India’s renewable energy opportunity

During his second official U.S. visit last week, India’s Prime Minister Narendra Modi chaired a roundtable event on renewable energy in California. Attended by U.S. Energy Secretary Ernest Moniz, CEOs of top energy companies, investors and academics, the event was an opportunity for PM Modi to emphasize India’s commitment to generate 175 gigawatts of clean energy by 2022.

Renewable energy has been a focal point of the Modi government’s agenda since it came to power last year. PM Modi has pledged to create cost-effective infrastructure in order to reduce the country’s dependence on fossil fuels. He has highlighted the importance of foreign investment in the sector on many foreign trips including in the U.S. last year, in Germany and in the United Arab Emirates.

The government’s recognition of the need for renewable energy stems from the fact that while India’s per-capita energy consumption is only one-fourth of the world’s average, more than 300 million Indians still lack access to electricity – this, despite the country’s massive and fast-increasing $150 billion energy import bill. In the context of this ever-growing demand and over-reliance on coal-based thermal power, renewable energy has emerged as an under-utilized alternative.

Renewable energy currently accounts for 13% of India’s total installed capacity. The government aims to increase renewable energy to 40% of India’s capacity by 2022. To meet this goal, India will have to produce 175 gigawatts of renewable energy (100 gigawatts from solar and 75 gigawatts from wind and biomass) in the next seven years. These ambitious targets are critical to India’s sustainable growth story and will help strengthen India’s position in the upcoming climate change discussions in Paris this December.

Government initiatives

Financing has traditionally been one of the biggest roadblocks to India’s energy sector. Distribution utilities, weighed down by heavy losses arising from inefficiencies and theft, are unable to raise funds. The government has taken several innovative measures to tackle these issues and promote clean energy.

India is one of the few countries in the world to have introduced a carbon tax. This will reduce borrowing costs and help extend support for foreign loans by leveraging the National Clean Energy Fund. Renewable energy has also been deemed a “priority sector” by India’s central bank, and financial institutions have already made a commitment to fund renewable energy projects totaling 78 gigawatts. The government has opened up the energy generation and distribution sector by allowing 100% foreign investment.

Apart from these initiatives, the government is also undertaking demand side interventions. The Ministry of Renewable Energy is engaging with popular e-commerce platforms to convince them to sell solar energy products. The ministry also offers assistance to consumers setting up solar rooftop installations.

Industry response

The renewable energy sector has seen a flurry of activity in the past year – overseas investors are increasingly looking to India and the government is expecting an investment of $250 billion in clean energy projects in the coming years.

SoftBank, along with Bharti Enterprises Ltd and Taiwan’s Foxconn Technology, will invest at least $20 billion in solar energy projects in India through a joint venture, SB Cleantech Ltd. U.S.-based SunEdison Inc. also plans to establish a joint venture with Adani Enterprises Ltd. to build a $4 billion solar photovoltaic manufacturing facility. A subsidiary of Singapore-based Sembcorp Industries Ltd. acquired a 60% stake in IDFC Alternatives-backed renewable energy firm Green Infra Ltd. In addition, Russia’s OAO Rosneft, the world’s largest publicly traded oil company, U.S.-based First Solar, China’s Trina Solar and several private equity and utility firms are also looking for opportunities to participate in India’s clean energy sector.

Even though the government now allows 100% foreign investment in the renewables sector, overseas companies seem to prefer entering the market through joint ventures for the time being. One benefit of this operating model is that it allows companies to leverage foreign bank loans, which provide financing at lower interest rates than Indian banks.

Concerns and outlook

Developers are often faced with a different regulatory environment in each state that they operate in. This lack of regulatory clarity, coupled with the challenges around land acquisition, are huge barriers for clean energy projects, both in terms of high prices and negotiations with multiple landowners. For instance, solar companies require around five acres for each megawatt of electricity generated, plus additional land to build the infrastructure required to connect their plant to the grid.

As mentioned earlier, the power distribution sector also struggles to pay for the power it procures from generating firms. Currently, up to 94% of the total investment in the sector is driven by asset-based financing. The fall in oil prices may also delay the shift to wind and solar energy.

One of the most fundamental problems in India has been spurring demand at the retail level given the lower price, due to subsidies, of coal-based thermal energy. To ensure mass adoption of renewable energy sources, the price will have to be competitive with other energy sources. This change will require reducing landed costs through specific policies and incentive structures. In the absence of these policies, it will be difficult to generate consumer demand.

It is now becoming clear that India is finding it increasingly difficult to meet its growing energy demand for both household and commercial consumption through traditional forms of power generation. The country has abundant renewable resources – and extensive research is demonstrating that in the long term, the cost of renewable energy, including solar energy, will be lower than energy from traditional sources. Driven by the government’s commitment to the sector, favorable policies and innovative mechanisms will help tackle challenges sooner rather than later.

All things considered, the renewable energy sector presents bright and viable potential in India.