State of play

Second wave dampens growth momentum

The devastating second wave of the Covid-19 pandemic abruptly slowed down India’s previously vigorous economic recovery. On May 8, 2021, India recorded over 391,232 confirmed cases, the highest for any country since the pandemic began. India was second in cumulative cases after the U.S. with almost 30 million cases. Despite India being the world’s largest vaccine manufacturer, just over 3 percent of the population have been fully vaccinated. However, there were positive trends. The vaccination rate has significantly accelerated in recent weeks, touching an all time high of 8.6m on 21 June. The second wave fell as fast as it rose. By June 22, 2021 the number of cases fell by 85 percent from the peak on May 8.

Though the second wave was far more lethal than the first, the economy did not suffer as much. The varied types of state level lock-downs allowed key economic activities to go uninterrupted. The Reserve Bank of India (RBI) is expected to maintain an accommodative monetary policy. The RBI is optimistic that the GDP will grow at 10.5 percent in the financial year ending in March 31, 2022 (FY22). As the prospects for economic revival brightened, many of the policies announced in the budget in February 2021 started taking shape, especially those for promoting investment in renewable energy (RE).

Development is priority: India’s hint to COP26

Prakash Javadekar, (ex) Minister for Environment, Forest & Climate Change (MOEF&CC) recently reiterated India’s well known position that it would demand equal distribution of carbon space and fresh finance at COP26 in Glasgow. Javedakar has also observed that developed nations cannot tell India not to use coal and that India will not raise its climate targets under pressure. The Minister for Coal, Mines and Parliamentary Affairs Pralhad Joshi has commented that India’s energy transition would not sacrifice growth and that coal was unlikely to be phased out in the next two decades.

These remarks suggest that India is not likely to pledge either a ‘net-zero’ target or a ‘peaking year’ for its emission ahead of COP26 in November 2021 even in the face of immense pressure from the USA and Britain. India’s stated position is that it will not announce its next climate target before 2023 when a global stock-take (GST) on collective targets of all countries is scheduled. Equity as a guiding and overarching principle of the convention (UNFCCC) and the Paris Agreement must, India has insisted, be incorporated to reflect historical responsibility for cumulative past emissions. But this is not a signal that India is backing off its climate goals. These are not new statements and should be seen in a negotiating context. However, they contrast with India’s action on the ground which features ambitious voluntary environmental targets.

In April India and the United States declared that they are launching the "India-US Climate and Clean Energy Agenda 2030 Partnership”. The Partnership will proceed along two main tracks: the Strategic Clean Energy Partnership and the Climate Action and Finance Mobilization Dialogue. In late June India called on the G7 nations to keep their unfulfilled promise of setting aside $100 billion annually to finance mitigation and transfer of technology to developing countries to meet the challenges posed by climate change.

Power Sector

India’s burgeoning renewable manufacturing and generating sector faced a complex mix of positive and dampening trends. And its legacy coal sector also encountered both positive and negative trends and signals.

Clean energy manufacturing: Trends significantly positive

Production linked incentive schemes for solar manufacturing

Indian Renewable Energy Development Agency Limited (IREDA) invited bids of at least 1000 MW from solar module manufacturers under the federal government’s five year, $600 million ‘performance linked incentive (PLI) scheme’. Current solar development relies largely on imported cells and modules. This programme for manufacturing high efficiency solar PV modules thus reinforces the 'Aatmanirbhar Bharat' (self-reliance) initiative. The government also committed $2 billion to create 50GWh of energy storage in advanced chemistry cell (ACC) batteries. The policy includes both mobile and stationary batteries, for electric vehicles (EVs) and electrical grid supply. Incentives for domestic battery manufacturing are expected to attract $6 billion in private investment. There is some concern among analysts that India as a late entrant to the fairly mature battery market faces severe challenges in competing with incumbent manufacturing superpowers. China, Japan and South Korea that are way ahead in the industry. India does not have guaranteed demand for batteries produced by policies that mandate that a certain percent of annual automobile sales to be EVs.

Self sufficiency goals and domestic content incentives create mixed impact on renewables generation and manufacturing

The increase in basic customs duty (BCD) of 40 percent on imported solar modules and 25 percent on solar cells will kick in on April 1, 2022; the costs of solar projects are bound to increase.

While domestic solar producers favored the increase in tariffs, they opposed extending these levies to special economic zones, suggesting that they aspire to assemble, but not fabricate, basic solar modules. (63% of solar cell manufacturing in India takes place in special economic zones.)

