India needs more investments to meet renewables target

Investor interest in renewable energy projects in India remains high, but capital spending may decline in the pandemic year as risk perceptions rise

Although investor interest remains strong in renewable energy projects in India, capital expenditure is likely to decline in 2020, said a new report, as the Covid-19 pandemic extracts an economic toll.

Equity investor returns expectations in India rose from around 14% in the first half of 2019 to 16-17% over the second half of 2019 and the first half of 2020, according to Clean Energy Investment Trends 2020 by the CEEW Centre for Energy Finance (CEEW-CEF) and the International Energy Agency (IEA).

The higher risk returns expectations reflect heightened risk perceptions due to policy and market uncertainty over potential contract renegotiation by off-takers and the potential imposition or extension of duties on solar photovoltaic imports, the report said.

India’s renewables sector has been hit by supply chain uncertainties caused by the pandemic and delays in the signing of power purchase agreements (PPA) in 2020, the report said.

“The robust market activity in the first half of 2020, including the participation of a few first-time investors, indicates that India’s renewable energy sector represents an attractive and resilient investment destination,” said Arjun Dutt, associate at the CEEW-CEF.

The continued interest to invest is a good sign for India’s energy transition, according to Lucila Arboleya, economic and financial analyst at IEA.

“However, capital spending is likely to decline in 2020,” Arboleya said. “Uncertainty is now growing over India’s ability to attract a diverse pool of private finance from domestic and international sources to affordably meet its ambitious renewable energy targets in the years ahead.”

As much as 15.3 GW of solar photovoltaic projects (including solar-wind hybrid) was sanctioned in competitive tenders in the first half of 2020, comparable to the capacity sanctioned over the full year 2019.

“This was driven in large part by the exercise of an option in June 2020 by two developers to expand allocations under SECI’s manufacturing-linked tender, capacities under which were initially awarded in December 2019,” the report said.

SECI is short for Solar Energy Corporation of India, a company owned by the federal government that facilitates the implementation of the National Solar Mission.

“Reaching India’s renewable energy targets will require a considerable increase in the pace of installation,” Arboleya said.

Ambitious target

India has set a target of 450 GW of installed renewables capacity by 2030. The country had installed capacity of 87 GW at the end of 2019, according to official data. It means project developers would need to install more than 30 GW every year from now to 2030 to reach the target.

In the years preceding the pandemic, the country saw large investment flows into renewable power, with capital spending up by almost 60% in the five years through 2019, according to the IEA.

The pandemic has disrupted clean energy supply chains, further weakened the financial position of distribution utilities (discoms) and taken a toll on investment flows.

These have added new layers of risk to ongoing challenges related to land acquisition, contract renegotiation, and equipment pricing uncertainties in light of potential new trade measures in the case of solar photovoltaic cells and modules and limited supplier options in the case of wind.

As a result of these factors, financing uncertainties have grown for both utility-scale solar and wind, the report pointed out.

Investor risk perceptions were lower for projects with more creditworthy counterparties and those with better access to land and timely grid connections, the report indicated.

The study noted a stronger preference for central government entities as off-takers with project sanctioning shifted strongly towards projects tendered by central government off-takers over 2019 and the first half of 2020.

Land related constraints affected both solar and wind sectors. Challenges in land availability slowed the development of solar parks. The share of solar park projects in new capacity sanctioned fell from 54% in 2017 to 7% in 2019. In capacity terms, solar park projects dipped by 60% from 2018 to 2019.

Challenges in the availability of land in states rich in wind resources, along with limited options for sourcing of equipment, have translated into a decline in sanctioned wind projects from 6.9 GW in 2018 to 2.9 GW in 2019. No wind projects were sanctioned in the first half of 2020, the study said.

“Addressing persistent risks relating to discom financial weakness, the timely availability of land and evacuation infrastructure, coupled with recently heightened concerns over sanctity of contracts and uncertainty surrounding impending trade barriers are essential for unlocking low-cost capital flows at scale,” said Dutt. “This will be key for the attainment of India’s renewable energy targets of 450 GW by 2030.”