Vandana Gombar: India gets renewables policy right

Low solar, wind tariffs to trigger structural changes

There were two major developments in India’s renewable energy sector last month: Solar and wind tariffs converged, and fell to below Rs 3.50 per unit in competitive auctions. While it was the umpteenth auction for solar power, it was the first auction for wind projects in India. It would be surprising if the record low tariffs do not trigger a strategic rethink within the government, as well as at companies active in this sector, on the future path for electricity.

The solar project will be India’s largest, at 750 megawatts (Mw), and located in Rewa, Madhya Pradesh. After a marathon bidding round of over 30 hours, three companies bagged the right to build 250 Mw each at a levelised tariff of Rs 3.30 per unit: Mahindra Renewables, Acme Group and Solenergi Power. In the case of wind, five companies will build 250 Mw each at a tariff of Rs 3.46 per unit: Mytrah Energy, Green Infra Wind, Inox Wind, Ostro Kutch Wind and Adani Green Energy.

The tariffs indicate three main things. Success of policy: The decision to do away with fixed incentive tariffs decided by regulators and to opt for transparent competitive bidding has been a boon for the country. The benefits have been limited to the solar sector so far. The first auction for wind sounds the death knell for feed-in tariffs in this sector too. Some states had a wind feed-in tariff of over Rs 5 per unit, and there was a generation-based incentive paid on top of that. That will be difficult to justify in the days ahead.

Electricity mix review: There is a case for reviewing the energy choices India is making, given how competitive solar and wind power has become in 2017. Leaving aside pithead coal plants, these tariffs would likely be lower than those for the many new coal plants under construction. Offshore wind plants are moving towards being competitive without subsidy support in some parts of Europe. A nuclear power-free policy has been adopted by Germany and Japan. There are some countries aspiring to get 100 per cent of their power from clean sources. There seems to be a case for revisiting the benefits and costs (including pollution costs) of various sources of power.

 

Structural change: The commercial and industrial users of power which subsidised residential users are moving away from grid-supplied power, and will likely trigger a restructuring of the whole market. Delhi Metro, which is the main procurer of power from the 750-Mw Rewa plant, is installing solar on the rooftop of its stations also to save on the power bill. India’s airports too are installing solar power plants because it leads to cost savings. Infosys and Tata Motors are among 88 companies that have committed to source 100 per cent of their power from renewables. Faced with significant leakages of revenue, distribution companies are already seeking tariff hikes for the residential user. What is interesting is that the case for a solar panel on the roof of a residential user would be more compelling if the retail tariffs were higher. It looks like the power market is set to usher in some structural changes.

The government has indicated that future auctions will follow the Rewa solar model, with safeguards built in for investors so as to get the most competitive bids. The country aiming to get the world’s lowest bids for solar and wind is Saudi Arabia, which is planning its first tender for 700 Mw — 300 Mw solar and 400 Mw wind — later this year.

The author is editor, Global Policy, for Bloomberg New Energy Finance; vgombar@bloomberg.net