For whom the bell tolls?

Never have two sit-up-and-take-notice events happened in rapid succession as in the Indian renewable energy sector in the February of 2017.

Solar prices at ₹3.29 (averaged over 25 years) and wind at ₹3.46 a kWhr have been events of such signal importance that they practically eclipsed another development in the sector—that of the government allocating a whopping ₹8,100 crore to foster solar parks.

That these prices were discovered through auctions whose terms contained favourable conditions doesn’t diminish the moral of the story – low prices of renewable energy are here to stay.

Remarkably, tariffs have fallen despite a few uncertainties—risks that would have been priced and woven into the bids. One is the uncertainty over the GST rate. D V Giri, Secretary General, Indian Wind Turbine Manufacturers Association, says that “if GST is pegged at 12 per cent, the project cost would go up by anywhere between ₹15-25 lakh—that is roughly 7-12 paise in the tariff. Further, there is no clarity on whether or not the ten-year tax holiday would be extended. Any favourable move by the government on these, combined with lower interest rates, will only soften renewable energy prices further. Renewable energy has had two problems – high cost of energy and intermittency. Now, half the battle has been won.

Against the other enemy – intermittency, or the on-off nature of generation – three sallies are in evidence, the first of which is likely to happen this month. It is a development no less epochal than the falling energy prices—the award of contract for the country’s first Renewable Energy Management Centre (REMC). There are four in the race –and please note their stature—Siemens, ABB, Alstom and OSI, an American company. One of them will bag the job for setting up the first REMC for southern India (essentially, SCADA system designed to predict wind and solar power generation, which will eventually help balance the supply with demand.) The government-owned transmission utility, PGCIL, has come up with a tender for the next REMC for the western region.

Managing and forecasting

Soon, India will have a string of REMCs. Coupled with this is forecasting of both generation and demand. Vishal Pandya, founder and Director, REConnect Energy, a consultancy which is doing forecasting for 4,400 MW of wind energy in Gujarat, observes that India is “getting prepared for clean energy revolution” by putting in place a robust forecasting system.

He points out that the government has been helpful. If a generator or a consumer deviates from the forecast, the penalties for that is to be absorbed by either the Power System Development Fund or the National Clean Energy Fund. “This significantly reduces investment risks for investors,” says Pandya. The infrastructure for managing fickleness of supply is the first attack on intermittency.

The second is storage. If you can store energy, you can regulate its supply. Storage is still a baby in India, as elsewhere. But the infant will grow. An estimate of Bloomberg New Energy Finance has it that 800 MW of storage could get built in India by 2020 – apart from the 10 GW of pumped storage planned for the next five years. A 2016 study of the Indian Energy Storage Association says that by 2022, India will have 70 GW/200 MWhr of storage. Last week, Bloomberg ran a story titled ‘The age of the giant battery is almost upon us’, noting that battery prices have fallen 40 per cent since 2014.

The third wave of attack—still on the horizon—is ocean energy, which is clean but gives 24x7 output, and can replace the supplement hydro and gas in providing grid-balancing supply. If clean energy is available cheaper and its supply is smooth, who would want conventional energy, particularly dirty coal? The rise in growth of generation from renewable energy began well before the dramatic fall in prices. In April-December 2016, electricity production from renewable sources grew 26.28 per cent, over the same period of 2015, while the growth in conventional energy production grew 17.89 per cent.

A month earlier, the contrast was starker, with RE generation growing at 28 per cent, against conventional power’s 5 per cent. Today, renewable energy – whose capacity, incidentally crossed the 50 GW-mark in January – accounts for 7 per cent of energy produced. This is set to increase rapidly with roll out of more wind and solar plants. Five years back, it used to be 3 per cent.

The first victim to the rise of renewable energy is coal. Investment in new coal power plants faces challenges of swelling capital costs, coal availability, price risk and long execution period, notes Salil Garg of India Ratings and Research, a consultancy. “Many recent investments have not been remunerative for investors as well as developers,” he says, observing that investor interest has shifted towards solar and wind. “With the emergence of renewables as an alternative source of electricity, further investments into coal-based power plants are uncertain,” says Garg.

Figures of Central Electricity Authority show near-100 per cent demand satisfaction. Energy deficit in January was 0.6 per cent; 99.5 per cent of peak demand was met. Many believe the disappearance of deficit is illusory because the demand is counted at the wholesale level, while at the level of end-consumers there is still unmet demand. Regardless, the direction is clear and what is likely to happen is perhaps what is happening today in Europe.

In Europe, as EY expert Matt Rennie observes in a press release, wholesale prices of electricity have halved over the last 5-6 years – from about Euro 80 a MWhr in 2008 to around Euro 30-50 today. Conventional power generators are in trouble, as evidenced by the experience of Germany’s two large utilities, E.ON and RWE. EY estimates that utilities in Europe had to write-off Euro 120 billion of assets. The Economist magazine quotes Rennie (tweeted many times) as saying that never in recent history has the “deployment of capital been more difficult than it is right now in the energy industry.”

In India, it is too early to think of a situation where conventional power generators such as NTPC are unable to sell power, but a hazy spectre of threat to them is showing up on the horizon.