudget.gov.in/economicsurvey/doc/vol1chapter/echap01_vol1.pdf
[27] Saumy Prateek, "Karnataka Court Quashes KERC Order Increasing Wheeling Charges for Open Access Power," MERCOM India (March 20, 2019)
[28] Ibid.
[29] Kuwar Singh, "A timeline: The Mexican standoff in Andhra Pradesh, India's renewable energy badland", Quartz India (November 25, 2019)
[30] "Policy flip-flops will have renewable energy target missing by over 42%: Report", Economic Times (October 06, 2019)
[31] "AP power regulator snubs discoms over renewable energy obligations", Business Standard (February 10, 2020)
[32] 'Chapter 01: Shifting Gears: Private Investment 01 as the Key Driver of Growth, Jobs, Exports and Demand', Economic Survey (2018-2019)
[33] Vikas Srivastava, "Rooftop solar players shut shop as going gets tough", Financial Express (July 19, 2019)
[34] Utpal Bhaskar, "Energy firms cry foul over hike in customs duty on solar equipment", LiveMint (February 3, 2020)
[35] See Section 3, An Assessment of Energy Data Management in India, Prayas (Energy Group) (October 2014), at 7-8
[36] See Section 3, An Assessment of Energy Data Management in India
[37] Supra note 35, at 23.
[38] Saubhagya Dashboard
[39] See, for example, Sreekumar et al, "100% rural electrification is not enough", Hindu Business Line (March 26, 2019)
[40] See Bhaskar Tripathi, "Why is India unable to provide 24x7 electricity despite building more power stations?", Scroll (June 23, 2019)
[41] See supra note 35.
[42] Supra note 35, at 25.
[43] Centre to set up renewable energy board to cut developers' risks By Sarita C Singh & Shashwat Mohanty, ET Bureau
[45] Shreya Jai, "Rajasthan levies Rs 2-5 lakh cess on solar projects, registration fee up 5x", Business Standard (December 10, 2019)
[46] "Rajasthan revises developer contribution in solar policy", Financial Express (December 24, 2019)
[47] Bharath Jairaj et al, "India's Renewable Energy Push: A Win-Win for Job Creation and Electricity Access", World Resources Institute Blog (November 22, 2017)
[48] Amala Devi, et al, "Here Comes the Sun: Residential Consumers' Experience with Solar Rooftop in 5 Indian Cities", World Resources Institute, 2019
[49] Bharath Jairaj et al, "Future Electricity Grid", World Resources Institute, 2016
[50] Ibid

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Renewable energy
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