Reliance makes a $10 billion clean energy manufacturing pledge

Reliance Industries Limited (RIL), India’s largest private conglomerate with significant interests in the oil & gas sector, announced a $10 billion investment plan in the renewables sector. RIL plans to set up four giga-factories, integrated solar photovoltaic module factory, advanced energy storage battery factory, electrolyser factory, and fuel cell factory in Jamnagar, Gujarat. It also committed to supply chain and financial initiatives for the entire clean energy sector. Clean energy advocates felt that this move will stimulate more investment in green energy. Existing players in the clean energy industry were taken aback, given RIL’s history of aggressive competition and ability to leverage government policy. The margin building strategy that Reliance used at its complex Jamnagar refinery was a signal that price competition would be a key ingredient in the Reliance strategy. Some analysts felt that RIL’s move was stimulated by Adani, another private company with the largest portfolio of renewable projects (25 GW) and also an influential conglomerate. Others saw this major green energy bid as a form of hedging, since a decline in the demand for oil globally could lower the returns from its existing mid-stream position as a refiner of heavy, difficult to manage crude. Reliance Industry Limited share prices fell by about 5 percent after the announcement, though other stock market indices increased in this period.

Renewables generation: Some headwinds, but government says capacity targets for renewables will be met

Utility finances and import tariffs cast a shadow on renewable projects

Payment risks from debt laden electricity utilities has once again become a burden for renewable projects in Madhya Pradesh, Maharashtra, Rajasthan and Andhra Pradesh. Wind power projects, constituting nearly three-fourths of the total private renewables capacity in these four states, have borne a larger share of the payment delays.

For solar projects, delays in signing power purchase agreements (PPAs) with electricity utilities and refusal of certain state governments to honour older renewables purchase contracts with higher tariffs are dampening investor confidence and threatening the viability of projects.

The increase in imported PV solar module price level by about 15-20 percent over the last 4-5 months, to around ₵22-23/watt will impact returns of solar power project developers. Given the import dependency for PV modules for a majority of the solar power installations in India, such hardening in the price of PV modules, if sustained, remains a near-term headwind.

Government committed to meeting targets

The government is optimistic that the target of achieving 175 GW installed renewables capacity (excluding large hydro) by December 2022 will be met. A total of 92.97 GW capacity (excluding large hydro) had been installed as on February 28, 2021, about 50.15 GW was under various stages of implementation and a capacity of 27.02 GW is under various stages of bidding which adds up to 170.14 GW capacity. But there is some scepticism over achievement of targets from within and outside the government.

Bridge to India, observed that there is a disconnect between government targets and various operational, financial and regulatory constraints on the ground. The consultancy expects a solar capacity to reach 82 GW and wind capacity to reach 53 GW by 2024. According to a report by the Global Wind Energy Council (GWEC), renewables installations in India are falling short of the levels needed to meet the government’s 2022 targets. News reports point out that in FY21 not even half of the capacity target was achieved even by February 2021.

However, India’s largest power generator, NTPC has doubled its commitment to renewable energy power generation capacity to 60 GW. Were it to be entirely solar, 60 GW of total capacity by 2032 would be approximately a fifth of India’s expected solar installations. NTPC’s move also raises questions about the future of the nation’s coal fleet, which just might peak in the next decade.

Additionally, the government is planning to set aside $2.5 billion under a new scheme for solarising agricultural feeders. To solarise the entire agricultural sector, 110 GW capacity will have to be installed.

Challenges facing India’s successful scaling of renewables

The challenges in implementing renewables projects did not seem to reduce India’s attractiveness as an renewables investment destination ranking third after the USA and China in Ernest & Young’s (E&Y) Renewable Energy Country Attractiveness Index. As E&Y put it, ‘exceptional performance in solar PV capacity addition that was marginally higher than that of wind along with the projection that generation from solar will exceed coal before 2040’ contributed to India’s moving up one place to the third position.

