As new government sworn in May-2014, Prime Minister Narendra Modi has made an announcement to add whopping 175 GW of solar capacity by 2022. It has also been announced to form a global solar alliance of 120 countries at Paris (COP21, 2015). In the wake of recent announcements, this article is intended to provide some basic guild line to global investors on India’s energy sector’s challenges and opportunities. GDP growth rate of second quarter (2015) is reported 7.4%, which made India the fastest growing economy in the World.
India’s energy mix – present scenario
India’s total installed capacity of Electricity generation is doubled from 135 GW to 279 GW in last ten years. Demand is still growing rapidly over the coming years due to industrial growth and rise in household consumption. Nearly 300 million people in India still do not have an access to Electricity in eighteen thousand villages, so there are plenty of opportunities for growth. The present energy mix is made of renewables, hydro, Nuclear, natural gas and coal. However a portion of coal is whopping 59%.
Is it realistic to achieve such a high level of solar integration? What would be the challenges in front of regulators and government? Which factors should be considered by the international investors in their risk registers? Let’s have a look.
Technical challenges and opportunities:
India’s rural areas have huge potential for solar integration to main stream energy supply chain in the form of micro grid. However poor existing T&D (Transmission & Distribution) infrastructure could be the show stopper for renewables’ integration. A new government announced to spend $6 billion to upgrade the existing T&D infrastructure, which is good news for renewable as well as for energy security of the nation. However this would not be sufficient enough for large scale solar integration, as scalable energy storage technology would also be a paramount importance. Solar alliance should work together to develop the breakthrough mass energy storage technology to make it a commercially viable option. It is yet to be seen that how much support the solar alliance will receive from the Western firms in this field.
Overseas investment for renewables:
A new government is planning to raise low cost overseas debt of $3 to $4 billion over the next few years for the development of large scale solar projects. Although per unit production cost would be lower in India compare to the cost in developed world, political and policy risks would be much higher. Regulators and government should work together in order to bring risk hedging mechanism to attract the overseas investment for large scale solar projects. On the other hand, there are ample opportunities available for investment in domestic, industrial and commercial solar projects under risk sharing mechanism with individual customers. Overseas investment should not only limited to project finance, but also channelled for manufacturing of solar panels, inverters, transformers, cables and other plants and equipments to create the sustainable ecosystem for solar alliance nation.
Underdeveloped energy market:
India’s total installed capacity is owned by three entities; central government owned utilities, state government owned utilities and private companies. Most central and state own T&D companies make whopping 25% of T&D linkage and report losses in their book every year. In order to improve the performance some of these T&D firms were sold to private firms, which also own power generation assets. Utility scenario could be very much different from one state to another. Some states are surplus of Electricity while others straggle to match supply with demand. Lack of interconnectors among the states could cause a major issue for renewables’ integration. Market will not become fully mature for trading until installed capacity outstrips the total peak demand. However there are ample opportunities for flattening the load curve and asset optimisation once T&D infrastructure will be upgraded. International investors must consider local factors in their risk analysis, this includes but not limited to state’s political, social, demand growth, energy stakeholders and credit rating of the state governments.
All in all, it is certain that there are plenty of opportunities in India’s energy sector. Selecting the right investment opportunity would be a real challenge, albeit 100% FDI is allowed in energy sector.