India’s Ambitious Policy to be a Power House of Renewable Energy

India’s economy has been a leader among developing nations, with gross domestic product (GDP) growing at 6.9 per cent between financial year (FY) 2012 and FY 2018. Energy and electricity demand has grown along with the economy and India now has the third-largest electricity grid in the world, with a gross installed capacity of 344 gigawatts (GW) in March 2018 (the end of FY 2018).

Nonetheless, with India’s population of about 1.4 billion people, the grid supplies just under 900 kilowatt hours (kWh) of generation per capita (FY 2018), which is one-third of the world average and 14 times less than average U.S. consumption. In addition to low average consumption, approximately 32 million homes still lacked electricity connection as of April 2018.

Indian government, however, had ambitious plans to connect all homes to electricity by 2019. India believed that this could be facilitated through the installation of Renewable energy (RE) infrastructures.

It is true that RE capacity has been growing rapidly in India with wind and solar accounting for 65 per cent of overall power sector. However, RE is not growing fast enough to meet incremental power growth; coal remains the residual source of capacity addition and generation. RE was only 6.6 per cent of gross generation in FY 2017, rising to 7.8 per cent in FY 2018. India’s share of RE generation in 2017 was comparable to the United States and even China (wind and solar only), but in Costa Rica and a number of countries in Europe, wind and solar have an electricity generation share measured in tens of per cent.

The Indian government, before signing of the Paris climate agreement had announced ambitious renewable energy targets that were aimed at quadrupling that country’s RE capacity between late 2014 and 2022, to 175 gigawatts (GW).

This drew the attention of the world given India’s relatively small RE base. This target also implied an annual growth of 25 per cent-a build out rate even faster than China’s, which has been seen as the world’s leader in deploying RE.

However, analysts pointed to some political and economic contradictions and suggested that this plan might be difficult to achieve. At the centre of India’s contradictions were two core facts.

The first fact was that though there was a vibrant approach regarding potential investment, there were certain unresolved aspects. This has now come to the forefront because of the COVID pandemic and its economic repercussions.

Foreign capital has not been rushing in, as expected. The functional difficulty has been enhanced thanks to costly foreign currency hedging and wariness about securing contracts and steady payments. It is also becoming evident that RE cannot yet compete with most existing coal-fired generation, which remains the dominant source of power in India. Falling RE costs have generated discussions of “grid parity”-an imagined moment when RE might be able to push coal off the Indian grid. It is becoming clear that such a moment is still far in the future when one includes the full costs of integrating RE into the grid. Energy economists have noted that the best performing RE systems, pertaining to the cost of integration, are competitive with the most expensive new coal projects, but not with existing coal plants.

It has also been found that another key challenge is that India’s grid and utilities are weak. The electricity distribution companies (DisComs), almost all owned and controlled by state governments, play central roles. Most DisComs are struggling financially in ways that can lead them to delay payments, renegotiate power purchase agreements (PPAs), or avoid signing new PPAs. Consequently, it is being felt that the difficulties of integrating RE into India’s power grid will worsen as RE’s share of generation increases, causing disproportionate strain on states rich in RE resources. Other sources of generation-notably coal-will then need to back down to accommodate rising yet variable RE generation. RE integration would be easier across larger balancing areas within the grid, but that approach would require substantial investments in long-distance RE-centric transmission, which have been limited so far.

It may be noted here that such a factor had been overlooked earlier. This has now become even more evident after the economic effects of the current prevailing pandemic.

In addition, many have also raised the question of working a better energy storage capacity. It has become very clear that India, to implement its plan will require massive new storage capabilities at acceptable cost by the early to mid-2020s. However, till now, a roadmap in this regard appears to have not been completed.

Despite these facts, the Indian government has repeatedly emphasised that its RE goals are the core of its energy policy. This insistence remains despite the interesting growing evidence that India does not need to meet its RE targets to achieve its goals under the Paris climate agreement. The opposition political parties are now beginning to give attention to this.

However, the Indian central government believes that RE is a suitable vehicle for building new industries and rewiring investment incentives in the power grid. This belief has partially resulted from the positive experience of what Prime Minister Narendra Modi achieved when he was Chief Minister of Gujarat, a pro-business state in India that has became an inspiration for private sector-led shifts to renewable and cleaner power, not to mention an improved electricity grid.

It needs to be mentioned that up till now RE’s impact on coal in India has been relatively limited. Coal remains the dominant supply source. Economists have also remarked that this is likely to grow at approximately 4 per cent per year in terms of generation through 2030– a high growth rate in absolute terms, but lower than the past.

Within this context, one needs to laud the central Indian government for their goal with regard to RE. However, at the same time, they might need to be more proactive in terms of creating the requisite political, policy, and regulatory conditions that allow those goals to become reality.

Some of the Indian States have not openly agreed with the central government’s plan of action. They have pointed out that high RE growth will in all likelihood mean high costs, especially when factoring in the impact on the rest of the grid and also the post-pandemic scenario.

Similarly, some of the States, might have the central government’s RE ambitions, but still do not have agreed, as yet, Renewable Purchase Obligations (RPO) that can add up to the national targets.

A detailed analysis on Indian coal demand through 2030 by Brookings India has suggested a total coal growth inclusive of industrial use of approximately 3.8 per cent of generation capacity. This has raised some scientists to point out that the question today is not one of sufficient energy, but of energy available at the right time and place with the right characteristics, such as ramping and predictability. It has also been remarked that RE is sometimes disruptive in a power system designed for large, centralised supply.

Consequently, as in Europe, China and Canada, it has been observed that in the future equation, growing RE’s share of generation will require institutional and regulatory actions to reduce the cost of grid integration. New market incentives will also be needed to create the right types of supply based on location, seasonal or daily availability, and ramping capabilities. Particularly important will be the need to focus on the DisComs, which are a weak link in the existing system and quite vulnerable to disruption.

It may be mentioned here that normally the highest paying commercial and industrial customers are among the biggest investors in rooftop solar resources. In Bangladesh there is a growing focus on them. A bigger push toward RE by these important customers could accelerate the downward spiral of DisCom finances.

The world is watching India’s transition to cleaner energy. Many are ready to support the growth of RE, particularly at the expense of coal. However, one needs to analyse India’s RE ambitions not in terms of specific targets and numbers, but broader trends. As in Canada and Republic of Korea, holistic policies will help to accelerate the transition.

One needs to point out here that the share of hydropower, prized for its flexibility, has decreased in India due to social concerns over land. India has approximately 25 GW of gas-fired capacity, but the plant load factor (PLF) for these facilities is very low due to high gas prices. Government policies have also continued to prioritise gas as a feedstock, especially for fertilizer production, and the economic value of gas is higher in non-power uses. Most gas capacity is base-load oriented combined cycle technology, which is not ideal for fast-ramping or fast-starting generation. Overall, lack of such nimble generation to balance RE is a substantial challenge.


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