The increase in target for renewables in 2014 to 175 GW by 2022 has meant a large degree of centralisation of the initiatives and programmes to increase renewables capacity. Centralisation of decision making has produced mixed results. On the one hand it has dramatically improved the visibility of India’s effort to decarbonise the power sector. This has attracted large overseas players and foreign investment. Centralisation has standardized competing in renewable auctions, which has affected their technical and economic flexibility. While the involvement of technologically competent international players in the Renewables sector has introduced advanced technology, it has also driven out small players with domestic roots, especially in the wind sector. The constant pressure to drive down the rates paid for generation has favoured large international players with access to low-cost finance at the expense of smaller domestic players. In addition, the emphasis on lower rates has meant that price caps set for centrally auctioned projects are often too low to make the projects bankable or economically viable. While solar is generally location agnostic, wind favours specific locations. This becomes a major problem when rate caps are set at low levels. Under a ‘one tariff fits all’ approach that centralised efforts pursue, wind projects crowd around the most favourable locations around the country. This limits ability of wind to be deployed in other potentially competitive locations, and has led to an actual wind power growth decline in 2020.

At the demand end, overcapacity in thermal generation, financially challenged electricity distribution utilities and lower than expected growth in demand for electricity are the challenges not just for renewables but for all generators.

Draft National Electricity Policy (NEP) – a mix of progressive features and an endorsement of use of coal

The draft NEP, if approved, provides for the first time choice to the consumers to choose their service providers. It also empowers the state regulatory commissions to fix the Renewable Purchase Obligations (RPOs) and impose penalties for non-compliance. The NEP also has provisions to safeguard timely payment to power generators. Another key feature is the unification of regional grids to balance their supply and demand.

The NEP argues that coal continues to be the cheapest source of generation and that relying exclusively on renewables in place of fossils could lead to instability and blackouts in the electricity grid, potentially causing blackouts. It argues for new coal-fired capacity in the future with tighter technology standards to reduce pollution. Comments from energy think tanks strongly argued that this statement should be revised to reflect the greater competitiveness of renewables, whose levelized cost of electricity (LCOE) is lower than coal’s. India has a late evening peak in power demand, a time when renewables generation is low, requiring back up generation or storage, and cited as the logic for continued coal. While the LCOE does not capture the cost of intermittency and uncertainty for renewables, even renewables with storage are cheaper than fossils. One example is Solar Energy Corporation of India’s (SECI) tender for renewable-cum-energy storage power purchase in 2020 (described as the world’s largest), in which the winning tariff was ₵1.3/kWh for solar paired with pumped hydro storage. This is comparable to the average cost of fossil power.

As a result, Indian state and major power utilities which account for half of the country’s generation capacity have ruled out or heavily restricted new coal plant capacity. Utility NTPC, which accounts for about one quarter of India’s power generation capacity, has ruled out new greenfield plants while Tata Power and JSW Energy have ruled out new plants altogether. Four states – Gujarat, Chhattisgarh, Maharashtra, and Karnataka – have also ruled out new coal plants.

Revised terms make Coal Block Auctions attractive for potential investors

India’s coal demand is projected to exceed 1 BT by 2023 from about 800 MT in 2021. The government is keen to increase domestic production to reduce imports. It offered the biggest ever Indian auction of coal mines in March 2021 — 67 coal blocks with peak rated capacity of 150 million tons (MT) a year at more favorable terms than previous auctions. Though the federal government believes the new auction mechanism will rapidly increase domestic production, there are questions over securing access to land, rehabilitating and resettling communities, statutory clearances and lease negotiations, all of which depend on state governments.

In the meantime, overall coal imports are expected to be subdued in the coming months on account of the second wave of Covid-19, high coal stocks and higher international prices. Import of coal fell by about 12 percent to 215.92 million tons (MT) in FY21.

Transportation

Incentives inject momentum in the EV sector

State Level Programs push EVs

EV sales in India are expected to grow at 26 per cent by the end of March 2023. High taxes on gasoline and diesel (about 60 percent of retail prices), lowering of goods and services tax (GST) from 12 percent to 5 percent on EVs along with incentives offered to EV purchasers are expected to drive growth of EVs. However, Fitch is not optimistic that the target of electrifying all new vehicles sold by 2032 will be achieved. Grant Thornton Bharat-FICCI India argues that India will need about 400,000 charging stations to meet the requirement for 2 million EVs forecast by 2026.

The government’s EV incentive scheme, FAME II has been extended to March 31, 2024. The maximum incentive is also doubled to 40 percent of the e-two-wheeler cost. The new revision of FAME and strong state support policies like the recently announced ones by the Gujarat government and Delhi government last year, may facilitate TCO parity with ICE (internal combustion engine) Hero electric, manufacturer of e-two wheelers said that it expects a multi-fold increase in the sale of e-two wheelers that will touch 5-7 million units on road over the next 5 years.

