Financial Viability of ‘Green’ Electricity in India

Anirban Paul

The energy sector is one which is capital intensive and hence has a high exposure to debt. For this reason, banks are weary of giving out credit especially if it does not have sufficient confidence in the ability to seek returns.

Electricity has always been a part of India’s larger socio-political debate. The need for increasing capacity and making it equitably available for all has been an inclusion in many governmental agendas. The country, which primarily generates most of its power from coal, has been exploring a change to its energy mix to meet energy demands and increase affordability. One such major avenue which the government has actively explored is green energy.

In 2018, the government announced that it planned on achieving 175 GW of power through renewable energy by 2022. Though prima-facie praiseworthy, the power sector in India is still riddled with problems. Combined with that, with the imposition of a lockdown due to the outbreak of COVID-19 has also caused a significant lag in industrial and economic activity thereby dropping the demand for power. In such a situation it is worth investigating the problems and understanding whether India is likely to hit its ambitious target.

Current Issues

The renewable sector has made significant strides in recent times. But being a fairly new sector, there is still a lack of confidence in terms of capacity development and financing. Furthermore, political support for developing the overall renewable power environment is not full-proof, due to which the sector is not receiving requisite investments.

India’s current Energy Mix (Source: Mercom India)  

Financial Viability of Distribution Companies (DISCOMs)

DISCOMs in India have had a history of financial instability. There are various reasons for this, including delay in payments, slow increase in tariffs, and lack of proper revenue collection. Combined with this, DISCOMs also lose out on revenue due to the added responsibility of subsidies, mainly provided to farmers and consumers.

The current situations of COVID-19 has worsened situations. Indian Energy Exchange (IEX) has cited a demand drop of 25 percent in April this year. The Power System Operation Corporation (POSOCO) has cited a demand drop of 20 percent for the first five days of May compared to the same time period last year (Joshi 2020). Hence, in this situation the financial condition of DISCOMs is likely to further decline. Market analytics firm CRISIL has estimated that DISCOMs will see a cumulative debt of about 4.5 lakh crores by the end of fiscal year 2021 (CRISIL 2020).

Therefore, DISCOMs are not likely to focus on electricity from renewable sources before tending to their financial instability. Adding to that, the renewable sector is fresh in nature, and thereby it is understandable if there is a lack of confidence in the portfolio. Also, DISCOMs are currently bound to electricity generation companies (gencos) by Power Purchase Agreements (PPAs). Until and unless a DISCOM satisfies the term period of a PPA, they are in no position to make any further purchases in fresh portfolios.

India’s drop in Energy demand due to COVID-19 (Source: European University Institute)

DISCOMs are however bound by Renewable Purchase Obligations (RPOs) which mandates them to compulsorily have a certain amount of energy mix from renewable sources. This is in line with India’s obligation to the Paris Climate Agreement (Ranade 2018). The problem with that is the cost efficiency in functioning of the current renewable energy environment. The Economic Survey of 2017 states that renewable energy has a social cost which is three-fold higher compared to thermal sources. This takes into account external costs and other private costs including the amount of land required for establishing renewable energy power plants, wastage, and the efficiency of operation and generation (Ranade 2018). Therefore, the higher costs are further headwinds to the balance sheets the DISCOMs, maligning their abilities to clear off their current debt.

Availability of Credit

The energy sector is one which is capital intensive and hence has a high exposure to debt. For this reason, banks are weary of giving out credit especially if it does not have sufficient confidence in the ability to seek returns. For investors who are looking to invest in renewable energy, the prospect therefore becomes costly. To put it in perspective, in Europe and in the United States, credit can be received for renewable energy projects at rates of up to seven percent. In India, the same is about 12-15 percent (Gupta 2020). Furthermore, as the renewables sector is capital intensive, the requirement is for long-term loans. However, as mentioned, banks are apprehensive of the longer time period.

The Reserve Bank of India (RBI) has looked to infuse some encouragement into the sector. RBI has listed renewable energy in the priority sector and as per the apex bank’s guidelines, banks’ lending portfolio must contain at least 40 percent of priority sectors. While this mechanism exists, renewable energy as a sector is clubbed under the umbrella of energy. Banks then prefer to give out loans to non-renewables of the sector where predictability and information about the performance is available. This comes as another roadblock for investors and firms of renewable energy.

Uday scheme: Discoms' losses rise 89% in FY19 - The Financial Express
DISCOM losses in India (Source: Financial Express)

Health of Governmental Support

India had instated a National Clean Energy and Environment Fund (NCEEF) for investing in renewable energy projects. The fund, financed via a coal cess, started as a mechanism to support research and create a private investment space. The fund also supports the lending of Indian Renewable Energy Development Agency (IREDA) to banks at a two percent rate so that banks can provide credit at subsidised rates for financing of renewable energy projects. Furthermore, to enhance investments in the sector, budgeted estimates of 2017-18 suggest that the Ministry of New and Renewable Energy was allocated about ₹53.4 billion. To take an overall view, with these mechanisms in place, it can be understood that the government created state-backed mechanisms to actively advocate for green energy (Sarangi 2018).

