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Industry overview
The growth of India’s renewable energy sector is among the most successful energy transition efforts globally. India is one of the few countries on track to achieve its climate goals and nationally determined contributions defined under the Paris Agreement. The war in Ukraine has exposed the developed world’s dependence on fossil fuels. Moreover, climate change by itself is the most critical issue that the world faces today, and movement towards a greener earth is happening on a war footing, faster than ever before. Owing to these two global factors, India’s RE sector will continue to register a robust growth and inflow of investments in the sector are likely to remain steadily in the medium term.
In longer term, demand growth is also expected to stay on the higher side, due to the following two factors
- Government’s policy initiatives which mandates providing uninterrupted electricity access to all along aimed at increasing per capita electricity consumption.
- Shift from other fuels to electricity in agricultural applications, transportation and cooking and so on. The share of electricity in India’s energy mix has increased from 17% in 2017 and now stands at 19%, which will move closer to 25% as is in developed countries.
Steady growth in demand and supply
In FY 2021-22, Indian power sector moved on steadily towards meeting the aspirations of a growing economy. Government’s focus on providing 24x7 power supply to all accelerated the demand growth as well as catalysed capacity additions. As the second wave of COVID’19 subsided, power demand in the country saw its highest growth in last six months of FY 2021-22, resulting in an annual growth of 8.2% and reaching 1380 BU* as compared to 1276 BU in FY21. Along with recovery in GDP growth which stood at 8.7% for FY22, a severe heat wave too contributed towards such a high demand. It is expected that the GDP growth for next year may be slightly lower, weighed down by the ongoing global geopolitical disturbances and higher inflation levels. However, with focus on 24x7 supply and a resurgent demand after protracted periods of Covid related restrictions, demand growth is expected to be remain high over the next twelve months.
*BU-Billion units
1CEA 2CEA 3CEA
On the supply side, despite its inherent systemic risks, country has been witnessing growth on the back of technological advancements in renewables and continued government push. With a total generation capacity of over 399 GW2 as of March 2022, India has emerged as the world’s third-largest electricity producer. Of its total installed capacity, around 49%3 is contributed by the private sector.
Capacity addition and energy mix continue to reflect the green transition
Out of the total generation capacity of 17.3GW added in FY22, 15.5GW addition of RE commanded a lion’s share of 89%, followed by 1.4GW of coal-based capacity. Within RE, solar capacity addition continued to dominate, accounting for 90% (or 15.5GW).
With robust RE capacity additions, power sector is fully geared to address the challenges related to climate change through energy transition initiatives which aligns itself with the commitments during COP’26. Being a developing nation, India’s energy requirements are of prime importance for its economic growth. Factoring in these growth aspirations, India has targeted to meet 50% of its energy requirements from renewable energy by 2030 and the rest from non-RE sources. Supply from conventional sources, coal in particular is going to play a crucial role during the transition phase to increase the share of renewable energy by providing balancing power. With a balanced energy mix India will be able to achieve twin goals, meet increasing demand for electricity to sustain the economic growth and simultaneously, accelerate clean energy transition.
While renewable energy has enormous environmental and energy security benefits, however, it poses a challenge due to its variable generation profile. Recognising this there has been now more focus on hybrid (wind-solar) bids and bids with storage. In addition to providing a flat generation pattern, such projects also use transmission system optimally.
Recent policy initiatives to address major issues in the sector
To address the challenges that have been affecting the power sector for long time, several policy initiatives were introduced in FY 2021-22. Since the financial health of Discoms and resultant payment delays to generators has remained a major issue, policy measures such as the introduction of Revamped Distribution Sector Scheme, Late Payment Surcharge Rules, and the push for adequate payment security were all forward-looking moves. Policies with a long-term objective were also introduced such as the amendments to National Electricity Policy, and the Green Hydrogen policy among others.