The government is also expected to execute bulk purchase orders for 300,000 electric three-wheelers. This should encourage manufacturers to scale up production, cutting prices. The government also intends to encourage production of e-buses under a ‘build own operate transfer (BOOT)’ model which will reduce the cost of entry for small manufacturers.

Meanwhile state governments continued to come out with specific policies and targets for EV adoption. The most recent was from Gujarat whose EV Policy 2021 offered subsidies in the range of $250 to $1300 for purchase of EVs. The goal is to have 200,000 EVs on the road in the next 4 years, almost all two and three wheelers. Gujarat has approved 278 charging stations, mostly on highways, and plans to add another 250 charging stations in the future. Maharashtra’s target in its EV policy 2021 is 10 EVs per 100 registrations by 2025. The state’s plans include converting 15 percent of the current fleet of 18,000 buses to electric, four highways and expressways fully ready for electric vehicles by 2025 and developing over 2300 charging stations in big cities and towns.

In both Gujarat and Maharashtra, partners of the philanthropic supported Electric Mobility Initiative (EMI) are actively supporting and assisting the governments in drafting the EV policies (similar to the roles they played in Delhi and Telengana among others).

Railway electrification accelerates

The Indian Railways has planned to fully electrify its tracks by December 2023, after a dramatic increase in electrification over the past seven years. By 2030 railways plans to draw its entire electrical load from renewable sources. Low carbon dedicated Freight Corridors (Eastern DFC and Western DFC) are also being developed which will greatly increase the efficiency of the rail system.

India lets gasoline and diesel prices rise with crude costs

There are no net subsidies to petrol (gasoline) and diesel in India. Both petrol and diesel (along with other products like aviation fuel etc) are net contributors to the Central and State exchequer. Central and State taxes constituted about 58 percent and 53 percent of the retail price of petrol and diesel price in Delhi on 12 June 2021 in Delhi (state taxes differ from state to state). Since taxes are high, crude price changes are not always passed through fully to retail customer, but this is a lowering of a tax, not a subsidy.

India’s gasoline prices were among the highest among countries with comparable gross domestic product (GDP) per person. The share of per person daily GDP required to buy a litre of petrol in India (GDP per person $2099 [2019 data]) was about 23 percent in India compared to 3 percent in Algeria (GDP per person $3552) and 6 percent in Indonesia (GDP per person $4135).

The importance of tax revenue from the petroleum sector in India has substantially increased after the introduction of the goods and services tax (GST). Excise duty from petroleum products alone now contributes roughly 24 percent of indirect tax revenue in 2018-19. The central government thus managed to increase taxes on gasoline and diesel by over 200 percent and 600 percent respectively over the last few years, capitalising on the decrease in crude prices. With the increase in crude prices there is renewed political pressure to decrease taxes. Retail prices of petrol have crossed ₹100/litre ($1.35/lite or >$5/gallon) in many states and low-key protests have been reported in many parts. But for the lock downs and restrictions on large gatherings protests might have been much louder and bigger – but so far the government has signalled that it needs the revenues.

Reaching for the high hanging fruit

Action plan for energy efficiency

The Bureau of Energy Efficiency (BEE) is preparing an action plan for 2021-30 to enhance energy efficiency in heavy industry and other hard to decarbonise sectors. It also estimated that the energy-saving investment potential ranges from $134 billion to $177 billion by 2031.

Poor air quality adds to the impact of Covid-19

Though the tragedies of the second wave of Covid-19 overshadowed most other concerns, the 'World Air Quality Report, 2020', released in March 2021, highlighted the continuing long-term health impact of poor-quality air in India, which is home to 22 of the world’s 30 most polluted cities. Delhi again is the most polluted city, even though its air quality improved by approximately 15 percent from 2019 to 2020. Significant challenges include fossil fuel dependence with inadequate pollution controls, biomass cooking, burning crop residue and the slow implementation of the national clean air programme (NCAP).

To fix the issue of air pollution caused by burning of crop stubble, India plans to launch a National Mission to use biomass in coal-based thermal power plants. It proposes over five years to create a supply chain of biomass pellets and agro-residue and transport these to the power plants. The government plans to increase the level of co-firing from the present 5 percent to replace higher levels of coal with carbon neutral crop residues.

However, citing its goal of self-reliance, the government has again delayed the deadline to meet emission norms for thermal power plants from 2017 to 2022. Many argue that power plants can meet stringent emission norms with low-cost technology available off the shelf.