The renewables era

Promise and perils of ever lower solar and wind prices

India’s renewable energy capacity, and the dynamism of the sector, continues to grow. The country has hit 10,000 megawatts of installed capacity in solar energy, up from only around 2,650 megawatts in 2014. This came with the commissioning of the Kamuthi solar power plant by the Adani group, the world’s largest with a capacity of nearly 650 Mw. Almost simultaneously, an auction conducted by the Solar Authority of India for 1,000 Mw of wind power capacity resulted in the winning bidders agreeing to sell wind power for 25 years to the Power Trading Corporation, or PTC, at Rs 3.46 a unit. This is not just low; it suggests that, at least in terms of auction prices, wind power is converging with solar power, which, in turn, is converging with coal-based power. A recent auction of solar power capacity at Rewa in Madhya Pradesh resulted in power contracts at Rs 3.30 a unit. In other words, solar and wind power have achieved “grid parity” with coal. The average coal tariff at the moment is between Rs 3.30 and Rs 3.50 a unit; more recently bid out coal tariffs may be slightly higher, starting at Rs 4 a unit.

While this is certainly good news and increases the likelihood of India meeting its still distant target of 175 Gw of installed capacity in renewables by 2022, there are still major grounds for caution. On the one hand, in the wind auctions, prices declined sharply even during the auction, suggesting a “win at all cost” strategy might have been employed by some bidders. If so, then the concern – as with all auctions with sharply low or high price discovery – is that the successful bidders are looking to renegotiate in the future. To what degree will making profits at these prices depend upon policy stability in the sector, and what will the goods and services tax, for example, do to margins? These questions do not have firm answers. It is to be hoped that the mistakes made in the past in the thermal power sector – over-enthusiastic bidding followed by eager renegotiation – are not repeated in this sector.

In other words, the long-term health of the power sector continues to be something that needs watching closely. The effect of such cheap, long-term power purchase agreements on the distribution company (or discom) ecosystem in general and on the recent power restructuring scheme, UDAY, should be examined. The central reform in UDAY is shifting pricing to market rates at which discoms do not make losses. Many discoms have long-term power purchase agreements in place, and thus cannot easily reduce their cost of power. But raising prices when other sources of power are ever cheaper may be difficult as well. In general, the fact that solar and wind power are as cheap, according to the market, as new thermal projects, indicates that those who said that India had commissioned its last new coal-based power plant may have been right. Even the Central Electricity Authority says no new plants will be needed for a decade. The question really is, given this tectonic shift in technology and pricing, how much of the old – old power purchase agreements, old plants – can be carried over into the new era?