Enforcing payment security mechanism for power procurement and payment of outstanding dues:
The total receivables from various discoms reached to ₹ 86,4347 crore at end of March 2022. To address this, ministry of power issued draft Late Payment Surcharge Rules. These rules provide for an time bound plan for payment of Outstanding dues (including LPS till date of notification).
Further, to regularise future payments for power procurement, Discoms are either required to maintain adequate payment security mechanism (PSM) or make advance payments. Generators are also not allowed to supply power unless there is adequate PSM or discoms have made advance payment, otherwise they shall lose the right to collect the LPS. Though, in case of renewable projects, more so in the case of older projects, some revisions in the rules may be needed for their smooth implementation and favourable outcomes.
Timely recovery of costs due to change in law rules 2021
These rules would reduce time taken to recover the costs incurred due to compliance with any new laws or regulations. As per these rules, an affected party can estimate and start billing the additional cost as per the formula given in the agreement. In parallel, parties would approach appropriate regulatory commission to get the cost impact on tariff due to change in law approved. Any differences between the billed amounts and amount approved by the regulatory commission will be now trued up subsequently.
Proposed amendments in National Electricity Policy:
National Electricity Policy (NEP) aimed to provide a long-term direction to the power sector in India. The proposed changes in the policy signal the government’s intention to resolve some of fundamental issues as well as to address some of the fresh concerns of the industry. Major focus areas of the proposed changes are:
Promotion of clean and sustainable generation of electricity
Development of adequate and efficient transmission system
Revitalisation and modernisation of Discoms
Development of efficient markets for electricity
Supply of reliable and quality power of specified standards in an efficient manner.
Revamped distribution sector scheme (RDSS):
The scheme focuses on improving the operational efficiencies and financial health of Discoms by providing financial assistance for strengthening and modernizing their systems, digitizing them and reducing interruptions. This will help in improving Discom financials which will in turn resolve many related issues in the sector. The scheme has central Government grant component to attract Discoms and it targets to reduce AT&C losses to 12-15% and ACS-ARR gap to zero by FY25 by modernizing the distribution network, introducing smart meters, improve billing and collection among other measures.
Important regulatory developments
With an overall objective of aligning the regulatory framework towards market-based operation and integration of higher share of renewables, several regulatory interventions were introduced and many more were in the pipeline. The important regulations that were issued in FY21-22 or those that were under development are:
1. Deviation settlement mechanism (DSM)
The regulations on Deviation Settlement Mechanism and Ancillary services enable the market participants (procurer as well as generators) to adhere to their original schedules and for any adjustment required to maintain the grid security, the same shall be dealt by the system operators. Apart from enhancing safety of the grid, this mechanism opens up opportunities for the generators, especially the ones which can quickly ramp-up / ramp-down their capacities by providing grid support through ancillary services.
2. General network access (GNA)
The concept of General Network Access is a major change in grid access regulations in India. Instead of the current system of contract-based access and pricing, under GNA the injecting as well as drawee entities will have access to the grid independent of nature and duration of power procurement contract. Further, charges for use of transmission system shall now be borne only by the procurer and not the generators. This will provide greater and faster grid accessibility, thereby encouraging a shift towards market-based power procurement, It will also provide relief to the plants with uncontracted capacities as these facilities had to take short-term open access or had to get fixed cost basis un-tied LTA to dispatch their power. For new projects, generators would have to take only the connectivity and they will be deemed to have GNA required for dispatch the power.
Spot market for Renewable energy
In addition to the above regulations, trading of green energy on power exchanges with day-ahead and term-ahead (up to 11 days) contracts, specifically for trade in power renewables were introduced and are now operational. Till now all renewable energy projects were being developed with only long-term contracts. Introduction of these products have brought in a market element in renewables, wherein generators can now optimize such contracts. This also enables development of hybrid projects, as the combined generation of hybrid projects may exceed the contracted capacity and whereby the additional generation can be then sold in the exchange.
All these policy and regulatory initiatives viewed together points to larger and better move towards market based and renewable friendly power sector.