However, these mechanisms are not watertight. The NCEEF’s funds are not monitored to see if financing has achieved the required goals. Due to the lack of a proper monitoring provision, there have been cases where the funds have been diverted towards unprioritised areas. Two such areas where the funds have been utilised in a likewise manner are for the GST Compensation Fund and for the Ganga cleaning mission.

Local capacity

India is currently becoming an exciting prospect for the cheap power it is able to produce. This especially holds for electricity from solar energy which is produced at a 14 percent cheaper rate per unit in India as compared to coal. While the optimism exists, it also true that domestic capacity is not significantly developed to meet a rising demand. Presently, about 9/10 solar panels are imported.

What has further hurt domestic capacity is India’s protectionary mechanism. In 2018, the country imposed a two-year duty on all solar panel imports to encourage domestic manufacturing. However, due to the lack of adequate funding mechanisms for domestic projects, there was still no stimulus for investors and developers (Gupta 2020).

The other aspect is the tax structure which Goods and Services Tax (GST) set up for solar projects. The MNRE had fixed taxation at five percent for all such projects. But GST introduced a dual tax structure for these projects. Under this, 70 percent of the project would be taxed five percent while the remaining would be taxed 18 percent. This readjusted the final rate of tax to almost nine percent thereby increasing costs, furthering hurting local manufacturers.

India has imposed a safeguard duty on solar panel imports. A safeguard duty would function even better if there is a push for developing local capacity.

Recommendations

With the current progress towards ‘green’ electricity, it is unlikely that India will meet its 175 GW target. Market research firm Wood Mackenzie says India is likely to miss its target by 25 percent. For the same, CRISIL estimates a miss by 42 percent. But even considering this, new tools are emerging which may be the future for bringing some financial viability to green energy.

Green Bonds

Green bonds are financial instruments which are used for specifically funding projects which are meant for the welfare of the environment. Except for this quality of green bonds, they function like any other bond including the need for having a credit rating. Another unique instrument which the IREDA has floated in the green masala bond. They are bonds issued outside India but denominated in Indian Rupees and specifically finances green projects. As of August 2019, India has issued US$8.6 billion-worth of these bonds, 80 percent of which were used to finance renewable energy projects in the country (Sarangi 2018).

Green Banks

They are not banks in particular but a mechanism created to ensure banks can lending at discounted rates for financing renewable energy projects. The aim is to utilise public funds to attract private funds. Many banks including State Bank of India has looked at the green banking aspect, by lending long-term loans at concessionary rates. However, this process has not gained due recognition from the RBI as yet. Institutionalisation of this process is imperative for long-term financing.

Local Capacity Investment

As of now, India has adopted protectionary measures to shield local developers from being overpowered by external markets, especially China. For this, India has imposed a safeguard duty on solar panel imports. A safeguard duty would function even better if there is a push for developing local capacity. While the time period of the safeguard duty ends this year, what needs to be done is to provide subsidies to local products instead of making imports expensive.

Approval Systems

Approval systems have to be developed in a watertight manner to make them targeted and monitored. This is especially true for the NCEEF where the lack of a proper monitoring mechanism has allowed for diverting of funds to areas of which was not meant for it.

Conclusion

A history of a financially unstable condition has plagued India’s energy sector over the years. The situation has become grim with the added headwinds that COVID-19 has provided. However, the potential of renewable energy that India harbours and the way it has been moving towards a more sustainable energy mix is testimony to the fact that the right steps can further India’s ‘clean and green’ ambitions. Furthermore, if the leverage on creating a sustainable portfolio is eventually stressed upon, the greater goal of making electricity a social good, and thereby a human right cannot be far away.


Anirban Paul is currently a second year student of the Master’s in Public Policy Programme at NLSIU. He has an undergraduate degree in Journalism and Communication from Manipal Institute of Communication, Manipal University.

A former Reuters News correspondent, Anirban enjoys the field of media, energy, and governance. You can reach him at anirbanpaul@nls.ac.in.

References

CRISIL. 2020. Discom debt to hit all-time high of Rs 4.5 lakh crore this fiscal. June 05. https://www.crisil.com/en/home/newsroom/press-releases/2020/06/discom-debt-to-hit-all-time-high-of-rs-4point5-lakh-crore-this-fiscal.html.

Joshi, Anshul. 2020. Covid-19 Impact: India’s power demand falls over 20 per cent in May. May 06. https://energy.economictimes.indiatimes.com/news/power/covid-19-impact-indias-power-demand-falls-over-20-per-cent-in-may/75584437.

Ranade, Ajit. 2018. livemint. February 21. https://www.livemint.com/Opinion/3n7VOJdiMCL6jOYFGLd5AN/The-renewable-purchase-obligation-is-hurting.html.

Sarangi, Gopal K. 2018. GREEN ENERGY FINANCE IN INDIA: CHALLENGES AND SOLUTIONS. ADB. https://www.adb.org/sites/default/files/publication/446536/adbi-wp863.pdf.

Gupta, Alok R. 2020. Financing India’s Renewable Energy Vision. ORF. https://www.orfonline.org/wp-content/uploads/2020/01/ORF_IssueBrief_336_RenewableEnergy.pdf.

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